Ken Silverstein EnergyBiz Insider Editor-in-Chief

The U.S. House Resources Committee just voted to ease a decades-long moratorium on drilling in the so-called Outer Continental Shelf, which is home to the 85 percent of federally-controlled waters in which drilling is strictly forbidden. The full House is expected to soon take up the measure while a similar bill is expected to be introduced in the U.S. Senate by the powerful head of the Senate Energy Committee, Sen. Pete Domenici, R-N.M.

Such a provision was in the recently passed energy bill but was ultimately stripped out. That's because Florida lawmakers threatened to try and stall the measure, given that their state is home to pristine beaches -- destinations that bring in a ton of money via tourism. But proponents of the measure counter that it is the one prudent solution to bring down natural gas prices.

"We cannot blame OPEC or anyone else for high natural gas prices when we choose not to address offshore access in moratoria," writes the Industrial Energy Consumers of America in a letter to Congress. "Inaction means we are choosing not to develop the significant natural gas and oil resources that are available in the country. We are choosing to have the highest price of natural gas in the world and choosing to send good manufacturing jobs overseas."

Current law says that the states control oil and gas drilling within three miles of their borders. Beyond that, the U.S. Minerals Management Service regulates drilling -- a law that has been in place since the mid 1980s. It has the right to grant leases to the highest qualified responsible bidder. Currently, about 35 percent of the natural gas consumed in the United States each year is produced in the Outer Continental Shelf.

But, in late September, the House Resources Committee voted to send a bill that would allow the states to "opt out" of the moratorium in exchange for a greater percentage of the federal revenue. The states, meanwhile, would have the right to decide whether to allow natural gas only production or natural gas as well as oil.

Immediate Questions

Supporters of the legislation say that 70 trillion cubic feet (tcf) of natural gas reserves is located in those places that are now off-limits to production. Domestic gas usage now stands at 22 tcf annually. The National Association of Regulatory Utility Commissioners passed a resolution encouraging state and federal lawmakers to consider greater drilling rights off America's coastlines.

A poll paid for by the Industrial Energy Consumers of America says that the citizens of the coastal states would support the "opt-out" provision. The survey contacted 3,200 people in California, Florida, North Carolina, South Carolina, Georgia and Virginia. Of those, only 9 percent said they would be opposed to drilling under any circumstance.

A more immediate question is whether the optimistic calculations as to the demand for natural gas can hold. U.S. production has dropped by nearly 5 percent while Canadian imports have declined by 23 percent from 2001 to 2004. Meantime, existing wells are producing less gas. Those economic realities coupled with prices that are about $14 per million BTUs for January deliveries, could likely curb future expected demand and force utilities to build more coal-fired generation that is cheaper and more plentiful.

Despite the lobbying efforts, winning expanded drilling rights remains difficult. The central challenge for those supporting increased production in the Outer Continental Shelf is persuading environmental activists that such drilling would leave unnoticeable footprints. The battle is now on in those states that border federal waters in the Gulf of Mexico as well as the Atlantic and Pacific coasts. The U.S. Conference of Mayors is fighting the legislation, saying it will strip state and local governments of their authority.

Opponents of allowing for greater drilling rights off America's coastlines note that 191,000 barrels of oil have already found their way into the Gulf of Mexico by way of damaged pipelines and hurricane-torn oil facilities. They also point out that the U.S. Mineral Management Service says that drilling is already permitted where 80 percent of all economically-recoverable natural gas is located in the Outer Continental Shelf.

Big Dollars

Florida's lawmakers don't want change: Twenty-two of its 25 U.S. House members sent a letter to House Resources Committee Chairman Richard Pombo, R-Calif., who authored the legislation. They oppose off-shore drilling, saying it would dirty the beaches there that draw millions of tourists each year. They add that more drilling won't ease price or supply problems, given that any activity would occur in the Gulf of Mexico or Atlantic Ocean, which are subject to hurricanes -- and disruptions -- each year.

"Eliminating the drilling ban poses a clear danger to our environment and an economy that are inextricably linked," writes the Florida delegation, which also has the support of its two U.S. Senators and Governor Jeb Bush, who would favor a law allowing drilling at least 125 miles from Florida's shorelines. President George Bush, though, supports the bill as written and says that the Outer Continental Shelf contains billions of barrels of oil and trillions of feet of natural gas that can be safely produced.

Critics are also complaining that the bill's supporters are using the recent natural disasters as a means to appease producers. Congressional backers counter consumers have paid about $200 billion more for natural gas when compared to the previous five years and lawmakers are therefore under pressure to increase supplies of both natural gas and oil. Lawmakers, in fact, have voted to allow for more drilling of oil in the Arctic National Wildlife Refuge and the pending bill would do the same for natural gas.

If momentum is to shift away from restrictive drilling policies and toward granting developers more access to properties now off limits, the evidence must be clear and convincing that new drilling techniques are far more benign than in the past. The argument remains a difficult hurdle for producers to cross. But the country's temperament may be changing because of the current high prices.

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