Oil and Gas:

MMS director Burton says Gulf Coast energy recovery could take months

Joining E&ETV immediately after her survey of hurricane damage in Louisiana and Mississippi, Johnnie Burton, director of the Minerals Management Service, says it could take three months before the oil and gas rigs, pipelines, and refineries along the Gulf Coast return to normal capacity. Burton also weighs in on how the storm will affect natural gas prices and whether lawmakers should try to open more regions in the Gulf of Mexico to energy exploration. Plus, she addresses the controversial subject of drilling off of the California coastline, after a federal judge denied MMS plans to renew 36 oil and gas leases.

Transcript

Brian Stempeck: Hello and welcome to OnPoint. I'm Brian Stempeck. Joining me today is Johnnie Burton, director of the Minerals Management Service. Director Burton thanks a lot for being here today.

Johnnie Burton: Good morning. I'm glad to be here.

Brian Stempeck: You just got back from a trip to the Gulf of Mexico and checking out a lot of the facilities down there that were affected by hurricane Katrina. You were down there with Secretary Norton, Secretary Bodman of the Energy Department. Give us a sense of what you saw and how the recovery effort is going so far?

Johnnie Burton: Our trip had a couple of purposes, the first one, for me at least, was to visit the staff, the really-the Colonel of staff. We have relocated in Houston, who used to be in New Orleans. So that was a very emotional get together with the Secretary, Secretary Norton and myself and the staff to see how well they were doing. And they've done an absolutely fantastic job of keeping things running under the circumstances. Then we went to Louisiana and all the way to Mississippi to see some of the facilities. We did not have a chance to go really way offshore to see some of the damaged platform. We flew pretty much alongside the coast, but we also had a chance to go by the strategic petroleum reserve and see how they were doing and how they were picking up the slack of the production that was shut in. And we went to see several-a major compressor pipeline-accumulation point of product pipeline in Mississippi, in Collins, Mississippi. We also flew over New Orleans and I have to say, a couple of things, what struck me, and I think is obviously is what strikes everybody, is the devastation, which is obvious when you fly over streets that are totally flooded. You see water halfway up houses and all that. But I also was surprised at how many streets there used to be flooded are now dry and the speed at which they seem to be recovering. When you listen to the news and you read the news I know that everybody felt the response was too slow. It may have been at the beginning, but I think right now everybody is making a fantastic effort, the local folks, the federal help they have, the nongovernmental organizations that help. Everybody is working rather well and I can see some real progress.

Brian Stempeck: Now your agency oversees all the oil and gas exploration that goes on in the Gulf and a lot of your employees are stationed in New Orleans. Give us a sense-right after the storm hit we heard about all these different energy facilities in the Gulf that had been shut down, the refineries, the offshore exploration platforms. Where do things stand now, about two weeks later? How much has been recovered and what is still shut in?

Johnnie Burton: Well at this point, first of all, right before the storm hit all the personnel were evacuated from offshore. They did a magnificent job, no injuries, no loss of life, all the valves were shut, no spill, no significant spill from any well. There was some spills that-mostly onshore that had to do with storage that got really banged by the storm and spilled some of the product that was in those tanks. But there was really-it was done very well. As far as our staff, onshore, most of them had evacuated. Some of them chose to stay and I find that difficult to believe, that some of them chose to stay, but so far as we know the majority left when the water started coming. We have seen, I think, a very organized evacuation from our viewpoint. The oil and gas that was shut in, was huge, 95% of the oil was shut in and about 88% of the gas was shut in, when the hurricane hit. Today, two weeks later, we have, and if you permit me so I can be sure and give you the right number, as of yesterday-I don't have the statistic for today's, but as of yesterday the statistics were that we have about 56% still shut in for oil. So from 95% we went down to 56% and for gas, from 88% we went down to 37%. So quite a bit has come back online. Part of the problem is you can bring back the production of the platform, but then it has to go somewhere. So you need to test all of the underwater pipelines. Then when it gets to shore there are hubs that receive this product and that has to be tested to make sure it's capable of receiving all that production. Then it goes to refinery. They have to be capable of receiving it. Then they send it to the product line and they have to be ready. So it's a domino effect. If you have a product line that doesn't work, for example, or a refinery that's shut in, you can't go very far with a product.

