The Impact of Offshore Drilling on US Military Readinessvs. Alleged Economic Benefits of Drilling

Joseph F. Bouchard, Ph.D.Captain, U.S. Navy (Ret.)

Member, Virginia House of Delegates

September 1, 2008

Overview

I. Impact on Military Offshore Training Ranges

II. Alleged Economic Benefits

Virginia CapesOperations Area

Almost all of the area designated for Virginia by the Minerals Management Service is within the VACAPES OPAREA.

72% of the area desired by Virginia is within the VACAPES OPAREA.

100% of the area believed to contain gas and oil (50-140 miles off the coast) lies within the VACAPES OPAREA.

Sources:Virginia Capes Operating Area Map: U.S. Fleet Forces Command, Virginia Capes Range Complex Draft EIS, June 2008.

Virginia Outer Continental Shelf Area: Minerals Management Service, Proposed Final Program Outer Continental Shelf Oil and Gas Leasing Program 2007-2012, April 2007, p. 68.

Secretary of Commerce and Trade, “Study of the Possibility of Exploring for Natural Gas in the Coastal Areas of the Commonwealth,” House Document No. 22, January 10, 2006, p. 11

The Problem: Virginia’s OCS Area Lies Within the VACAPES OPAREA

App

roxi

mat

e lim

it of

are

a

likel

y to

hol

d oi

l and

gas

The Official DOD/Navy Position on Offshore Drilling

“…the Navy requires unencumbered access to the full expanse of this operations area.”

“…the Department opposes oil and gas development activity in this OCS planning location.” April 10, 2006

“To prevent such incompatible encroachment, DoD has sought to discourage oil and gas development that would interfere with current and future military uses of the OCS.”

October 7, 2005

The Minerals Management Service 2006 Decision

Special Interest Sale, 2011“This area will only be offered if the Congressdiscontinues the annual moratoria.”

DOD/Navy Response to the MMS Decision

South AtlanticPlanning Area

North AtlanticPlanning Area

Virginia CapesOperations Area

Mid-AtlanticPlanning Area

Dare andCherry Point

Operations Areas

“…the special interest sale proposed for the Mid-Atlantic Region in late 2011 is not acceptable to the Department [of Defense] because of its incompatibility with the military training and testing conducted in this area.” November 27, 2006

Virginia OCS AreaMMS “Special Interest Sale” area

“…the Department [of Defense] is willing to discuss with you [MMS] possible alternatives that may provide opportunities for exploration and potential joint use of the Mid-Atlantic Area consistent with the critical military test and training activities in this area.” November 27, 2006

Have DOD & Navy Dropped Their Opposition?

“Pentagon press secretary Geoff Morrell stated publicly yesterday that SECDEF is revising the policy which prevents oil and gas drilling within military training areas.”

CHINFO Quick Response, August 6, 2008

Drilling advocates claim yes…

…but does this apply to the Virginia OCS area?

“Military open to offshore drilling”The Washington Times, August 12, 2008

“DoD Weighs Impact of Offshore Drilling”McClatchey-Tribune Information Service, August 6, 2008

Focus of the DOD Policy Review is on the Eastern Gulf of Mexico

The Gulf of Mexico Energy Security Act of 2006 placed the entire area in yellow off limits to exploration and drilling for oil and natural gas.

DOD is reviewing whether that entire area is really needed for training.

W-158

Large Area of Eastern Gulf of Mexico is Outside Training Ranges

Key Military Air Bases Navy Ranges Air Force Ranges

This area is the focus of DOD policy review.

Does the Navy Public Affairs Guidance Signal a Change in Policy?

Absolutely not!It reiterates DOD and Navy policy on offshore drilling in training ranges.

For safety reasons, the military is compelled to discourage certain oil and gas activities where such activities would clearly be incompatible with military missile flights, low-flying aircraft, and weapons testing and evaluation.  We remain willing to discuss possible alternatives that may provide opportunities for exploration and potential joint use of the OCS where we operate.

- Navy public affairs guidance, August 6, 2008

DoD and DOI have negotiated an OCS Memorandum of Agreement (MOA) and have successfully worked together for the past two decades to insure a continuing successful leasing program with a manageable impact on defense operations.  The MOA has worked well to avoid OCS conflicts.

