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Mar 07, 2012

Congress Says Yes To North Slope Energy Jobs Bill

By: Nicholas Grant

The Bi-partisan “Jobs and Energy Permitting Act Of 2011” Is Called A Crucial Step

The U.S. House of Representatives recently passed legislation that is critical to the ongoing operation of 1) the Trans-Alaskan Pipeline System (TAPS), 2) offshore operators of oil and gas production wells in the Arctic Ocean, and 3) the pipeline construction industry that would benefit from the roughly 915 miles of new pipelines that would be required to support planned offshore production fields.

With production from North Slope oil fields expected to continue to decline at a rate of 6% per year, TAPS is in danger of reaching the minimum throughput required for basic operations by 2022. However, if offshore oil fields in the Alaska Outer Continental Shelf (OCS) are brought on-line, production could potentially sustain TAPS and the maintenance and operations positions associated with this system until 2057. Additionally, production from Alaska OCS oil and gas fields will require the construction of extensive new pipelines connecting the offshore fields to TAPS, creating thousands of jobs in the pipeline industry. If enacted, this legislation would help expedite Alaska OCS oil and gas production, prolonging the sustainability of TAPS.

H.R. 2021, the “Jobs and Energy Permitting Act of 2011”, is a component of the House Majority’s “American Energy Initiative.” Co-sponsored by Rep. Cory Gardner (R-CO) and Rep. Gene Green (D-TX), the bill is a bipartisan effort. Initially drafted in the House Subcommittee on Energy and Power, the current version was passed by the House Energy and Commerce Committee on June 2, 2011 by a 34-14 vote. The bill was presented to the House of Representatives on June 22, 2011, passing with bipartisan support by a vote of 253-166. The bill’s companion legislation, S. 1226, “The Offshore Energy and Jobs Permitting Act”, was introduced in the Senate on June 16, 2011, also with bipartisan sponsorship. S. 1226 was referred to the Committee on Environment and Public Works, where it remains under consideration and review.

H.R. 2021 proposes three substantive amendments to the Clean Air Act, codified at 42 U.S.C. § 7401, et. seq. Section 2 of H.R. 2021 will establish the “corresponding onshore area” as the sole sampling point for measuring (or modeling) the air quality impacts of any OCS source.

Section 3 of H.R. 2021 provides the other substantive changes to section 328(a)(4)(C) of the Clean Air Act (codified at 42 U.S.C. § 7627(a)(4)(C)). This section will clarify that while emissions from vessels servicing an OCS source are considered direct emissions from the source, these vessels are not subject to the Prevention of Significant Deterioration (PSD) permitting requirements applicable to “major stationary sources”, found at 42 U.S.C. §§ 7470-7479. And finally, Section 3 adds language to 42 U.S.C. § 7627(a)(4)(C) stating that for “platform and drill ship exploration”, the OCS source is considered “established” from the time drilling activity commences at a location to the time drilling activity ceases at the location, or is temporarily “interrupted because the platform or drill ship relocates for weather or other reasons.”

H.R. 2021 also contains a new procedural provision prescribing the administrative process governing OCS permits for exploration. Section 4 would require the Environmental Protection Agency (“EPA”), the regulatory agency with jurisdiction over OCS permits, to take final action on a completed air permit application within six months of filing. Included in this six-month period is any petition for reconsideration of “the issuance or denial of such permit.” Additionally, Section 4 removes the authority of the Environmental Appeals Board (“Board”) to consider “any matter regarding the consideration, issuance, and denial of such permit.” This amendment also removes the ability of EPA to use an “administrative stay” to circumvent the bright-line six month requirement for final agency action. After six months has expired, the permit must be challenged in federal court, regardless of its current status. Importantly, EPA action on OCS permits will be considered “nationally applicable” under section 307(b) of the Clean Air Act. The import of this provision is that after the six month review process has expired, the only forum for challenging agency action is the U.S. Court of Appeal for the District of Columbia. Importantly, this provision only affects “exploration” permits, a small subset of OCS permits. Permits for production activities would still be adjudicated according to the current statutes and corresponding regulations.

The procedural amendment provides a necessary modification to the permitting process. Under the current regulatory scheme, EPA’s decisions on air permits are subject to endless review before the Board, delaying exploration activities. By forcing EPA to take action within six months and limiting administrative review of EPA action, H.R. 2021 streamlines the permitting process by requiring prompt and final agency decisions on OCS air permits.