Brian Stempeck: Do you have a sense on how much of this is long term damage? You're talking about, in the oil sector, about half the facilities are back online. How long until we're back to 100% full capacity on oil and gas?

Johnnie Burton: This is a question I've been asked many times and I hesitate to say because frankly not all the assessments have been done. It is a huge amount of work to go and check that there's no structural damage. That everything is in good shape so you can produce. They are not totally done with the assessment. My guess, at this point, is that the facilities in the Gulf, meaning the production platform, we probably could have 85 to 90% of production as it was before the storm, restored probably in 30 or 40 days. But that doesn't mean it's going to flow in that length of time, because there are obstacles somewhere else. The infrastructure between the platform and the delivery pipeline is crucial and we still have four refineries around New Orleans that are very critical that are shut in and have been damaged by water. Those might take several months. So we work around it, industry works around it. I would say, bottom line, for the market to see the product, 85 to 90% of the product, I would say probably two to three months.

Brian Stempeck: What kind of affect you think that's going to have on energy prices? We've already seen oil sector respond with gasoline prices going up. Secretary Norton and Secretary Bodman yesterday were saying that the next big concern is that natural gas prices this winter are going to spike because of some of the supply disruptions. Is that your sense as well?

Johnnie Burton: Absolutely, absolutely. I think that-you know, this shouldn't be a surprise, but this is a hard lesson to accept. The market dictates the prices and when you have a very tight supply you're going to have high prices. Everybody is fighting for the product. I think a lot of people don't realize that the offshore production accounts for about close to 30%, 29 something percent, of all the oil produced in this country. It comes from the Gulf of Mexico. It's about 19 to 20% for the natural gas. That's a huge amount. When that gets impaired, either in total as it was for a few days after the storm or partially as it will be a little bit longer, it reflects on a market that was already very tight. Now oil, there are some things we can do with oil. First of all, the president, as you know has okayed the releasing of oil from the petroleum reserve and making loans, if you will, to refineries. If they don't get the product then they can get it from the petroleum reserves. So I think there are ways to work around the oil until the production comes back. Gas is a different story. There are inventories of natural gas, but it's not as huge as the petroleum reserve and gas is not some easy to import. As you know, the only way to import it from far away is in liquefied form. That requires a real expensive infrastructure to do it on the side where it has to be liquefied and then when it comes to this country to receive it and re-gasify it and put it in the system requires special terminals.

Brian Stempeck: As we're seeing these prices go up we're seeing a strong reaction on Capitol Hill, talking about the need for maybe more energy legislation. In one of the things that's being talked about, that really wasn't accomplished too much in the last energy bill that passed in August, was the idea of more offshore exploration, especially in the Gulf of Mexico. They're talking about maybe some area-lease sale 181, I know is one of the large natural gas packages. Is this something that MMS and the Interior Department are working with Capitol Hill right now on? I mean are you meeting with Chairman Pombo or any lawmakers to try to get these things done?

Johnnie Burton: Let me first clarify that at my level I wouldn't be meeting except to provide information. When we're asked information we provide it. Is my secretary meeting with them? Is the administration meeting with the Hill? I'm not sure I can answer that question because I'm not sure I know factually whether they are or not. I can tell you that we think, at the Department of the Interior and my secretary thinks that we're going to have to look at where else is there some natural gas in particular, simply because it has a tremendous impact on the economy of this country. Some folks don't make the connection very readily, but natural gas is used as a feedstock or as a fuel for a lot of things, for chemical industry, for example, all the utilities. And it's going to be difficult for those folks to get the supplies that they need. So I think that domestically we need to make an effort to produce it if we have it. Now there are some areas you don't want to go and produce petroleum products period. They are too sensitive. You don't want to do that. And this is why this administration has always supported the moratoria. Now the moratoria were painted with a very broad brush. Can we refine that? I don't know that answer. This is not for me to decide. All I can say is we will provide data. We'll provide information and if Congress feels there are some areas where we need to have some leases so people can look for petroleum product, we'll be ready to do it.

