Jumping to Conclusions

Wednesday, May 26, 2010
Written by Don Briggs

How can lawmakers effectively advocate policies and regulations to reduce risk when we don’t even have the facts about what caused the Horizon explosion?

As we speak, industry experts and government officials are working diligently to solve the disaster created by the tragic explosion and sinking of the Deep Water Horizon drilling rig off the coast of Louisiana’s shore. By utilizing advanced engineering mechanisms, they will soon find a permanent solution to stop the flow of the leaking well and limit its environmental impact. Thus far, the riser insertion tube tool containment system that is being utilized to collect and carry nearly 2,000 barrels a day of oil from the leaking pipe has served as a positive and temporary solution to fixing the problem.

To successfully achieve a solution to any problem, it’s important to take the following actions: define the problem, look at potential causes for it, find an approach to resolve it, create a plan of action, and implement the plan. For instance, take a look at the steps that BP has taken to resolve the oil leak in the Gulf of Mexico. The problem, which is a rare accident, has been defined. With the assistance of some of the brightest industry experts and engineers, a plan of action was created to temporarily contain the leaking well. Alongside the efforts to stop the leak on-site, nearly 19,000 personnel have been deployed, 17 staging areas have been established, and 1.7 million feet of marine protection booms have been positioned. In the next week or so, plans to permanently solve the issue will entail the injection of heavy drilling fluids into the well to stem the flow of oil and gas, followed by cement to indefinitely seal the well.

On a daily basis, industry leaders, business owners and individuals use logical problem-solving methods to find answers to everyday problems. Unfortunately, politics work in a different manner. In many cases, when things become politically charged, problems are created out of problems. Without knowing with reasonable certainty what created this catastrophe, it’s puzzling to think that lawmakers would begin pushing for regulatory measures. How can anyone effectively advocate policies to reduce risk when we do not even know what happened? As the Independent Petroleum Association of America Chairman Bruce Vincent put it, “Controlling the well and protecting the environment are the main priorities today. And we are urging the federal government, as they consider new regulations and new offshore exploration policies, to first allow the facts in this incident to be investigated.”

The current situation in the Gulf of Mexico has renewed and heightened the debate in Washington over the need for an expansion of offshore drilling. While brave men and women are working night and day to fix this isolated and rare situation, politicians and bureaucrats in Washington are finding ways to capitalize and politicize this tragic event. Already there have been at least six congressional hearings set to discuss issues with the domestic oil and gas industry. In addition, members of Congress are hastily moving forward with legislation that will have significant and negative consequences for the oil and gas industry. This past week alone, more than 15 pieces of legislation have been introduced as a response to the incident. The most detrimental issue on the table entails significant changes to offshore financial liability requirements and the Oil Spill Trust Fund.

Recently, Sen. Robert Menendez, D-N.J., offered a bill that would increase offshore liability limits under the Oil Pollution Act of 1990. As it currently stands, the Oil Pollution Act imposes liability on offshore producers for removal costs and $75 million in damages. Menendez’s bill, S. 3305, would raise this limit to $10 billion. It’s important to note that independent operators must rely on insurance to assure that they can meet requirements set forth in the OPA 90 requirements. Insurance is not available at the levels set in this bill. Additionally, insurance has met its threshold worldwide for this industry.

Benjamin Wilcox, executive vice president of Alliant Insurance Services, wrote in a letter to Sen. Menendez: “If as we understand, there is legislation under consideration which would materially increase the liability cap for economic damages from its current level of $75 million, based on our experiences operators and non-operators in the US Gulf of Mexico will be unable to obtain adequate protection from insurance.”  In like manner, Lloyd & Partners, a London-based major account (complex risk) insurance broker specializing in onshore and offshore energy insurance, noted in a letter addressed to Menendez, “Any significant increase in this limit will cause insureds operating in US waters to face the prospect of significant self insurance, since the insurance market will not have sufficient capacity to provide cover for this in addition to clean-up costs and third party properties damage suits.”

