Can we drill our way to energy independence?

This story was written in collaboration with the Rural West Initiative at the Bill Lane Center for the American West.

True to the frontier attitude still prevalent here, oil and gas officials say there’s a treasure of fossil fuels in the West that will take America closer to energy independence than any plan conceived in Washington D.C.

While speaking to a group of energy industry leaders in Wyoming recently, Chesapeake Energy’s John Dill said his company — and other oil and gas developers — fully intends to implement their own American energy plan.

“The country has waited long enough for a national energy policy,” Dill told attendees of the Wyoming Infrastructure Authority’s October meeting in Laramie. “So we’re going to take the bull by the horn and do it ourselves.”

Petroleum Consumption, Production and Import Trends (1949-2010)

(Petroleum Consumption, Production and Import Trends — click to enlarge)

Chesapeake Energy’s plan, “A Declaration of Energy Independence,” proclaims America’s “$400 billion a year” in foreign oil imports is “fiscally insane.” Toward American energy independence, Chesapeake created a $1 billion venture fund to convert transportation fleets from gasoline to compressed natural gas (CNG), aiming at the No. 1 driver for oil imports. The company invested another $150 million in Sundrop Fuels, which is developing what it calls a non-food biomass “green gasoline.”

“We believe American energy needs to be supplied 100 percent by domestic resources,” said Dill, director of Chesapeake’s corporate development and government relations.

With a huge presence in America’s current onshore drilling boom, Chesapeake Energy is the second largest natural gas producer in the nation. It’s recent acquisitions in the Denver-Julesburg Basin and Powder River Basin are part of an industry-wide shift toward developing shale oil.

And, Chesapeake is among many in the oil and gas industry touting an American energy policy, beginning with a lesser reliance on oil imports. This year the Western Energy Alliance (WEA), an industry trade association with more than 400 members, including Chesapeake, published its “Blueprint for Western Energy Prosperity.” The blueprint promises that by 2020 the West alone could supply enough domestic oil and gas “to produce more energy on a daily basis than the total U.S. imports from Saudi Arabia, Iraq, Kuwait, Venezuela, Colombia, Algeria, Nigeria, and Russia.” But it can’t be done unless we get rid of “redundant and burdensome government regulations and bureaucratic red tape,” according to WEA’s blueprint.

“Our blueprint shows that tapping the West’s natural resources could generate 70,000 new jobs, if only the federal government stopped adding more redundant regulations,” Kathleen Sgamma wrote in an Oct. 13 op-ed in The Denver Post.

The blueprint, Sgamma notes, doesn’t set out to make the case for 100 percent reduction in foreign oil imports. It makes the case for a game-changing break from those oil-supplying nations most out of sync with American interests. But the main thrust of the blueprint campaign is the message that a deliberately burdensome set of environmental regulations are being deployed against the industry, costing the nation tens of thousands of new jobs and a short road to “energy independence.”

But even industry analysts who don’t necessarily align themselves with environmental groups say the connection between environmental regulations and energy independence is usually overstated. And critics of the WEA and its blueprint campaign say it perpetuates a false notion that Americans must accept more environmental impacts on public lands in return for jobs and energy security.

Flaring takes place in the Pinedale Anticline Natural Gas Field in 2004. The Western Energy Alliance has created a "blueprint" which claims that by 2020, the West alone could produce more natural gas and oil than it's current imports from several top foreign providers. (Photo by John Amos/Flickr — click to enlarge)

Chesapeake Energy’s Declaration of Energy Independence makes little mention of the fact that a percentage of America’s domestic natural gas will likely be marketed overseas long before our energy needs are met “100 percent by domestic resources.”

Industry watchdog group, The Checks and Balances Project, notes that domestic oil and gas drilling is more vigorous than ever; in October drilling peaked at a level not seen since the early Reagan administration. The U.S. rig count was 2,000 at the end of November, compared to 1,687 the same time a year ago, according to Baker Hughes.

That leaves little room to complain that the Obama administration is blocking the development of domestic oil and gas, said Matt Garrington, deputy director of Checks and Balances. Even in the West where the industry is closely regulated, some 7,000 permits to drill federal minerals still sit idle, and more than half of the federal minerals currently under lease by the industry still are not under development.