The current language of the Clean Air Act governing OCS permits is unclear, and does not account for the uniqueness of Arctic exploration. H.R. 2021 is designed to resolve these ambiguities. The substantive portions of H.R. 2021 define the geographic location and time at which emissions from OCS sources are measured, as well as what constitutes an “OCS source.” These provisions define the scope of the permit application, and will ensure that exploration permits are comprehensive and compliant with all applicable laws and regulations.

The first substantive amendment, found in Section 2 of H.R. 2021, clarifies the proper point for measuring the air quality impacts from any OCS source. Under the current language of 42 U.S.C. § 7627(a)(1), OCS sources located “within 25 miles of the seaward boundary of such states” are subject to the same requirements as would be applicable “if the source were located in the corresponding onshore area.” The new language of H.R. 2021 will clarify that “ any air quality impact of any OCS source shall be measured or modeled, as appropriate, and determined solely with respect to the impacts in the corresponding onshore area.”

This proposed amendment emphasizes that the “corresponding onshore area” is the proper – and only – location to measure or model the air quality impacts of any OCS source, regardless of its distance from shore. Currently, the Clean Air Act makes no distinction between OCS sources located within 25 miles of the seaward boundary of a State and those located farther than 25 miles. Further, it does not provide the proper location for “modeling” air quality impacts, a situation that arises when instruments are not available to measure air quality impacts. If the goal of the Clean Air Act is protection of the air quality experienced by human populations, then it seems logical that these impacts would be measured only at the corresponding onshore location, where the majority of the potentially impacted human population presumably resides. The language in Section 2 will resolve any confusion regarding the proper point at which to measure air quality impacts of OCS activities.

More importantly, Section 2 accounts for the unique nature of Artic oil and gas exploration. Arctic exploration rigs are not static platforms like the type used in Gulf Coast drilling. The exploration drills are housed on ships, and generally only remain at a single drill site for 30 days. Based on this characteristic, it is appropriate to measure (or model) the impacts on air quality of these activities at one location. Otherwise, new measurements could be required every time the drilling vessel is relocated, or at offshore locations, such as the hull of the drill ship. By establishing a single location for measuring air quality impacts, Section 2 of H.R. 2021 accounts for the fundamental differences in Arctic drilling while still protecting the air quality of human populations.

The second substantive amendment would modify the Clean Air Act definition of “OCS source” to make clear that service vessels are not “OCS sources” requiring individual permits. Under the current definition, found at 42 U.S.C. § 7627(a)(4)(C), service vessels are arguably subject to PSD permitting requirements as an “OCS source.” This amendment, found in Section 3 of H.R. 2021, would strike “shall be considered direct emissions form the OCS source” in the text following clause (iii) of 42 U.S.C. § 7627(a)(4)(C) and would insert the following language: “shall be considered direct emissions from the OCS source but shall not be subject to any emission control requirement applicable to the source under subpart 1 of part C of title I of this Act.” This amendment would make clear that while the emissions from service vessels are to be considered “direct emissions” from the OCS source, the vessel itself does not require a “major stationary source” permit.

The language removing service vessels from PSD requirements makes clear what is already evident in the PSD regulations: vessels are not subject to the PSD permitting requirements for “major stationary sources”, even when servicing an OCS source. Under current regulations, the PSD program only applies to “major stationary sources.” “Stationary source” is defined as “building, structure, facility, or installation which emits or may emit a regulated NSR pollutant.” A vessel is expressly excluded from the definition of “building, structure, installation or facility” under 40 C.F.R. part 52.21, which implements the PSD program. Since “vessels” are excluded from the definition of “building, structure, facility or installation,” they are beyond the authority of EPA to regulate under the PSD program as a “major stationary source.” This amendment, designed to make the PSD regulations consistent with the Clean Air Act statutes, does not equate to a “end-run around” the Clean Air Act. Service vessels will still be regulated as either direct emissions from the OCS source or as “mobile sources,” but the potential for requiring vessels to obtain PSD permits will be removed.

The second part of Section 3 would add language to the definition of “OCS source” defining when an OCS source engaged in exploration is considered “established.” The current definition of “OCS source” does not address when the source is considered “established.” H.R. 2021 introduces the proper timeframe for determining when an OCS source is “established.” “Platform and drill ship exploration” would be considered “established” at the time drilling commences at a location, and would cease when drilling activities end at the location or are temporarily interrupted due to relocation due to weather or other reasons. This language is important to the permitting of Alaska OCS drill ships because it clarifies that the ship is only considered an “OCS source” while drilling activities are ongoing, and not while it is mobile.

