Office of the Secretary

Louisiana Department of Natural Resources Secretary Scott A. Angelle

Comments To LSU Law Center’s 57th Mineral Law Institute

“Good afternoon. I am excited about spending my day with folks who share my passion for a strong domestic oil and gas industry. I bring greetings to you from Governor Jindal and the men and women of the Louisiana Department of Natural Resources who are working each day to help find the energy to fuel this great nation while making sure we do it in an environmentally acceptable manner.

I appreciate the opportunity to be part of your extensive agenda and I, like you, am very thankful to the Mineral Law Institute for nearly 6 decades of service in helping promote an understanding of mineral law in this state. I want to especially thank Mr. Pat Martin, the Institute’s Executive Director and former Commissioner of Conservation for his outstanding record of public service. And finally I want to acknowledge the many DNR and Attorney General folks who are with us today. I appreciate all the wise counsel you have given me over the years and I publicly thank you for making the sacrifices you do to serve the public.

Well, what a heck of a run it’s been for all of us over the last 5 years. We started 2005, with oil around $42 and natural gas at $5.50. We watched oil go to $149 for July 4, 2008 and by Christmas it was at $36, and now back up to $81. We witnessed natural gas peak at $13 in July, 2008 to $1.87 for Labor Day, 2009 and after flirting with $6 this winter trading below $4 yesterday. During that same 5 year period state government went from a billion dollar surplus to a billion dollar deficit, Katrina, Rita, Gustav, and Ike, the election of America’s first governor of Indian descent and our first African American President. We have heard of carbon capture, cap and trade, climate change, global warming, and yet witnessed four snowfalls in south Louisiana. We’ve heard of renewables, alternatives, hydrokinetics, wind, solar, biodiesel, shale plays, from saying yes to imported Liquefied Natural Gas to too much domestic natural gas, from “drill baby drill” to finding world oil consumption down but yet oil prices going up, we witnessed the implosion of the auto and housing industry, financial markets at near collapse, credit freezes, we learned a new phrase-“too big to fail,” we enjoyed two college football national championships, a national baseball championship, and a trip to the final four, finally and after 43 years in football purgatory, a super bowl champ, Can I get an Alleluia or Amen?

So I think it is good idea for us to call a time out and gather round the camp fire today to discuss what we see as the major issues facing our energy industry.

Let me say at the Department of Natural Resources we recognize that exploration and production companies first and foremost have a choice where they spend their dollars. That in order to be a major player in the 60’s and 70’s you had to be here in Louisiana. But that has all changed. In 2003, we found ourselves watching a drilling rig count going up in Texas, up in Oklahoma, and up in America, but down in Louisiana. Something was wrong. We went through a period where our cavalier attitude in permitting and governmental customer service drove people away. But by arriving early, staying late, with a little pep in our step, running it like a business, demanding excellence with accountability, and believing that attitude in government service can make a difference –our overall numbers show we have made a drastic improvement on how the board rooms of America view Louisiana. Our Louisiana only rig count, excluding OCS activity, has increased 118 percent in six years, from 79 to 173.

While there is much uncertainty in government across the country today, I confidently report to you today that Louisiana remains a province where our tax policy, our environmental policy, and our regulatory climate is both stable and predictable—that the rules which apply on Monday also apply on Friday, regardless of who you are and where you are from.

Without question, it is time to end the “either/or” debate on energy policy versus and the environment in this country. For more than four decades we have witnessed a failed energy policy, which is clearly a major factor impacting our nation’s current economic condition. At DNR, we believe in order to have a sustainable economy, with some immunity from reaction to even minor global events, our nation must finally recognize that a robust domestic energy industry AND a sustainable environment can co –exist.

It is critical that we focus on what I call the three E’s--Energy, Environment, and the Economy. I believe Louisiana understands that focus, but I am not confident that the message is fully understood on the banks of the Potomac River or even on the Main Streets of America. But with our long and distinguished history of energy production, it is critical for us here in Louisiana that not only the decision makers of America, but the people of this nation, understand the beneficial role the oil and gas industry plays.

Let’s look at the numbers. In addition to finding 5.6 billion barrels of oil and 54 tcf of natural gas from 2005 to 2007m this industry has paid $242 billion in federal taxes and another $23 billion in mineral royalties to the federal government in 2008 alone. Mineral royalty revenue is second only to taxes as a source of revenue for our federal government. In Louisiana, total direct mineral income, for the most recent fiscal year was more than $1.6 billion. Mineral Income has doubled since 2004 and quadrupled since 1999 and is about 17 percent of the direct state general fund revenue. In fact, in the latest report to the Revenue Estimating Conference a few months ago, the state’s chief economist said that mineral income “was the bright spot in Fiscal Year 2010”

So, in addition to finding the energy to fuel our cars and heat our homes, the oil and gas industry contributes the revenue that, among other things, helps government to pay the bills to educate, medicate, incarcerate and rehabilitate.