“I think it’s about a land grab,” Garrington told WyoFile. “They don’t have enough rigs to ramp up drilling in the Rockies like the Bakken (shale oil play in North Dakota). Really, this is about using the political climate to make a land grab and sit on millions of acres. It’s good for their books, it’s good for their investors.”

Energy Independence

In spite of the industry’s revolutionary increase in domestic oil and gas production, it still protests an allegedly anti-energy administration that is supposedly blocking the industry from reaching its full potential.

Part of the dynamic has to do with the fact that the current boom in domestic shale gas and shale oil drilling is happening mostly on private minerals (in North Dakota, Pennsylvania, Louisiana, Texas and Oklahoma), while complaints of a stifling federal regulatory bureaucracy center on the industry’s ambitions to tap oil and gas on public lands in the West.

Lower 48 States Shale Plays

(Lower 48 states shale plays — click to enlarge)

Wyoming, Colorado and Utah were in the lead on domestic natural gas growth for the decade preceding today’s boom. Many elected officials from these states make a link between regulations and the migration of drilling rigs from the Rockies to shale gas plays in the eastern U.S., and they promise to fight federal regulations on public lands in an attempt to bring the rigs back.

So, what if the industry were to be granted its wish of a moratorium on additional regulation and get a green light to drill unfettered by what WEA and others regard as regulatory over-reach? Would it actually result in getting America on the road to energy independence?

“The easy answer to that is no. It does not matter … Anytime you hear somebody — a politician or otherwise — speak of energy independence, that goes against the statistics,” said John Curtis, director of the Potential Gas Agency at the Colorado School of Mines.

A quick primer on oil imports and how domestic natural gas factors into the equation: The U.S. currently produces about 5.5 million barrels of oil per day, and it imports about 8.3 million barrels of oil per day. U.S. oil imports are primarily driven by demand for transportation fuels. To address that demand for transportation oil, American natural gas producers propose converting a large portion of our transportation fleet to CNG — requiring an infrastructure transformation many years in the making, and requiring federal policy changes to help push the transformation.

At present, our domestic natural gas supply plays a modest role in offsetting foreign oil imports. Many shale gas wells also produce a small stream of liquid condensate that’s sold into the oil market. In this manner, the increase of domestic shale oil and shale gas production combined has helped to soften demand for foreign imports of crude oil. According to the U.S. Department of Energy, the nation is currently importing about 11.9 million barrels per day — a 15.9 percent decline from our average 14.1 million barrels per day import rate in 2007. Crude oil and petroleum products are down more than 2.2 million barrels per day over the past four years.

University of Wyoming economics professor Timothy Considine, who has studied shale gas development, said that most of the decline is due to lower demand, which is down 1.3 million barrels per day from 2007 levels. Domestic production of crude oil is up over 554 thousand barrels per day, almost 11 percent higher while natural gas liquids production is up over 353,000 barrels per day, nearly 20 percent higher than levels seen during 2007.

Replacing the entire 11.9 million barrels per day of foreign oil imports remains a significant task, said Considine. If future growth of U.S. crude oil and natural gas production continues at recent rates and with lackluster growth in demand, oil imports could decline another 3 million barrels per day by 2020.

Unless there’s a massive build-out of CNG infrastructure to convert our transportation fleets from gasoline — which many consider a worthy endeavor in a national energy policy — American natural gas will play a very minor role in U.S. oil imports. Notably, Chesapeake Energy isn’t promising that the gas it produces in the U.S. will stay in the U.S.

In a WyoFile interview, John Dill said that Chesapeake isn’t opposed to exporting domestic natural gas before America breaks its oil import habit. Chesapeake spokeswoman Kelsey Campbell later added that Chesapeake Energy has an obligation to its shareholders to seek the best market opportunities, which may soon include foreign exports.

After all, domestic natural gas has lingered below $5 per thousand cubic feet (mcf) and recently dipped to $3.11 per mcf, according to the EIA. It’s easy to understand why U.S. natural gas producers would want to sell the domestic product to Japan, China and Europe where buyers are paying nearly five times that price for imported natural gas.

U.S. Natural Gas Reserves Summary

(U.S. Natural Gas Reserves Summary — click to enlarge)

Rather than domestic natural gas, energy analysts say efforts to make America more energy independent has everything to do with oil. Still, many experts downplay the urgency and the notion America can, or should, become entirely free of foreign oil.

