456 September 19 1985 OFFSHORE OIL LEASING KEY TO U.S. ENERGY.
SECURITY INTRODUCTION At the peak of the energy crisis, in 1979,
Congress sought to spur offshore energy exploration by enacting the
Outer Continental Shelf Leasing Act Amendments OCSLAA. This called
for the In expedited exploration and development of the Outer
Continental Shelf [OCS I1 In keeping with this mandate the Reagan
Administration in 1982 announced an unprecedented five-year leasing
program to open up the nearly one billion acres of OCS controlled
by the federal government for consideration as oil and gas
development sites. The billion acres were divided into 41 "lease
offerings More important, most of the 41 offer ings would be on a
so-called "area - wide"-basis, so that the tracts with the greatest
potential to hold oil and gas deposits would be leased first. The
importance of the Outer Continental Shelf cannot be overestimated.
Currently, OCS reserves contribute 11 percent of U.S. oil
production and 25 percent of U.S. natural gas production. More
important, as much as 59 percent of future oil, and 36 percent of
future natural gas, discoveries are expected to occur offshore.
Therefore, the five-year lease offering represents a critical step
toward ass uring U.S. energy security.
This proposal came under attack. As a result of concerns voiced by
coastal state governors 18 of the proposed 41 lease offerings were
postponed. Department of Defense objections based on a number of
national security concerns le d to the removal from consideration
of a further 107 million acres. Bowing to pressure from state
governments and environmental groups, Congress imposed successive
leasing moratoria on many of the most promising tracts ultimately
tying up more than 50 mil lion acres believed to contain more than
2.1 billion barrels of oil.
The problem of congressionally imposed moratoria was com pounded
this July when Secretary of the Interior Donald P. Hodel 2 abruptly
announced a preliminary agreement with a handful of Ca lifornia
Congressmen. Still in preliminary form, the agreement calls for the
removal of some 6,310 tracts, amounting to 36 million acres on the
California Outer Continental Shelf, from consideration for oil or
gas leasing through the year 20
00. This comp rises more than 97 percent of the total available
,off the California coast and includes the bulk of the most
promising prospects In fact, only about 15 percent of the 150
tracts on which leasing will be permitted are thought by the
industry to hold more than marginal potential of containing
significant amounts of oil or gas.
While the Interior Department has been careful to note that the
agreement is not final, many observers within the industry were
stunned by its announcement It not only reversed nearly five years
of Reagan Administration policy concerning the Outer Continental
Shelf, but did so at a time when congressional senti ment regarding
OCS leasing seemed to be moving in favor of develop ing the
nation's oil resources.
Critics of the original Re agan five-year leasing schedule claim
that such an aggressive program would lead to severe environ mental
damage from spills and that sensitive fish and wildlife habitats
would be destroyed. They also argue that the oil industry does not
have the capabili ty to exploit fully the amount of acreage being
offered for lease. And they maintain that the proposed bidding
system would not allow the government to receive as required by
law, a "fair.market value" for the leases.
On close examination, these arguments have little merit.
They also overlook the fundamental point that leasing OCS tracts is
necessary to maintain America's energy security. Despite the
softening of prices and relative availability of world oil supplies
at present, the nation's energy vulnera bility clearly has not
ended. What many observers ignore is that it has been the greater
reliance on market forces and the reduction of U.S. regulatory
barriers to energy production that have halted spiraling prices and
spot shortages. This relief could b e short-lived if these policies
were not expanded Key to such expansion is more comprehensive
development of the U.S. Outer Continental Shelf. Such development
is in the national interest and poses none of the dangers its
critics suggest are present. Examp l es 0 During the course of
drilling some 31,000 offshore oil and gas wells over the past 32
years there has been only one major spill the environment And that
has had no lasting harmful effects on 0 There is ample scientific
evidence to indicate that OCS o i l and gas development ironically
can benefit local marine and other wildlife. o A far greater danger
to the environment is caused by the tanker traffic carrying
imported oil increase should the U.S. fail to develop OCS oil and
gas resources This is certai n to 0 The U.S. still obtains up to 30
percent of its petroleum from foreign sources, many of which are
Up to 60 percent of future U.S. oil and gas discoveries are
expected to be found on the U.S.
Outer Continental Shelf.
The new fe deral revenues generated by increased offshore oil and.
gas drilling would help reduce the federal.deficit 0 o Put simply,
U.S. energy security requires the Reagan Admini stration to stay on
course and carry out its five-year OCS leasing program. While so me
might seek short-term political gain by embracing congressional
programs that will lock up the vast OCS the long-term cost is the
energy security of the nation.