The role the energy industry plays has often been taken for granted and it is an obvious observation that this nation went through a period of cheap available energy from 1981 to 2005 and we completely lost our focus on aggressive energy policy. Now we find that a 50 cent increase in the cost of a gallon of gasoline shocks the American economy at a rate of $1.4 billion a week. We have progressed or shall I say regressed, to a point where decision makers often treat the three E’s --energy, environment, and the economy, in a disconnected policy approach. It is the cheap and abundant supply of fuel in this nation that has helped create the backbone of America- a strong middle class. A backbone that is at risk!

Somehow we lost our focus on the need to foster a healthy domestic energy industry. We got complacent with flat energy prices. We took it for granted. We lost our focus. And focus is important

Things are changing very fast in this country. I would remind everyone that in 2003, then-Federal Reserve Chairman Alan Greenspan, the top economist on the planet, testified to Congress that we needed to embrace imported Liquified Natural Gas (LNG), because we didn’t have enough natural gas in America to fuel the economy. I don’t fault him for that observation. As the number one economist on the planet, all of the information he had indicated such a shortage. That was only seven years ago, a mere snap of the finger when it comes to energy policy – and some now say we are sitting on a 100-year supply of natural gas.

Things are changing, indeed. We have gone from a period 20 years ago, when two-thirds of the rigs in the country were drilling for oil, with a third drilling for natural gas. That statistic has flipped, and now two-thirds of our rigs are drilling for natural gas and a third for oil. In Louisiana, over the past three years, we have been a 90-plus percent natural gas drilling province. For the last several years, as goes the price of natural gas, so goes the drilling rig count in Louisiana.

At one time, there was a predictable correlation between the price of natural gas and oil. We now see in this world economy, with the weakness of the dollar, even that has changed. From 2000 to 2008, oil averaged trading at an 8 to 1 ratio vs. natural gas.

Now, we see that oil is trading at 16 to 1. Again, a changing climate.

The one thing we can all be certain of is change itself. We are seeing exponential changes in technology in shorter periods of time. Like the old TV commercial, “This is not your father’s Oldsmobile.” I would submit to you This is not our grandfather’s, our father’s, or perhaps even our older sibling’s energy industry. The winds of change are blowing and we must adjust our sails.

Discoveries such as the Barnett Shale in Texas and the Haynesville Shale here in Louisiana are game-changers for this country. The Haynesville Shale alone is estimated to contain almost 250 tcf of natural gas. Enough natural gas to perhaps fuel 10 years worth of our country’s current demand.

Natural gas that we all know, that everyone in this room knows is abundant energy, that everyone in this room knows is good for the environment and that everyone in this room knows is good for the economy. It is about the 3 E’s, again. It is always about those three E’s – energy, environment, economy.

This new ability to reach natural gas we never thought we could before means we as a country must absolutely shatter our previous thinking about our domestic energy supply.

In the past decade or so have we seen the transformation of shale plays. In September of last year, horizontal drilling activity surpassed vertical drilling activity for the first time in our country’s history.

When it comes to E and P in our state – we have two Louisiana’s. While the north Louisiana province is setting records—activity in south Louisiana and the federal waters has been flat. As shale plays become more in vogue, the drilling investment dollars are flowing disproportionately to these unconventional resources. What was once uneconomical has become unconventional and is now becoming the new normal. While our overall numbers are strong-different regions of the state might as well be on different planets. The OCS rig count has been on a steady decline since 2001, even while prices were going up and having enjoyed eight years of a very pro-energy administration on Capitol Hill. Regarding the OCS we had 109 rigs working in 2001, oil was trading at about $26 and natural gas was $4.21. The OCS rig count now stands at 40 while oil is trading north of $80 and natural gas around $4. – south Louisiana activity is beginning to see some uptick and we are cautiously optimistic with the McMoran find but had been anemic since the economic crisis of 2008. I will be introducing a resolution at the April Mineral Board requesting the board to consider leases with reduced royalty rates and perhaps a delay in lease payments for a drilling commitment. All of the new money is going to the Haynesville with financing and credit issues negatively impacting traditional drilling prospects. While most of the nation was incurring the Swine Flu, we have been experiencing Shale Fever in Louisiana. Louisiana currently accounts for about 15 percent of the nation’s drilling activity, with 10 percent of the nation’s activity in only six northwest Louisiana parishes – Bienville, Bossier, Caddo, DeSoto, Red River and Sabine.

