Department of Energy and Natural Resources

OFFICE OF THE SECRETARY

Technology Assessment Division

Comments Submitted to the Southern States Energy Board and Southern Governors' Association Task Force on Energy Policy

by T. Michael French, P.E.
Director, Technology Assessment Division, Louisiana Department of Natural Resources
March 28, 2001

Present U.S. Energy Policy

The present energy policy of the United States is an incredibly simplistic hodgepodge of items woefully inadequate for a subject as complex and as important to the wellbeing of this country as energy supply. For all practical purposes, present policy can be summarized as a culmination of the following:

The federal government has a long history of imposing unrealistic regulations on the oil and gas industry from such things as the 1938 Natural Gas Act, the 1954 Phillips decision of the Supreme Court, the Powerplant and Industrial Fuel Use Act of 1978, and the 1978 Natural Gas Policy Act. Counterproductive distortions in the supply of natural gas caused by these policies still haunt us today.
Through ineffective and excessive regulations on permitting and construction and by neglect in the area of nuclear waste disposal, the federal government has ensured the demise of the nuclear power industry in the U.S. Meanwhile, unprocessed radioactive powerplant wastes pile up, and other industrialized nations forge ahead harnessing the power of the atom, often with U.S. technology.
The federal government places entirely too much emphasis and reliance on the Strategic Petroleum Reserve as the cure-all to prevent and/or deal with all future supply disruptions and threats to oil imports. This is irresponsible and naive in view of the increasing dependence of the nation on foreign oil which already exceeds 50% of U.S. supply.
The final key ingredient to existing U.S. energy policy is low oil and natural gas prices. Somehow, the natural market place laws of supply and demand are supposed to automatically solve whatever energy problems the preceding measures do not address. What this fails to recognize is that U.S. energy supply and demand are part of world supply and demand over which U.S. market forces do not have control. Low oil and gas prices will not last forever, but while they last, they make effective long term development of domestic oil and gas resources as well as development of alternative energy supplies marginal or uneconomical.
The Energy Policy Act of 1992 and the President’s Clinton’s Domestic Natural Gas and Oil Initiative ranked high on good intentions, but were woefully lacking on meaningful action. The Clean Air Act Amendments of 1990 have had a far larger impact on energy than either of these policies.

As demonstrated in the past, it cannot unreasonably be expected that when the next energy "crisis" arises and all of the above fail, the federal government will react by implementing comprehensive new federal regulations on the oil and gas industry to legislate the country out of the crisis. Certainly the most advanced nation in the history of the world can formulate a more responsible and effective policy than demonstrated so far.

Needed in U.S. Energy Policy

Though not intended to be comprehensive, the following is a list of some of the most crucial energy policy inadequacies that need to be effectively addressed in a comprehensive U.S. energy policy.

Petroleum

Insufficient incentives and even financial disincentives in the tax laws for oil and gas exploration continue to drive U.S. petroleum investments overseas.

Inconsistent offshore drilling policies (i.e., all out development off the coasts of Texas, Louisiana, Mississippi, and Alabama with drilling banned everywhere else but off Alaska) have a debilitating impact on developing new supplies of our most flexible energy resource.

Nuclear Power

Constantly changing regulatory requirements and institutional obstacles have essentially killed the future development of nuclear power in this country while most of the world continues to exploit and improve this energy source. Realistic and stable regulatory requirements combined with streamlined approval of standardized designs, and definitively resolving the safe disposal of nuclear wastes could restore public confidence in atomic energy and revitalize the nuclear power industry. Additionally, if nuclear power is to have a long term role, the commercialization of the fast breeder reactor is necessary to stretch nuclear fuel supply from about half a century to a couple of centuries.

Energy Conservation

Official concern for energy conservation disappeared with the last gasoline station lines. Energy conservation standards, targets, etc. should be strengthened, not eased. Having the most voracious energy consuming appetite in the world dictates that a continued commitment to the gradual long term reduction of energy requirements is essential for long term prosperity and security. This nation cannot conserve itself into prosperity, but unlike a BTU of energy produced, which has to have a source to be produced again and again, a BTU of energy saved through conservation is like a perpetual BTU, never having to be produced again.

Coal

The abandonment of a concerted drive to develop a synthetic fuels industry due to low oil prices ensures both higher overall energy prices in the future and dependence on unreliable foreign sources. It's a good thing aviation pioneers did not wait for air travel to become more economical than the train to establish the aviation industry or air travel would still be available only to the rich and powerful. Coal is the nation's most abundant energy resource. At one time ships and trains burned coal and could once again. Cars and airplanes cannot burn coal, but they could burn liquid fuels from coal. For environmental, economic, and other reasons, it is not feasible to convert to coal the schools, businesses, stores, homes and much of industry that utilize natural gas or fuel oil; on the other hand, they could use synthetic gas or oil from coal. For those industries that could feasibly convert to direct combustion of coal, transportation access and costs would often present crippling obstacles due to lack of coal slurry pipeline legislation.

Fusion

Ultimately, the technology that will free the world from its bondage to limited economical energy will be nuclear fusion. The recent retreat from the already feeble nuclear fusion research effort amounts to negligent disregard of our children’s long term energy future.