Brian Stempeck: One of the ideas that's talked about is the idea the idea of doing gas only leasing, so you don't have this prospect of an oil spill coming up. Is that something that you think Congress might be interested in pursuing?

Johnnie Burton: They might and we told them if they are we will deal with it. We will do that. I have to tell you though that I'm not sure how successful that would be. It's very difficult when you put the bit in the ground to be absolutely sure. Now industry knows and our own scientists know there are some areas that are gas prone and there are some areas that are oil prone, but you don't really know for sure until you put the bit in the ground. Natural gas seldom comes totally by itself. It has some liquids with it, sometimes its oil, sometimes it's very refined oil. It's a distillate. It's almost gasoline, but you don't know that until you drill. So the question is do you want to drill a well offshore that will cost anywhere between 20 and $80 million, depending on where you are, or more? And then, if you find oil with it what do you do? Do you plug it? That's going to be a decision for industry to make. We are willing to offer gas only, if Congress thinks it's a good idea we'll do it. I don't know how successful it will be.

Brian Stempeck: Let's turn to another subject. In California your department recently was in the middle of a lawsuit. A number of environmental groups filed a lawsuit against MMS saying they didn't want about 36 oil and gas exploration sites off of California, some leasing sites that came before the moratorium, to be renewed. And a judge sided with the environmental groups and said, "I don't think these should be renewed." How much of a loss was that for MMS?

Johnnie Burton: If I may rephrase your question a bit, the judge didn't say he didn't think it should be renewed. We were talking about following a process and the process, the rules that we all live with, say that if industry applies for an extension of their lease, if they have good reasons to want the lease extended, then we will consider it. The judge said, because California didn't want us to consider extending, the judge said, "You need to do some more environmental work." So we did. The court agreed to a schedule with us. We did it. We presented it. Now the California coastal commission does not like what we did apparently, they objected to that work. We don't know at this point what's going to happen. Extending the leases doesn't mean drilling. In this case we're involved in a process that we need to follow. We do not have the authority to say the leases are null and void. We don't have this authority. We do have the authority to say we will not renew the lease unless you, industry, provide us with some good reason why we should. And so this is the process we're following.

Brian Stempeck: But at the same time why-someone in California would ask why are you pursuing these leases, even if it's just part of the procedure-

Johnnie Burton: Right.

Brian Stempeck: Why are you pursuing them if it's pretty clear that almost no one in California wants this to happen? If Republican and Democrat alike don't want drilling off their coast, then why is MMS still going through with this process?

Johnnie Burton: MMS is an agency of the government that has to follow the law and it has to follow its own rules. So that's what we're doing now. Having said that, MMS also received the order from the president, or at least from this administration, not from the president, he doesn't get involved at that level, but from the administration to try and settle with the folks who paid a lot of money for those leases. If they can go drill them, then we should be able to get them back and we'd like to buy them back. And we have started negotiation with a company to buy the leases back, so then there will be no question. They won't be drilled. The problem is that industry has spent a lot of money on those leases and they want they want a lot of money back. And at this point we're not sure that they should get what they ask for. So there is a process of negotiation that is ongoing. If we arrive at a settlement we'll buy back the leases and the whole issue disappears. And that's really what the secretary would like to do and we've been working on that. In the meantime, until those negotiations reach fruition, we have to follow the process because as an agency of government we don't have the latitude of saying, gee, we don't like those leases. We don't want them there. So therefore we'll ignore our rule. Because if we were to do that there, well, who says we can't do it everywhere we please? And that's not what we should be doing.

Brian Stempeck: Alright, Director, we're out of time. We're going to go ahead and stop there. I'd like to thank our guest today. That was Johnnie Burton, director of the Minerals Management Service. I'm Brian Stempeck. This is OnPoint. Thanks for watching.

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