Properly delineating when an OCS source is “established” is critical to the permitting process for OCS activities because it accounts for the unique nature of Arctic oil and gas exploration. Arctic drilling equipment is housed on ships, not stationary platforms. Drilling operations usually occur at one location for 30 days, after which time the exploratory well is permanently capped, and the drill ship moves to another location. Since OCS source permits are required while OCS sources are “established,” the proposed language will help ensure that OCS permit applicants are fully informed of the Clean Air Act requirements applicable to their activities. By submitting a comprehensive permit application that addresses all of the issues surrounding OCS exploration, the leaseholder will help assist the EPA in making a proper and timely decision, and will avoid the time and cost associated with amending the application, or worse, defending an administrative appeal action.

The substantive amendments in H.R. 2021 are designed to resolve ambiguities in the current OCS statutes. The current language in the OCS permitting statutes is unclear, causing confusion among applicants. Further, it is often inconsistent with its implementing regulations. By creating a statute that is clear and consistent with its regulations, H.R. 2021’s substantive amendments will help ensure that OCS permit applicants are fully aware of what the law requires, helping promote an efficient and expedient permitting process.

The centerpiece of H.R. 2021 is the new procedural provision, found in Section 4. This new section would streamline the permitting process by forcing timely agency action. Importantly, it will also eliminate the possibility of endless review before Board by removing their authority to adjudicate challenges to agency action. By defining an actual timeframe in which EPA must act, and forcing opponents to challenge agency action in federal court, Section 4 will create a process that is timely, comprehensive, and promotes finality.

Section 4 would limit the time in which EPA must take final action on an air permit application. Under the proposed language, final agency action must be taken “no later” than six months after the date of the filing of a completed permit application. This timeframe includes any reconsideration of the issuance or denial of a permit. Further, the authority of the Board to review EPA action is removed. All agency action on OCS permits would be considered “nationally applicable” under “section 307(b)” of the Clean Air Act, channeling all challenges to the U.S. Court of Appeal for the District of Columbia. And finally, judicial review would only be available in accordance with section 307(b) “without additional administrative review or adjudication.” Section 307 of the Clean Air Act is codified at 42 U.S.C. § 7607.

This new procedural provision is the cornerstone of H.R. 2021. By requiring EPA to act within six months, it promotes timely decision making. Also, it removes the ability of EPA to utilize “administrative stays” as a method of circumventing the six-month requirement. Further, the provision stating that final agency action will be deemed “nationally applicable” eliminates the potential for inconsistent rulings. If the EPA’s rulings were deemed “locally or regionally applicable,” the proper forum for judicial review would be the appropriate federal circuit. By establishing the D.C. Circuit as the only forum in which challenges to agency action on OCS source permits can be adjudicated, H.R. 2021 will ensure consistent judicial decisions.

The permitting process for OCS permits is a major hurdle for Alaska OCS leaseholders. The current process is flawed, as evidenced by the obstacles Shell Offshore, Inc. has faced in attempting to begin oil and gas exploration in the Alaska OCS. H.R. 2021 is essential to realizing the benefits of OCS oil and gas resources. Without it, the ongoing operation of TAPS is jeopardized, opportunities for new pipeline projects will fail to materialize, and the economic benefits of Alaska OCS production will be lost.

Economic Benefits

The Alaska OCS is one of the most promising untapped oil and natural gas resources in the world. According to the Bureau of Ocean and Energy Management Regulation and Enforcement, an estimated 27.5 billion barrels of oil and 120 trillion cubic feet of natural gas exist in the Alaska OCS. According to Oliver Scott Goldsmith, a Professor of Economics at the University of Alaska-Anchorage, development of this source could result in production of more than 1 million barrels of oil per day for “more than a generation.” This is not a trivial amount, considering recent data shows the U.S. imports 8.877 million barrels of crude oil per day.

Alaska OCS production will also provide substantial economic benefits to the Alaskan and U.S. economies. A 2010 study by Northern Economics and the Institute for Social and Economic Research (ISER) at the University of Alaska showed the following potential benefits of developing oil and gas in the Alaska OCS:

Annual average of 54,700 jobs would be created and sustained through 2057, with 68,600 jobs created during production and 91,500 during peak production.