- Navy public affairs guidance, August 6, 2008

Our departments agree that, balanced against the geologic potential of an area, certain defense related activities on the OCS may be irreconcilable with mineral exploration/development and will, under the procedures established above, be deferred from the pending lease offering. These activities are defined under this agreement as those which must take place in a particular area of the OCS due to their relation to fixed monitoring or control stations which cannot be moved except at great expense and compromise of their mission; those which relate to sensitive operations of a classified nature; and those which pose a direct danger to mineral exploration/development structures and/or personnel.

“Memorandum of Agreement Between the Department of Defense and the Department of the Interior on Mutual Concerns on the Outer Continental Shelf,” July 20, 1983

“…the Department opposes oil and gas development activity in this OCS planning location.” - Department of Defense, April 10, 2006

“…the special interest sale proposed for the Mid-Atlantic Region in late 2011 is not acceptable to the Department because of its incompatibility with the military training and testing conducted in this area.” - Department of Defense, November 27, 2006

Oil and Ordnance Don’t Mix!

NASA also Opposes Drilling in the VACAPES Operations Area

“…NASA believes the Mineral Management Service has not adequately recognized the potential conflicts with OCS oil and gas activities within the Mid-Atlantic and Virginia proposed area, and the Department of Defense and NASA activities within the same area. …We support the continued current Presidential withdrawal and the annual Congressional moratoria. …Impacts to NASA’s mission and other agencies utilizing the current range continue to be a major issue and concern.” November 27, 2006

NASA Wallops Flight FacilityMid-Atlantic Regional Spaceport

Wallops offshore warning area

Growing Economic Opportunity at Wallops Flight Facility

NASA Wallops Flight FacilityMid-Atlantic Regional Spaceport

Governor Kaine Announces 125 New Jobs for Virginia

RICHMOND – Governor Timothy M. Kaine today announced that Dulles, Virginia-based Orbital Sciences Corporation has confirmed its selection of the Mid-Atlantic Regional Spaceport (MARS), located at Wallops Island in Accomack County on Virginia's Eastern Shore, as its base of operations for the company's new Taurus II rocket. Orbital will invest approximately $45 million in Virginia to assemble, test and launch the Taurus II space launch vehicle. The rocket program will also create approximately 125 new jobs in the state... June 9, 2008

Wallops offshore warning area

Why NASA Opposes Drilling in the VACAPES Operations Area

NASA Wallops Flight FacilityMid-Atlantic Regional Spaceport

Wallops offshore warning area

August 22, 2008: NASA destroys rocket after it veers off course

Burning debris falls into VACAPES Operations Area

Impact of Drilling in the Virginia OCS Area

• Degradation of military training• Loss of instrumented ranges• Loss of ranges suitable for training with live ordnance

• Increase costs for military training• Cost of instrumenting new ranges • Cost of travelling much greater distance to remaining ranges

• Impairs NASA Wallops Flight Facility operations

• Joint use within the Virginia OCS area is not an effective option• Threat to oil and gas facilities – spills and loss of life• DOD: “incompatible encroachment” on training

But, DOD is willing to discuss possible alternatives to the Virginia OCS area for exploration and potential joint use of the Mid-Atlantic Area consistent with critical military test and training activities.

II. Alleged Economic Benefits

• Will offshore oil drilling reduce the price of oil?

• Will offshore oil drilling decrease dependence on imported oil?

Crude Oil Production and Price 1989-2007

0

10

20

30

40

50

60

70

80

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

Pro

du

cti

on

(M

il B

BL

/Da

y)

an

d P

ric

e (

$/B

BL

)

Production (Mil BBL/Day) Price ($/BBL)

Global Crude Oil Production and Price 1990 - 2007

Production

Price

Between 2002 and 2005 global production rose by 6.64 million barrels per

day,but price increased 112% - more than doubled!

Will increasing production by drilling offshore really help lower the cost of oil?

1970-2007: For every 1 million barrels per day increase, oil rose $1.95 per barrel

2001-2007: For every 1 million barrels per day increase, oil rose $8.99 per barrel

OCS Oil Production vs US Price of Oil, 1990-2007

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

OCS Production (x 10 mil) Price of Oil ($/BBL)

Between 1990 and 2002OCS production increased 98%

Yet US price increased 21%

US Offshore Crude Oil Production, 1990 - 2030

2007

Data Source: Energy Information Administration, “Annual Energy Outlook 2007 with Projections to 2030,” February 2007

Increased production from lifting the moratorium off the coasts of the lower 48 states is projected not to exceed 0.22 million barrels per Day

Mil

lion

Bar

rels

/Day

Between 1990 and 2007 offshore oil production increased 0.89 million barrels per day (48%), yet the price of US oil increased by $64.88 a barrel (343%).