Hodel's preliminary agreement should be rejected, as should any
attempt to curtail the numbe r of lease offerings. Instead, the
Reagan Administration should proceed with its wise five-year
leasing plan Secretary AMERICA'S CONTINUING IMPORT WLNERABILITY
Although it is less than a decade since Americans last waited in
long lines to purchase gasolin e , the combination of
declining-prices and an easing of the supply crunch has led to
growing complacency about oil imports vainly struggling to maintain
prices in a market awash in crude 5 oil may provide considerable
psychological satisfaction, but it mas k s the U.S. vulnerability
to import disruptions declined substantially from their 1977 peak
of 47.7 percent, they still constitute nearly a third of all U.S.
petroleum consumption roughly the amount they did.in 1972, the year
before the Arab oil boycott. E v en though the U.S. is no longer
heavily dependent on the Middle East as a source of supply, nearly
half the U.S imports come from Latin America and the Caribbean,
another highly volatile region. Therefore, it can be said that,
rather than eliminating the n ation's import vulnerability, America
has ex changed one form of vulnerability for another of an
interruption of Western Hemisphere imports might be less than that
of imports from the Middle East, it is nonetheless real The image
of OPEC ministers While i m ports of petroleum products and crude
oil have While the danger Oil import dependency can be reduced.in
two ways: conserva tion and additional production both areas in
recent years, in large part because of market orientea policies oil
output. Key to this is the oil and gas available on the Great
strides have been made in But more must be done to increase
domestic 4 Outer Continental Shelf. To be sure, a policy of OCS
development raises legitimate environmenLa1 concerns. These should
be addressed, but with the understanding that OCS development is an
urgent energy priority.
OFFSHORE OIL DEVELOPMENT AND ENVIRONMENTAL DEGRADAT I ON One of the
most powerful environmental images of the early 1970s was the
television presentation showing hundreds of volun teers trying to
clean crude oil off of birds after the 1969 Santa Barbara o il
spill. Yet, despite the lingering impression of this incident, the
record of the offshore oil industry is remarkably free of serious
accidents leading to serious environmental damage.
Even the Santa Barbara spill caused no lasting harm to the Cali
forni a ecosystem. More important, it was the only incident in 32
years of offshore drilling that resulted in a significant amount of
oil reaching shore. Since 1969, more than five billion barrels of
oil have been produced by wells offshore; fewer than 800 barr els
have been spilled as a result of blowouts.
By contrast, according to the National Academy of Sciences 41
percent of ocean pollution is caused by river runoffs and other
transportation systems account for another 20 percent.
Natural oil seeps account f or 15 percent, while municipal and
industrial sources amount to 11 percent. In contrast to these
sources of ocean pollution, all U.S. offshore oil and gas drilling
contributes only 5/100ths of 1 percent to the total amount of
petroleum-related pollutants in the world's oceans Tankers THE
HABITAT QUESTION Environmentalists warn that offshore oil drilling
helps destroy ecologically sensitive fish and wildlife habitats. On
close examination, this charge too seems to have little merit.
Where there is legitimate concern over wildlife such as seals m sea
otters, of course, special care can be taken in drilling operations
to assure their continued survival drilling lease stipulations
require such steps.
In some areas Ironically, activities associated with oil drilling
in some cases have helped local marine and wildlife populations to
Example: The banks built along canals in conjunction with oil
drilling operations in Louisiana provide nesting areas for birds
and have helped increase their populations. E xample: Local fish
use offshore platforms as breeding grounds. Indeed, the experience
with offshore platforms has been so positive that there have been
several attempts in Congress to enact legislation allowing com
panies to leave platforms behind to serv e as artificial reefs
after they conclude oil drilling and development operations.
September 1982, Florida accepted the donation of a platform for
just such a purpose, as did Alabama the following year In 5 The
concerns about fish and wildlife habitats being damaged by offshore
oil operations are not supported by the facts.
Rather than posing a threat to the marine ecosystem, offshore
drilling can enhance it and increase local marine populations.
More important, even if an accident occurs similar to the spill at
Santa Barbara, studies by the Interior Department, National Academy
of Sciences, and American Petroleum Institute agree that any
disruption of the environment would at worst be transitory.
Nature repairs itself in a remarkably short time.
AREA-WIDE LEASING Economic objections also are being raised to the
proposed five-year leasing schedule program's basic approach, known
as area-wide leasing.