Currently in Louisiana, 55 percent of the wells drilled are Haynesville wells – that number was zero four years ago. That’s more than half of our drilling happening in an area that covers about 6 percent of the state. Six companies are responsible for 70 percent of the activity.

This shift in activity to the Shale Plays is a perfect example of the demands of balancing the need for energy, the needs of the environment, the needs of the economy.

I am confident we will again demonstrate to America, with a focus on water management, waste management, and safety management, we can make this resource available to strengthen the economy without compromising the environment.

We believe the Haynesville in Louisiana is about 3500 square miles and with a 640 acre initial spacing that’s 3500 wells. We are ultimately projecting three wells per section for a total of 10,000 wells over the next 16 years, producing 50 tcf of natural gas and using from 50 to 100 billion gallons of water for hydraulic fracturing. This demand for water is a new challenge to the E and P business in Louisiana. We cannot allow our ground water resources to be damaged for any reason so we have worked with industry to embrace the use of surface water. We are not only blessed to have the Haynesville we are also blessed to have it sandwiched between two (2) massive surface water features, the Toledo Bend Reservoir and the Red River. In a state that has always treated water as a liability, in a state that has spent billions to get rid of water, many national experts believe water is the commodity of the 21st century and this should provide us with a distinct advantage.

A very interesting development over the last month is that the Attorney General has recently opined, after receiving multiple request from legislators and local governments that the running waters of the state are a public thing and the use of these running waters by a non riparian land owner requires a fair market compensation to the state to avoid a constitutionally prohibited donation. This is one I would suggest everybody pay attention to. I anticipate legislation will be introduced and adopted which will for the first time bring a management scheme to the surface waters of this state. This issue has a lot of tangents-industry, agriculture, local government, navigation, fisheries, coastal restoration, sediment management, aquatic life, recreation, and on and on. A total of 3 opinions and one guidance document have been issued, answering a variety of questions, all of which are sure to lead to spirited debate.

Another observation worth noting is the disproportionate drilling activity in north Louisiana is on non state owned lands. If this trend continues this will no doubt have an impact of royalty collections since the vast holdings of the state are submerged lands in coastal Louisiana. What long term impact this has on the state’s mineral income is uncertain but again worth paying attention to.

If you look back at the last 30 years – royalties, lease bonuses and interest on state-owned land have made up at least 43 percent of total state mineral income on average. A sustained move away from production on state-owned lands could mean a sustained reduction in state mineral revenues or will the Haynesville severance income be enough to replace that? All questions we are grinding through.

We are still bullish on south Louisiana and oil production. There are opportunities to use Enhanced Oil Recovery techniques to draw on up to 6 billion barrels of oil stranded in old oil fields in this state. We know the best place to find oil today is where we found it yesterday. Denbury Resources is betting in a big way on the potential there with a 320-mile CO2 pipeline under construction now.

We have also seen an upswing in drilling rigs targeted for oil in south Louisiana and the OCS. That number has more than tripled from less than 10 in October of last year to more than 30 in the last two months.

We have also seen a federal lease sale for the Gulf OCS just last week that brought in $949 million. That’s about $170 million more than was bid in last year’s lease sale. Companies put down more than 150 more bids than last year and were bidding on better than 120 more OCS tracts.

The majors have invested more than $7 billion in OCS leasing in the last few years – that speaks of confidence in the future of energy production in the OCS.

Regarding legacy suits, the Supreme Court overturned a lower court’s holding that Act 312 was unconstitutional and with that ruling, ensured judicial awards for environmental contamination from E and P sites must be spent on remediation. There were only two settlements in these cases in 2006 and 2007. Since the Supreme Court decision in 2008, there have been 23 notices of settlement in these cases.

This law goes a long way toward making us an attractive province for energy and economic development without forgetting our stewardship responsibilities to protect our people and our environment.

As we move forward, it is again about the three E’s – Energy, environment, economy. All are dependent on one another.

We see even now that environmental concerns at the highest levels of our nation are having their effect on energy policy. We have seen in the past two years the impact price and availability of energy have had on our economy.

The debate in Washington now is about cleaner energy, about greater energy efficiency. Often, at the expense of our traditional domestic energy industry in favor of an undeveloped, unproven, unready and more expensive renewable resource. Here you see the disconnect in national policy affecting those three E’s.