OCS vs Total US Production, 1990-2007

0

500,000,000

1,000,000,000

1,500,000,000

2,000,000,000

2,500,000,000

3,000,000,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

OCS Production (Barrels) Total US Production (Barrels)

Between 1990 and 2002OCS production increased 98%

Yet total US production declined 32%

Will Offshore Oil Drilling Decrease Dependence on Imported Oil?

US Crude Oil Self-Sufficiency, 1970 - 2007

Red line: Percent of US oil consumption that comes from US

domestic production

Blue line: Impact that allowing drilling off the coasts of the lower 48 states in 1985 would have had on percent of

oil US consumption that is produced domestically

Even if the offshore drilling moratorium is lifted, US demand for oil exceeds domestic production capacity by such an overwhelming amount that increasing

domestic supply cannot significantly reduce US dependence on imported oil

Will Offshore Oil Drilling Decrease Dependence on Imported Oil?

Alleged Economic Benefits?

• Drilling for oil offshore will have no impact on oil prices

• Drilling for oil offshore will have very little, if any, impact on US dependence on imported oil

The only way the US can reduce the harm being done to our economy by exorbitant oil prices is to

significantly reduce our demand for oil

Conclusions

• Drilling for oil off the coast of Virginia would cause “unacceptable encroachment” in the heart of a vital training range.

• This encroachment would be a threat to the future of NAS Oceana

• Increased domestic offshore drilling for oil will not lower prices or reduce dependence on imported oil

• The only viable long-term solution is to reduce US demand for oil

• Leveraging American innovation and entrepreneurship is the key to ensuring US prosperity and national security

Recommendation: Do Do notnot endorse drilling off the coast of Virginia. endorse drilling off the coast of Virginia.

The End

Questions?

Backup Slides

Virginia OCS Area

No obstruction zone

The Issue: Virginia Wants Royalties from Offshore Drilling

MMS Virginia Administrative area within the oil and gas prospective area.Source: 2006 Secretary of Commerce and Trade report, p. 14. Adapted from the January 3, 2006, MMS administrative boundary map and MMS 2000 Assessment of Conventionally Recoverable Hydrocarbon Resources of the Gulf of Mexico and Atlantic Outer Continental Shelf as of January 1, 1999.

“Using the estimates above, sharing of half of federal revenue from Virginia’s Outer Continental Shelf could mean nearly $3 billion in direct payments to Virginia’s treasury. These payments would be spread out over thirty to fifty years, the estimated time it would take to develop and produce the offshore resources, and would be unlikely to begin, if at all, until the year 2016 at the earliest.

Of course, this is all very speculative and requires the piling of speculation upon estimates upon forecasts .”

Source: Secretary of Commerce and Trade, “Study of the Possibility of Exploring for Natural Gas in the Coastal Areas of the Commonwealth,” House Document No. 22, January 10, 2006, p. 16

Virginia Policy:

“In recognition of the need for energy independence, it shall be the policy of the Commonwealth to support federal efforts to determine the extent of natural gas resources 50 miles or more off the Atlantic shoreline, including appropriate federal funding for such an investigation. The policy of the Commonwealth shall further support the inclusion of the Atlantic Planning Areas in the Minerals Management Service’s draft environmental impact statement with respect to natural gas exploration 50 miles or more off the Atlantic shoreline. Nothing in this Act shall be construed as a policy statement on the executive or Congressional moratoria on production and development of natural gas off the Atlantic shoreline.”

Virginia Energy Plan, Chapter 3, Section 67-300 (Senate Bill 262, May 18, 2006)

“The PFP includes a special interest sale in the Mid-Atlantic in late 2011. This area is under presidential withdrawal under section 12 of the Act, and has been subject to congressional moratoria. If the Presidential withdrawal is lifted and the Congressional moratorium is discontinued, a call for information will be issued. If industry interest reflected in comments on a call for information does not support consideration of a sale, the sale will be postponed. A request for nominations and comments will be issued again the following year, which is the last year of the program.” (P. 6) “The area off the coast of Virginia in the Mid-Atlantic Planning Area is included on the schedule as a special interest sale in 2011; but before MMS proceeds, it will issue a request for nominations and comments and will move forward only after consideration of the comments received in response to annual calls for information. If industry interest reflected in comments on a call for information does not support consideration of a sale, the sale will be postponed. A request for nominations and comments will be issued again the following year, which is the last year of the program.” (P. 64)

Source: Virginia Outer Continental Shelf Area: Minerals Management Service, Proposed Final Program Outer Continental Shelf Oil and Gas Leasing Program 2007-2012, April 2007.