The term "area-wide leasing" does not accurately convey the meaning
of the concept It does not mean, for example, that all of the
nearly one billion acres of the U.S. Outer Continental Shelf under
federal control would be leased for oil and gas exploration.
Rather, it means simply that all of the area would be available for
consideration for oil and gas leas e s. Any one of a variety of
factors, ranging from environmental concerns to lack of potential
oil and gas could prevent a particular tract from being leased. All
that area-wide leasing implies is that no tract would be excluded
automatically from the biddi ng process merely because an official
in the Department of the Interior did not believe that anyone
wanted to submit a bid on it.
There are a number of major advantages to the area-w ide leasing
approach. It allows the bidders to consider the whole geological
structure rather than one small portion of it. Ecology tends to be
as much of an art as a science, and most oil companies have highly
individual criteria for making exploration d ecisions.
Allowing a firm to take a whole structure into consideration gives
the U.S. the full benefits of a diversity of approaches and
drilling philosophies. each acreage offering reofferings of areas
previously unleased. This allows knowledge gained fro m operations
in leased tracts to have an impact on the bidding process. The oil
industry is replete with examples of discoveries that have been
made on the basis of new information in areas that previously had
been thought to hold little or no potential S o me of these
challenge'the original The result is maximum energy yield from
Under the area-wide leasing approach, there are periodic A major
objection to area-wide leasing is that it will not yield a "fair
market" return to the federal government for the l e ases granted.
The trouble is, there is no objective standard of fair market value
when a willing seller and willing buyer come together with full In
practice, a fair market value is achieved 6 The reasons: Only a
small portion of the Outer Continental She l f offers any potential
for oil or natural gas. What area-wide leasing does is ensure that
areas with potential become available for exploration. And offering
these tracts on an area-wide basis allows an entire geologic
structure to be assessed. This permi t s drillers to optimize
development of a particular field, ensuring a maximum recovery of
the available oil in place. Nor is there shortage of equipment to
develop the leases. In 1981, the oil industry began a 50 percent
expansion of its drilling fleet of o ffshore rigs, involving a
capital expenditure of more than $12 information and agree on a
price arbitrarily fix a value is not only impossible, but
economically inefficient and potentially very costly To circumvent
the market and I The fair market value o f a tract leased in 1980
when oil prices appeared to be climbing rapidly, for example, might
be quite different from the fair market value of that same tract
A final objection to the area-wide leasing contends that industry
does not have the capability to explore and develop effectively the
entire Outer Continental Shelf. This is true.
But the area-wide leasing program does not call for leasing the
entire OCS. It simply makes available for lease most of the OCS.
In practice, less than 7 percent of the tracts offered for lease
have be,en leased; less than 1 percent of the total acreage offered
will be drilled.
Offshore rigs now can operate in water markedly deeper than
previously. There are currently 134 rigs capable of drilling in
depths of up to 2 ,500 feet; 18 rigs can operate in more than 2,500
feet of water; four can drill in 6,000-foot depths, and one rig is
certified for depths of 10,000 feet. Even water depth does not
appear to be a constraint.
None of the economic objections to the area-wide leasing approach
appears to have merit. Rather, area-wide leasing is a very rational
policy for developing America's Outer Continental Shelf oil and gas
PRELIMINARY INTERIOR DEPARTMENT AGREEMENT The preliminary agreement
reached in late summer by the Interior Department and a group of
California Congressmen effec tively would foreclose a11 but a small
portion of that state's Outer Continental Shelf to oil and gas
exploration. Had the agreement been concluded, it would have
undekmined much of th e Reagan Administration's progress toward a
sound energy policy. 7 This tentative agreement imposed a
moratorium through the year 2000 on OCS leasing on all but 150 of
the 6,490 tracts available on the California OCS. Of the tracts to
be available for leas e , only a small proportion were believed to
hold any promise of yielding significant oil and gas resources. All
of the 36 million acres affected by the action previously had been
closed to leasing by congressionally imposed moratoria. But the
Interior Depa rtment's action endorsed the moratoria and thus
contradicted the intent of the Outer Continental Shelf Leasing Act
Amendments (OCSLAA) and the Administration's stated goal of
achieving a market-based energy policy.