“The energy independence idea, from an economic standpoint, a lot of economists don’t feel it’s that relevant … because countries trade all of the time,” said Considine.

While a healthy domestic supply of oil protects a country from interruptions, oil remains a global commodity. Considine said he doubts America could ever increase oil production enough to replace all foreign imports — no matter what changes are made to regulations.

“The boom in the Bakken (shale oil) and Eagle Ford (shale oil) in Texas is coming on real strong. And on the horizon is eastern Ohio (Utica shale oil),” said Considine. “So the future looks pretty bright for U.S. domestic oil production. Whether it can replace foreign oil imports, that’s quite a stretch.”

What attracts drilling rigs?

Drilling rigs were not driven away by regulations. They followed the money.

Mike Chiropolos, lands program director for Western Resource Advocates, a Boulder, Colo.-based environmental watchdog group, said he believes the oil and gas industry continually overstates the link between regulatory reforms on public lands and whatever might be achieved in the way of American energy independence.

Grand Mesa

Grand Mesa, at the border of Utah and Colorado, is an area rich in oil shale. Analysts say production of the product is often seen as an opportunity to make a quick and certain return on investment, attracting drilling rigs to different regions across the U.S. (Photo by Doc Searls — click to enlarge)

WEA’s projection of a drastically more energy independent America by 2020 in exchange for regulatory reforms is really an attempt to justify expanded access to public lands, said Chiropolos.

“This whole cry for access, I really don’t get it,” Chiropolos told WyoFile. “A lot of industry’s economic challenges are of their own making; they overproduced and now there’s a glut of gas on the market in a weak economy. Part of the reason they’re sitting on a lot of (federal mineral) leases is because there’s just not a lot of demand to keep all the wells operating, let alone expand new drilling operations.”

Producers don’t like to talk about profit margin differentials between domestic plays, but shale gas plays such as the Marcellus in Pennsylvania are generally regarded as more attractive than tight-sands gas wells in the Rockies for a variety of reasons. Not only are the shale gas plays in the eastern and southern U.S. closer to the end-use markets compared to the Rockies, but in the shale gas formations you can drill just about anywhere and strike a lucrative resource, whereas in the West the resource is more geographically restricted.

The bottom line, according to market analysts such as Bentek Energy, is that the opportunity to make a quick and certain return on investment is what really attracts drilling rigs to different regions of the U.S. Drilling in the Niobrara shale oil formation in southeast Wyoming, for example, has been much slower than anticipated despite being a private mineral play free of those regulatory burdens that WEA claims are blocking rigs from the Rocky Mountain states.

Rather than developing a large expanse of the Niobrara across all of southeast Wyoming, operators here say it will be a long process of finding the “sweet spots” to concentrate development, which means the pace has to be set almost entirely on geology and the price of oil. Not regulation. To a lesser extent, that also applies to natural gas development on federal lands in the West, according to Tom Sherman of Bentek Energy, whose clients include the “top firms in the energy industry.”

“Right now, it’s probably more economics and better opportunities outside the Rockies as opposed to regulations that really, really are hindering development in the Rockies. … If (natural gas) prices were where they were in 2008, you’d see a lot of those rigs coming back to the Rockies,” said Sherman.

“The Bakken oil shale, the economics are very good, and it’s similar in the northeast — the shale gas frenzy in the Marcellus is very economic, and they (industry) don’t have that type of opportunity in the Rockies yet,” Sherman told WyoFile.

There are other considerations when it comes to choosing where to drill that industry doesn’t readily advertise. Many operators in the Bakken, for example, are racing against the clock. Many of the private mineral leases fueling that drilling boom were struck nearly five years ago at $200 per acre — on five-year terms. Now those leases are about to expire, so the operators are in a frenzy to drill in order to keep the leases active at those current rates. If they don’t start a well on those lands before the leases expire, they have to renegotiate at much higher rates — up to an estimated $2,000 per acre.

Public Lands Battlefield

Industry does have a long and, at first glance, compelling list of complaints about federal leasing, permitting and regulatory stipulations in the West.