As a reminder to our policymakers, it’s important to remember that negatively affecting producers in the region will have a certain damaging impact on the entire spectrum of the offshore industry. In 1999, Applied Technology Research Corp. conducted a study that estimated the offshore industry has a direct impact of $3 billion on the state of Louisiana. At the time, the study showed that more than 21,000 producing company jobs existed in Louisiana as a direct result of oil and gas activities on the Outer Continental Shelf. The estimated payroll was $1.2 billion with an actual average salary around $60,000. In addition, producing companies paid nearly $6 billion to vendors and contractors in support of Outer Continental Shelf activities, with more than $3.7 billion spent in Louisiana.

For decades, the oil and gas industry in Louisiana has played a critical role in our nation’s energy infrastructure. According to Louisiana Economic Development, nearly 88 percent of U.S. offshore rigs are off Louisiana’s coast. Independents operating in the Gulf of Mexico hold approximately 90 percent of all oil and gas leases. While operating responsibly in the Gulf of Mexico for decades, independents produce nearly 30 percent of Gulf of Mexico oil and more than 60 percent of its natural gas.

One thing is certain, legislation to increase the cap for liability will severely and unreasonably impact independent operators’ ability to provide the necessary energy for our nation. Egregious and over-burdensome regulations will directly inhibit Louisiana’s ability to produce oil and gas and will indirectly affect all Americans. Simply put, less production in the Gulf means higher energy prices for all Americans.

Don Briggs lives in Lafayette and has been president of the Louisiana Independent Oil and Gas Association since 1992. Matt Ross, LOGA’s assistant director for north Louisiana, contributed to this column.

Shale Shock

Written by Don Briggs
Wednesday, April 28, 2010

The Haynesville Shale’s economic impact is widespread — and staggering.

Over the past few years, the parishes of northwest Louisiana have experienced an unprecedented influx of oil and gas development. It’s no secret that the discovery of the Haynesville Shale natural gas formation is the driving force for this positive growth. Since its discovery in early 2008, the financial impacts created by the development of this remarkable natural gas find have led to the injection of billions of dollars in capital investment and millions of dollars in tax revenues. The Haynesville Shale had since been making headlines in publications throughout northwest Louisiana and the state: “Mineral lease sales bring $4 million,” “Mansfield gets $80,000 in monthly lease sale,” “December mineral lease sale brings approximately $8.8 million,” and “Lease sale means $6.1 million for DeSoto schools.” The size and scope of the financial impact of the shale development has affected the entire spectrum of our community. The state of Louisiana, parish and city governments, business owners, schools, and families have benefited greatly from this tremendous discovery. 

Beyond individual lease bonuses and even royalty payments, which do not directly affect every citizen, the taxes paid to local governments and the increase in jobs has had a profound effect on every community in northwest Louisiana. According to Dr. Loren Scott’s 2008 study, “The Economic Impact of the Haynesville Shale,” more than $3.2 billion was paid to private landowners in bonuses for leases and royalty checks. It’s estimated that during 2008, activity in the shale generated approximately $2.4 billion in new business sales within the state of Louisiana. As a result of these activities, nearly $3.9 billion in household earnings was created in 2008. During that year, investment in the Haynesville Shale resulted in the direct creation of more than 430 high-paying jobs and indirectly contributed to the creation of over 32,000 jobs. In addition, state and local tax revenues skyrocketed by at least $153 million.

Let’s take a close look at some of the taxes generated within each specific parish from operations in the Haynesville Shale. According to the Red River Parish Sales and Use Tax Agency, in 2005 the total yearly sales tax revenues for Red River Parish were $2.9 million. Shortly after the Haynesville discovery in 2008, that number jumped to roughly $8 million. In 2009, sales tax revenues climbed to an outstanding $24.5 million.  After looking at these numbers, from 2005 to 2009, sales tax collection in the Red River parish rose more than 845 percent. Now you probably want to know what portion of taxes in the parish were paid by the oil and gas companies operating in the Haynesville Shale. In 2006, the total oil and gas related tax assessments was $1.3 million. Fast forward to 2009 and that number swells to $23.4 million.