Definition of a Special Interest Sale

The August 6, 2008 Navy Public Affairs Guidance

CHINFO Quick ResponseOffshore drilling – update

August 6, 2008 Background:  Pentagon press secretary Geoff Morrell stated publicly yesterday that SECDEF is revising the policy which prevents oil and gas drilling within military training areas.   PA posture is passive. OSD has PA lead.  Talking Points:  •The Department of the Navy (DON) is DoD's appointed Executive Agent for Outer Continental Shelf (OCS) matters, and has a long history of working well with Minerals Management Service to avoid OCS conflicts.

•DoD and DON support the national goal of exploration and development of our offshore energy resources and understand that the Administration’s outer continental shelf oil and gas leasing program is critical to our nation’s energy security, economic stability, and national defense.

•DoD, the Department of the Interior (DOI), and the oil and gas producing states have worked together successfully for many years to ensure unrestricted military access to critical testing and training areas while enabling oil and gas exploration in accordance with applicable laws and regulations.  Through this relationship, we have been able to maintain the proper balance between our nations’ energy and national security goals.

•DoD and DOI have negotiated an OCS Memorandum of Agreement (MOA) and have successfully worked together for the past two decades to insure a continuing successful leasing program with a manageable impact on defense operations.  The MOA has worked well to avoid OCS conflicts.

•For safety reasons, the military is compelled to discourage certain oil and gas activities where such activities would clearly be incompatible with military missile flights, low-flying aircraft, and weapons testing and evaluation.  We remain willing to discuss possible alternatives that may provide opportunities for exploration and potential joint use of the OCS where we operate.

Source/Coord:  OSD (Isleib); I&E (Keck) CHINFO POC:  Windstein

The 1983 DOD/DOI MOU on the Outer Continental Shelf

Areas on the OCS requiring deferral from lease offerings. Our departments agree that, balanced against the geologic potential of an area, certain defense related activities on the OCS may be irreconcilable with mineral exploration/development and will, under the procedures established above, be deferred from the pending lease offering. These activities are defined under this agreement as those which must take place in a particular area of the OCS due to their relation to fixed monitoring or control stations which cannot be moved except at great expense and compromise of their mission; those which relate to sensitive operations of a classified nature; and those which pose a direct danger to mineral exploration/development structures and/or personnel. More particularly, in selected instances, these may include but are not limited to: 

A. Research, development, testing and evaluation (RDT&E) ranges involving hazardous weapons, which encompass but are not limited to missiles activated by radar reflectivity or heat or errant missiles whose onboard sensors seek targets of opportunity. 

B. Intense operations by air, surface, or subsurface units whose activities are hazardous to non-DoD structures, equipment, personnel and which if forced to take place in close proximity to such structures would also become hazardous to DoD ships and aircraft. 

C. Certain classified activities which DoD will disclose to appropriately cleared DoI personnel.

D. Submarine transit lanes.

“Memorandum of Agreement Between the Department of Defense and the Department of the Interior on Mutual Concerns on the Outer Continental Shelf,” July 20, 1983

The Official DOD/Navy Position on Offshore Drilling

Position on MMS Proposal to drill in Virginia OCS Area:“The Department of Defense has reviewed the draft proposed program and the seven OCS planning areas proposed for leasing. …We have considerable concern, however, with the proposed lease sale areas within the Mid-Atlantic Planning Area off the coast of Virginia. The VACAPES undersea, surface, and air space areas are critical to the development, fielding and certification of naval weapons systems; as a consequence the Navy requires unencumbered access to the full expanse of this operations area. The Navy, Army, Air Force, and Marine Corps all use the VACAPES Operations Areas. …Because hazards in this area to operating crews and oil company equipment and structures would be so great, the Department opposes oil and gas development activity in this OCS planning location.” April 10, 2006