The agreement would have allowed the fore closed acreage to be
opened to drilling in the event of an energy emergency as defined
by the Energy Policy and Conservation Act of 1976 stipulation,
though, was little more than cosmetic it ignored the reality of OCS
oil development In frontier areas suc h as OCS, up to 15 years can
pass from the time a lease is granted to when oil production
begins. Even in established areas, the process can take from three
to five years. Therefore, the exemp tion for an emergency really is
a tactic to mollify those who m a y object to the moratoria on
national security grounds. Similarly a provision allowing drilling
of three test wells in 1992 does not change the fundamental fact
that the new moratorium would prevent the development of most of
California's OCS until well i nto the next century This The most
puzzling aspect of the preliminary agreement is I that it seemed to
circumvent the carefully designed process by which the current
federal offshore leasing policy was developed.
More than 5,000 pages of testimony and coun tless hours of con-
challenges. It is among the most thoroughly debated and considered
policy documents ever issued by the federal government To reverse
its conclusions after a brief consultation with a handful of
Congressmen from only one of the affected states is reckless.
It invites massive litigation and dispute sultations preceded its
adoption It has survived numerous court I The agreement would
become final if it were to be approved by Interior Secretary Hodel
this month. The Department of the Interi or held field hearings in
California during August to gather more information on the matter,
and as a consequence, the Interior Department has suggested that
the acreage made available for lease under the current proposal be
replaced with other tracts, wh ich are believed to hold greater
prospect of support.
Still even this modification falls far short of what is needed a
return to the successful Reagan policy of relying on market forces
to encourage domestic energy development.
CONCLUSION The development of the nation's offshore oil and gas
resources must remain a major objective of domestic energy policy.
Even 8 today, the Outer Continental Shelf reserves contribute 11
percent of the oil and 25 percent of the natural gas produced in
the U.S More importan t, as much as 59 percent of future oil, and
36 percent OF future gas, discoveries are expected to occur on the
Outer Continental Shelf It is a resource the nation can ill afford
To develop offshore oil and gas, the p.ace of the five-year leasing
program must be quickened. Successive congressional moratoria have
hindered OCS development and locked up more than 50 million acres
of prime offshore tracts. These moratoria not only hav e prevented
development, but have lost valuable time to reduce America's
dependency on imported oil In moving to accelerate the offshore
leasing schedule, the federal government should advise the public
of the facts regarding the environmental consequences of offshore
Numerous studies, including those by the National Academy of
Sciences, indicate almost no damage from offshore drilling.
Today the U.S. is falling behind other nations in development of
its offshore resources. Total U.S. offshore production has dropped
from a high of more than 615 million barrels of oil in 1971,to
436.5'million in 19
83. By comparison, the rest of the world nearly doubled its
offshore output during the same period from 2.4 billion barrels
annually to 4.5 billi on barrels. The share of world offshore
production accounted for by U.S. offshore production has decreased
from 21 percent of.the total to only 9 percent of the total.
Declining U.S. offshore production has been offset in large part by
oil imports from na tions that have followed a more aggres sive
offshore development policy. Example: two main sources of U.S. oil
imports are Britain's North Sea Field and Mexico's Gulf of Mexico
Campeche Trend. Similarly, new offshore fields in Asia are
providing increasin g amounts of oil to the U.S Oil imports already
account for nearly half of the U.S balance of trade deficit. The
increased outlays for foreign crude oil that will be necessary if
U.S. offshore resources are not developed can only make the U.S.
payments bal ance even grimmer.
The environmental consequences of a failure to capitalize on
America's domestic resources could be severe as well. While
offshore oil drilling accounts for only about 5/100ths of the
world's ocean pollution, spills from tankers and other ocean
transportation account for some 20 percent. This traffic, of
course, will increase as oil imports increase.
Foreclosing offshore oil development, moreover, would deny the
federal government a major source of revenue. From the inception of
the offsh ore leasing program through 1983, the federal treasury
has received 68 billion in bonus payments rentals and royalties
from offshore oil drilling operators. At a time when new revenue
sources are at a premium, arbitrarily eliminating such a
potentially lu c rative one makes no sense. 9 In sum, there appears
to be no line of argument--whether it concerns the environment,
national security, industrial capability or any thing else--raised
in opposition to the five-year offshore leasing schedule that has
any mer i t. To the contrary, the only action consistent with U.S.
national interests is acceleration of the schedule. While the U.S.
is enjoying a temporary respite from high oil prices and shortages,
this favorable situation can be sustained only by steps to ensu r e
that domestic resources are developed to their full potential. The
Reagan Administration made a good start in that direction when it
chose the path of area-wide leasing and an accelerated five-year
schedule. It is a path the Administration should contin ue to
Milton R. Copulos Senior Policy Analyst