Federal mineral leases nominated for sale are often challenged administratively within the Interior and in court by environmental groups. Several major natural gas drilling proposals have been stuck in National Environmental Protection Act (NEPA) review processes for more than five years, and industry leaders complain that air quality standards have been a moving target for many years. Endangered Species Act protections for multiple species also restrict access to certain areas during different times of the year. This, combined with unpredictable weather in the West, creates limited drilling seasons and a planning nightmare for operators competing for rigs and other services.

WEA’s Kathleen Sgamma, and other industry leaders, often cite analysis by EnCana Oil & Gas USA that suggests current federal planning delays cost Wyoming 30,666 jobs annually. “If there were the political will to develop our oil and gas resources in the West, the (Bureau of Land Management) could find ways to get things done in a more timely manner,” said Sgamma.

But, clearly, it’s not federal regulatory delays alone that impede efforts to drill all available leases on public lands in the West. Sgamma concedes the industry is currently short on rigs and workers. The industry has launched workforce training programs, but America just doesn’t have 30,666 workers qualified to go to work in the industry in a short amount of time. Nevertheless, in the face of those problems, people in the industry express confident optimism.

“The drilling industry would meet it and exceed it,” said Patrick Hladky. And if all onshore rigs are busy, “We’d just build new ones,” he said.

Hladky, president of Gillette-based Cyclone Drilling, said in September that all 28 of his rigs were in operation — most of them in North Dakota where the Bakken oil play is putting a strain on the U.S. rig fleet. If you called to move a rig to a new location in the West, you would have to wait at least six months, he said.

As for the skeptics, environmental groups often note the fact that thousands of applications for permits to drill on federal minerals in the West are issued every year that are not drilled within the 2-year permit term — and many are never drilled. Central to the energy development on public lands debate is this; the industry nominates, and the BLM sells, oil and gas leases that companies never develop.

According to the BLM, some 75,192 leases on 57.6 million acres of federal minerals have been issued since 1969. These lease totals are higher than the actual acreage that BLM manages in Wyoming (BLM manages more than 17 million surface acres and 42 million mineral acres in Wyoming) because the figures reflect the fact that many federal lands are leased over and over again.

Yet only 6.5 percent of the leases sold and 5.3 percent of the acreage was actually developed into production, according to a recent BLM environmental assessment (page 8). Industry critics say it’s not regulation that holds the leasing-to-development ratio down so low, but rather operators historically lease more minerals than they intend to develop in order to explore and hold a position in case the markets rise.

As Industry and Science Evolve, So Too Must Regulation

Regardless of an administration’s politics, BLM officials say regulatory standards and stipulations necessarily evolve to follow the latest science and to address actual changes detected in air quality, water quality, surface conditions and in the health of wildlife populations. Advances in air quality modeling, for example, also require additional steps in planning and monitoring.

BLM and the Wyoming Department of Environmental Quality, for example, are now required to carefully scrutinize plans for drilling expansions in the Upper Green River Basin due to the industry’s role in dangerous ground-level ozone spikes in recent years.

Drilling Rig Pinedale

The drilling seen here in Upper Green River Basin has been associated with regional spikes in ground-level ozone, prompting new requirements for federal agenciesin reviewing expansion plans. (Click to enlarge)

“We do have more instruction regarding sage grouse protections, more instruction regarding inventory of lands that may provide wilderness characteristics,” said Wyoming BLM spokeswoman Beverly Gorny. But, she noted, some of the drilling projects delayed in Wyoming were revamped at the request of the operators because they expanded their drilling proposals.

Chiropolos, the lands program director for Western Resource Advocates, said responsible oil and gas operators who want to do business in the West for the long-haul ought to be careful what their lobbyists wish for. If a full-throttle pace of drilling were to spread across the West it would easily trigger a full listing of the sage grouse under the Endangered Species Act, he said.

A sage grouse listing, most stakeholders agree, would essentially shut down all new oil and gas activities on public lands in the West, in addition to agriculture, recreation and myriad other activities.

“They can publish blueprints and make abstract cases for more access, but what would really happen if we turned them loose?” said Chiropolos.

Darryl Watts, Wyoming BLM’s acting branch chief for fluid mineral operations, said, “In my mind the biggest thing that leads to leasing deferrals and other delays … is the greater sage grouse issue. It’s the biggest single reason why we defer lease parcels or don’t lease them at all.”

— This story was originally reported and published by Contact Dustin Bleizeffer at 307-577-6069 or

(Banner photo by Travel Aficionado/Flickr)

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