Position on original MMS proposal for drilling in Atlantic and Gulf Coast ranges:“As a user of the oceans, navigational waters, and air space above the OCS, the Navy and Air Force have maintained a keen interest in preserving unrestricted access to these areas and ensuring that national security interests associated with ongoing training and testing activities are not adversely affected by activities that occur in the OCS. Our commanders have told us that unrestricted use of critical sea ranges, warning areas, and military airspace operating areas is essential to naval exercises, pilot training, and live ordnance and weapons system testing and evaluation. Drilling rigs and related structures, because of their height and size would be hazardous to low-flying drone aircraft and missiles and military exercises would be hazardous to operations associated with oil and gas resource development. To prevent such incompatible encroachment, DoD has sought to discourage oil and gas development that would interfere with current and future military uses of the OCS.” October 7, 2005

W-106

W-105

W-107

W-386

W-387

W-72

W-110W-122

W-158

W-159

W-132/33/34

W-157

W-497

W-161/177

Navy and Air Force Training Ranges

Eastern Gulf of MexicoEastern Gulf of MexicoMoratorium AreaMoratorium Area

Key Military Air Bases NASA launch sites Navy Ranges Air Force Ranges

All were protected by Presidential Moratorium… until it was canceled by President Bush

All are protected by Congressional Moratorium… unless it is canceled by Congress

Eastern Gulf of Mexico ranges protected by law… but House & Senate bills would cancel it

W-106

W-105

W-107

W-386

W-387

W-72

W-110W-122

W-158

W-159

W-132/33/34

W-157

W-497

W-161/177

Navy and Air Force Training Ranges

Key Military Air Bases NASA launch sites Navy Ranges Air Force Ranges

Impact of Senate BillLifting Moratorium

These ranges are protected because

adjacent states oppose offshore

drilling

W-106

W-105

W-107

W-386

W-387

W-72

W-110W-122

W-158

W-159

W-132/33/34

W-157

W-497

W-161/177

Navy and Air Force Training Ranges

Key Military Air Bases NASA launch sites Navy Ranges Air Force Ranges

Impact of House BillLifting Moratorium

The House BillContains No Prohibitions on Drilling in Training Ranges

Availability of Offshore Oil Leases in the Gulf of Mexico

Only 41% of available area has been leased

US OCS Oil Production, 1990-2007

OCS production peaked in 2002 concurrent with a steep increase in the cost of US offshore oil.

It’s all about profits. Period. If the oil companies can make more profits by importing than drilling, then they will import oil rather than drill for it. That, and only that, is why overall US production has been declining since 1969 and US OCS production has been declining since 2002.

US Price of Oil Adjusted for Decline in Value of the Dollar

A barrel of oil would cost about 35% less today if the dollar had not lost so much value during

the Bush Administration.

Is it worth expanding offshore oil drillingto compensate for bad economic policy?

Reliability of Virginia Royalties Estimate

Virginia Prospective

Area(% of

Mid-Atlantic)

Atlantic MMS Area

Gas(Tcf)

Mid-AtlanticMMS Area

Gas(Tcf)

VirginiaOCS Area

Gas(Tcf)2

Atlantic MMS Area

Oil(Bbl)

Mid-AtlanticMMS Area

Oil(Bbl)

VirginiaOCS Area

Oil(Bbl)2

Virginia Royalties($ Bil)3

Gas only,over 30-50

years

Virginia 2006 Estimate

(2003 MMS Data)

11%33.3

(Mean)11.68 1.31 3.5

(Mean)1.23 0.1351 $2.9 bil

Virginia HighEstimate

(MMS Data as of 2006,

5% probability)

8.1%4 66.46 23.3 1.9 7.57 2.65 0.215 $4.2 bil

Virginia Mean

Estimate(MMS Data as of 2006,

~50% probability)

8.1%4 36.99 12.9 1.0 3.82 1.34 0.109 $2.2 bil

Virginia LowEstimate

(MMS Dataas of 2006,

95% probability)

8.1%4 14.30 5.0 0.4 1.12 0.39 0.032 $0.89 bil

1. Estimated by Virginia study group based on overall % increase in MMS estimate for Atlantic area 2000-2003. MMS did not break down by Mid-Atlantic or state.2. Virginia study group assumed oil and gas are distributed evenly throughout the Atlantic prospective area (each acre contains the same amount of oil and gas).3. Virginia study group assumed that the state will receive 50% of royalties.4. MMS in 2007 reduced the size of the Virginia OCS prospective area 26% smaller than the area used by the Virginia study group.