A total of $145 billion in new payroll would be paid to employees through 2057, including $63 billion to employees in Alaska and $82 billion to employees in the rest of the U.S.

A total of $193 billion in government revenue would be generated through 2057, broken down as follows:

$167 billion to federal government.
$15 billion to the state of Alaska.
$4 billion to local Alaska governments.
$6.5 billion to other state governments.

H.R. 2021 is a critical step towards realizing the economic benefits of Alaska OCS oil and gas production. The Alaska OCS is a world-class oil and gas reserve, containing enough crude oil to lower foreign imports by 10%. Developing the Alaska OCS will energize the Alaskan and U.S. economy by creating thousands of high-paying jobs while generating billions of dollars in tax revenue for federal, state, and local government. Without legislation designed to promote domestic oil and gas production, these benefits will be lost, and the oil and gas industry will shoulder the consequences.

H.R. 2021 is necessary to prevent a failure of TAPS. Continuing decline in production from North Slope oil fields is negatively impacting the long-term viability of TAPS. Alyeska Pipeline Services Company (Alyeska), the entity responsible for construction, maintenance, and operation of TAPS, has recently conducted low-flow studies outlining the adverse effects of declining throughput. According to Alyeska’s website, daily crude oil throughput for 2011 has averaged 605,282 barrels per day. This is approximately one-third of the maximum daily throughput from 1988, and one-third of the pipeline’s actual maximum capacity. With oil production from the North Slope expected to continue to decline 5-6% per year, TAPS is in danger of malfunctioning if daily throughput approaches 210,000 barrels per day, the minimum required for operation. Alyeska is in the process of developing mitigation plans to address issues associated with low throughput, (as per the graph at the top of this article, Figure 1: Projected decline in throughput (graph used with permission of Alyeska Pipeline Service Co.), the major ones being low crude temperature and water content. Alyeska’s long-term plan is to develop strategies to support continued operations at 300-400 thousand barrels per day. Figure 1 illustrates the projected decline in throughput and operational issues that arise at certain levels.

Despite Alyeska’s efforts to sustain the TAPS, without production of oil and gas from new sources, it is only a matter of time before throughput will reach minimum levels, resulting in a shutdown of the system. With Alaska providing 17% of annual U.S. domestic oil production, and TAPS carrying 15% of U.S. domestic oil production, taking TAPS offline would result in the loss of jobs in Alaska and refineries in the Lower 48. A domestic production loss of this magnitude would necessitate additional foreign imports. Additionally, once TAPS is no longer in use, it must be dismantled. H.R. 2021 could eliminate the risk of a TAPS shutdown by allowing for exploration and possible production from new sources that would keep TAPS online and functional for 30 years beyond its current projections.

Developing Alaska OCS sources would also create new opportunities in the pipeline construction industry. Using TAPS to transport OCS oil and gas to marine terminals at Valdez will require the construction of a new pipeline expansion connecting TAPS to offshore pipelines in Camden Bay and the Chukchi Sea. According to a 2011 study by ISER, this would require construction of a 235 mile offshore/onshore pipeline from the Beaufort Sea OCS leases, and a 680 mile offshore/onshore pipeline from the Chukchi Sea OCS leases. This project would create thousands of jobs in the pipeline construction industry, as well as a steady, long-term revenue stream for pipeline construction and maintenance contractors.

Production from offshore fields in the Alaska OCS would also have a positive impact on the proposed Alaska natural gas pipeline. With the certainty of economically recoverable natural gas available to fill it, a natural gas pipeline becomes technically viable. Further, with high throughput lowering the cost of transportation, the potential for delivery of Alaskan natural gas to Lower 48 markets becomes more economically feasible. A project of this caliber would provide a private stimulus package to all levels of the pipeline industry, from component manufacturers to laborers.

H.R. 2021 provides a permitting process that is timely and industry-friendly. By clarifying ambiguities in the Clean Air Act provisions governing OCS permits and limiting the potential for endless administrative review, H.R. 2021 will streamline a permitting process that has stalled Alaska OCS exploration. The potential benefits of Alaska OCS production (and certain consequences of a TAPS shutdown) to the Alaskan and U.S. economies are too important to be ignored. All members of the oil and gas industry, from offshore companies to pipeline laborers, should support this developing legislation.