When it comes to the conversation about green energy, when it comes to alternative energy, certainly each and every one of us wants to take advantage of the opportunities provided by the switchgrass and the biomass and the birds and the bees, and the flowers and the trees – but let’s keep the conversation real.

Renewables only make up about 7 percent of the energy market share in the U.S. Those resources are not ready to take on the load, day in and day out, of fueling this nation.

Transition, any transition, takes time. And during that time, we still need to heat and cool our homes. We still need to travel to work. The economy still needs energy that is affordable.

What we are seeing from Washington is an effort to use economic pressure to change the way we find and produce our energy, using environmental issues as a key reason.

These efforts lack balance in energy, the economy and the environment, efforts such as the plan to cut tax incentives for exploration and production (E&P). Supporters of that plan say they want more emphasis on energy sources that make our environment cleaner.

The call to get rid of tax incentives that help investment in oil and gas exploration and production could put $36 billion in incentives at stake in the next decade.

None of us need a study to know that what they will actually do is cut available investment for E and P, which will cut down our domestic supply, and which will in the end, cut jobs. And energy prices will go up because there is not yet a sustainable, affordable renewable to step in. That will lead to another economic valley and we will see an extension of recessionary times.

These tax proposals are a special threat to our independent producers. That means it’s a threat to the businesses who develop 90 percent of the wells in this country. That is also 98 percent of the producers in this state.

We must be sure that our national leadership, our business leaders, our people understand that removing such incentives raises the risk of destabilizing the economy.

There is also the push for the cap-and-trade plan to cut carbon emissions, a plan that without question would mean higher energy costs, but would have very questionable environmental benefits. I believe the Waxman-Markey bill is dead, but that may not be the last we hear of such a plan.

Yet another concern is the growing attack on the practice of hydraulic fracturing. We believe that the current state regulatory structures do the job of protecting the environment and drinking water.

The industry has been using this process for more than six decades. And after all that time, just a few weeks ago, the director of the EPA’s Drinking Water Protection Division said himself that he has not seen a single documented case of the fracturing process leading to contamination of water supplies.

This is simply an overreach by the federal government to get more control of what should be reserved for the states.

We hear these federal pushes are for the environment, we hear they are for the economy, we hear they are for energy, but the environment will be no better protected, exploration will be more difficult and expensive, and more energy will have to come from foreign sources. 85 percent of our outer continental shelf is already off limits to drilling – I do not believe we need to further cut ourselves off from our domestic energy potential.

It is time for us to get serious about an energy policy in this country. We have seen in the past two years what can happen when fuel prices spike too high, too fast. The reaction to the cost of oil and gas in 2008 not only led to that sudden drop in oil and gas prices, but fed the storm that swept up our national economy. Helped cripple our car manufacturers, our banks, our housing markets.

We have had six recessions in this country since 1972. Prior to each one of them, the price of oil saw a sustained increase over the previous year. A major increase in fuel prices has almost always been an indicator of a major recession or downturn in our economy.

So, a note to Washington, as goes the long term and predictable business climate in which America’s energy industry operates, so goes the health of the nation’s economy. Fix the energy policy and you fix the auto manufacturers. Fix the energy policy and you fix the housing slump. Fix the energy policy and you fix our environmental policy. Fix the energy policy and you fix the economy.

If anyone tells you it can’t happen, look around you at what is happening in Louisiana. We have kept our energy, our economic, our environmental policies connected. We are not perfect, we have our problems. But, our state has outperformed the rest of the nation in these times of economic problems. Maybe that’s because we get the three E’s.

You see, I believe in a Louisiana where we prove every day that “We Can Have It All.” That this is a slice of America where:

• More than a quarter of the nation’s natural gas supply and the nation’s oil supply is either produced in Louisiana, off of our coast or moves through our state

And at the same time,

• We haul in, through our commercial fishermen, a fifth of the total catch in the lower 48 states

And at the same time,

• We provide habitat for almost 2 million migratory waterfowl
• We contribute, through our recreational fishermen, $1.7 billion to our state’s economy each year

This is not, and never will be an “either or state.” We have demonstrated to the rest of the nation through the responsible management of all of our natural resources we can, at the same time, be America’s Energy State and the Sportsman’s Paradise.

We call on America to follow our lead. We will be a strong voice in making sure that those who debate our energy future, our environmental future, our economic future, those three E’s, know that it can be done. That, as Louisiana, has done, so can the nation “have it all.”

I want to thank you again for having me here today, thank you for the part you play in the process of finding, producing and delivering energy to our nation.”

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