Across the entire northwest Louisiana region, each parish has experienced similar growth in revenues. In Bienville Parish, the total oil and gas related tax assessments in 2006 was approximately $39 million. As we saw in Red River parish, in 2009 that number in Bienville nearly tripled to $96 million. In Bossier Parish, oil and gas tax assessments in 2006 were $48 million, and in 2009 that number increased to $131 million. In similar fashion, Caddo Parish oil and gas tax assessments were roughly $21 million. In 2009, those assessments rose exponentially to $59 million.

Of all the parishes, DeSoto has experienced the most significant impacts of the Haynesville Shale development. It has been estimated that nearly 5 percent of the entire nation’s drilling is occurring within DeSoto Parish. With such a significant share in the development, it’s certain that tax revenues within the parish would rise to epic proportions. According to the DeSoto Parish Tax Assessor’s Office, the total oil and gas related tax assessments in 2006 was $41.9 million. In 2009, total tax assessments on oil and gas development jumped to $145.8 million.
One thing is certain, the Haynesville Shale is real. As of April 8, 2010, there are 1,113 total Haynesville Shale wells. Of those 1,113 wells, 395 have been completed and are producing wells, 374 are permitted and waiting operations, and 115 are in the process of drilling. These numbers are only a reflection of the initial growth in the Haynesville. As more wells come online, the need for pipeline and gathering systems, processing plants, and other essential infrastructure will significantly contribute to an even larger economic impact for the area. These initiatives mean even more jobs and increased revenue, and will continue to broaden our state’s position as one of the largest producing states in the Union. In the coming weeks, we will release an exciting new study of the 2009 Economic Impact of the Haynesville Shale. Within the report are remarkable new numbers in terms of tax revenue, job growth, lease payments, and royalty and interest payments. In addition, the 2009 economic study will include future projections for 2010 to 2014.
   
The Haynesville Shale stands to be a tremendous economic engine for local communities, the state of Louisiana, and our entire nation for years to come.  Already, in its initial stages of development, the Haynesville has proven just that. Over the past decade, discoveries of unprecedented natural gas shale plays all around the country have changed the dynamics of the energy debate not just in Washington, but around the entire globe.  Shale plays such as the Haynesville, the Eagle Ford and Barnett shales in Texas, the Marcellus Shale in the Appalachian Basin, and the Fayetteville Shale in Arkansas are only but a few potential reserves that stand to fuel our nation’s energy needs for decades to come. Producing and developing these superabundant reserves of American natural resources will ensure energy supply for all Americans and significantly contribute to reducing our dependency on foreign sources of oil. Take it from us in Louisiana, we know energy. And we know what the oil and gas industry has contributed to our community.

Don Briggs lives in Lafayette and has been president of the Louisiana Independent Oil and Gas Association since 1992. Matt Ross, LOGA’s assistant director for north Louisiana, contributed to this column.


Total sales tax revenues,
2005 vs. 2009
(Haynesville Shale discovered in 2008)
Red River Parish    $2.9 million    $8 million

Total oil and gas related tax assessments,
2006 vs. 2009
Bienville Parish    $39 million    $96 million
Caddo Parish    $21 million    $59 million
DeSoto Parish    $41.9 million    $145.8 million

Leave This One to the States

If the EPA regulates hydraulic fracturing, development of natural gas around the country could shut down, killing thousands of jobs and billions of dollars in investment.

Energy Reigns

Louisiana’s congressional delegation and leading energy execs took a break from Mardi Gras festivities for a frank discussion about the industry’s challenges.

The Price Is Right

The EIA releases its two-year pricing outlook for crude oil, a stable $80-$84 per barrel, and natural gas, which could swing from $3.88-$8.47.