Impediments to Developing Responsible Energy Policy

Development and implementation of a responsible energy policy requires short term (up to ten years) trade offs for the long term (ten to twenty years or more) good. Unfortunately, our Washington leaders are elected politicians and their perception of the long term, with few exceptions, is the next election, be it two years, four years or six years. These disparate, short planning horizons produce an inherent conflict, yielding a predicament in which the few Washington politicians who realize what needs to be done are unwilling to risk the political heat of singularly pushing legislation that entails consequential cost and/or sacrifice for benefits that will be realized after the next election, much less beyond that period.

Promoting Sound Policy

The key to developing and implementing a successful energy policy is to coalesce a broad base of support by convincing as many diverse interests as possible that sound energy policy benefits them and their states. To accomplish this, the interests of environmentalists, conservationists, coal states, oil and gas states, producers, consumers, etc., all have to identify with the policy.

A national energy policy cannot just be implemented in oil and gas states or just energy producing states. If natural gas is to be pushed as the “ultimate” fuel to replace other fuels to clean up the air in our polluted cities, then some serious plans must be made about what to do when gas returns to a short supply situation — other than diverting gas supplies away from industry in the gas producing states. There is plenty of natural gas in the ground, but it must be developed in order to be available to supply the projected growth in gas demand. It is naive to think that the huge future emphasis on natural gas use is going evolve without ending the historically low BTU price discount of gas to oil. Much of the future gas supply will have to come from yet undiscovered gas supplies from areas that are currently off limits to exploration or from deposits that are deep and expensive to produce. Significant new incentives are needed to further develop and reduce the cost of technology to develop deep reservoirs.

In the past when energy issues have been debated, Louisiana has always been cast in the image of a rich producing state floating in a sea of oil and gas that is being inequitably shared with the consuming states.

Often misunderstood or overlooked is the fact that about two thirds of the production from the state is in the federal OCS (Outer Continental Shelf) territory and, hence, produces no revenue for the state while at the same time incurring great cost to the state in terms of damage to the wetlands and funding of onshore public works support infrastructure necessary to facilitate OCS exploration and production.

Also often overlooked or not explained is the fact that though Louisiana is the 2nd highest energy producing state in the nation (7th if OCS production is excluded), Louisiana is 2nd highest in per capita energy consumption and 5th highest in total energy consumption. Therefore, Louisiana is more of a consuming state than 45 other states! This story is never told, nor are Louisiana's difficulties as a key consuming state given much concern at the federal energy policy level.

Additionally, Louisiana is consuming most of this energy as a through-processor of energy supplies for the rest of the nation, consuming colossal amounts of energy for their benefit. For example, Louisiana nitrogenous fertilizer manufacturers who employ less than 1500 people use approximately 20% of all natural gas consumed in the state, to transform natural gas into ammonia and urea, 98% of which is shipped out of state for use as fertilizer. With about one third of the entire U.S. ammonia and urea capacity located in the state, who is going to be the worst hit when poor energy policy results in these plants not being able to obtain sufficient and/or affordable natural gas feedstock — the nation's farm belt or Louisiana? Perhaps hundreds of thousands of out of state agricultural jobs and tens of millions of food consumers are dependent on this single energy intensive Louisiana petrochemical industry, yet how often have the "consuming" states been concerned about the cost and availability of natural gas in Louisiana?

Another example of how Louisiana is consuming energy resources for the primary benefit of other states is petroleum refining. The energy equivalent of 10% of Louisiana's entire petroleum product consumption is required just to fuel the processes that refine crude oil into gasoline, diesel fuel, jet fuel, heating oil and other products consumed out of state. The oil refining industry employs less than 11,000 workers in the state; whereas tens of millions of jobs throughout the country are dependent on the affordability and availability of the products from the continued operation of these refineries and associated petrochemical facilities in Louisiana.

Many other examples could be cited of the numerous energy intensive natural gas and oil derived chemical products Louisiana (and also Texas, Oklahoma, and California) through-processes for the rest of the U.S. Per unit of output, these industrial processes in Louisiana are characterized as capital (equipment), energy, raw material, and pollution discharge intensive, and low in labor requirements and dollar value added, essentially the opposite of the downstream industries in other states that upgrade these chemicals into ultimate end products.

Conclusion

The essence of this discussion is that the rest of the country needs to realize that Louisiana and other producing states are as much, or even more, consuming states as they are. Moreover, since Louisiana's and other oil and gas producing states’ consumption is primarily that of through-processors of fuel derived products, the rest of the country needs to understand that their economies are indirectly as dependent as the oil and gas states on sound energy policy that fosters the economic and available supply of energy in Louisiana and all energy producing states. Additionally, states that support consumption of energy produced elsewhere, but resist development of energy resources within their borders, need to realize that such a situation cannot be perpetuated indefinitely without imperiling energy supplies, costs, and security.

Implementing an effective energy policy that will ensure net long term affordable and available energy supplies does not come without short term costs. Those short term costs consist of the adequate funding of substantial advanced energy research to develop new technology and the financial incentives to expand domestic energy production and to commercialize existing technology that is not economical with current world oil and natural gas prices.

Economic incentives through an effective national energy policy can resuscitate the ailing oil and gas industry while at the same time encourage energy conservation, solar energy, renewable fuels, clean coal technology, synthetic fuels from coal, and national energy security. A broad base of support must be mustered to develop, finally, a meaningful national energy policy.

Epilogue

It has been said by great philosophers and leaders that a nation that fails to learn lessons from history is doomed to repeat the mistakes of the past. This will be this nation's epitaph if a responsible energy policy is not soon implemented.