Virginia Off-Shore Oil Fact Sheet



Thomas Jefferson Institute for Public Policy

9035 Golden Sunset Lane ● Springfield, Virginia 22153

703/440-9447 · info@ ·

Michael W. Thompson

Chairman and President

Virginia Off-Shore Gas & Oil Fact Brief

Prepared by

Dr. David Schnare, PhD

Director,

Center for Environmental Stewardship

Thomas Jefferson Institute for Public Policy

May 2009

Thomas Jefferson Institute for Public Policy

The Thomas Jefferson Institute for Public Policy is a non-partisan research and education organization devoted to improving the lives of the people in Virginia. The Institute was organized in 1996, and was the only state and local government focused public policy foundation in Virginia based on a philosophy of limited government, free enterprise and individual responsibility. It is a “solutions tank” seeking better ways to accomplish the policies and programs currently being undertaken by state and local government – always based on the Institute’s underlying philosophy. The first study was published in February 1997.

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For more information on the programs and publications of the Thomas Jefferson Institute, please contact:

Thomas Jefferson Institute for Public Policy

9035 Golden Sunset Lane

Springfield, Virginia 22153

703/440-9447

email: info@

website:

This Policy Letter, “Virginia Off-Shore Oil and Gas – Fact and Fiction,” is published by the Thomas Jefferson Institute for Public Policy. This paper does not necessarily reflect the views of the Thomas Jefferson Institute or its Board of Directors. Nothing in this study should be construed as an attempt to hinder or aid any legislation.

Virginia Off-Shore Oil and Gas ~ Fact and Fiction

Prepared by David Schnare, Esq. PhD

Director, Center for Environmental Stewardship Thomas Jefferson Institute for Public Policy

Revised May 2009

On February 19th, Governor Kaine asked the Federal government to delay oil and gas exploration off the Virginia coast. Attorney General Bob McDonnell and Lieutenant Governor Bolling, in separate letters to Interior Secretary Salazar explained why it is in the interest of Virginia and the United States to maintain the current exploration schedule, a position reflecting a large majority of Virginia and U.S. citizens. As this issue has become a political matter, the Center for Environmental Stewardship has prepared this fact sheet to ensure the debate is based on the best information available. Here are a few of the key facts:

• We don’t know how much oil and natural gas is available off Virginia’s shores, but it is most likely well in excess of Federal estimates, although not likely as large as some have suggested.

• Development of off-shore resources is about reducing U.S. dependence of foreign oil and gas. It is not about global warming. It is about keeping jobs in the U.S. rather than losing them to other nations. It is about expanding Virginia’s economic base and it is about reducing the cost of living for Virginia and U.S. citizens. 72% of citizens support off-shore drilling.

• Using modern drilling techniques, off-shore oil reserves may produce from 130 million to 2 billion barrels of oil, an amount that would provide from less than one year’s worth of Virginia crude oil needs to 14 years of our crude oil needs.

• Estimates for off-shore natural gas reserves range from 1.14 to 36 trillion cubic feet, an amount that would provide 3.6 to 100 years worth of Virginia natural gas consumption.

• Off-shore production could produce about $69 million in state royalties for the Commonwealth, if that production supplied 100 percent of Virginia’s oil and gas needs and no more.

• Estimates of $200 million a year in royalties for natural gas alone do not seem likely at this time.

• Environmental impacts from offshore exploration and production are negligible.

• Sixty-three percent (63%) of adults now say finding new sources of energy is more important than reducing the amount of energy Americans currently consume.

Figure I

U.S. and Virginia Energy Supply and Consumption

The left side of Figure 1the figure shows the source of our nation’s energy and the right side shows how we use it. The large bold percentages (circled) represent Virginia energy sources and uses.

Virginia Petroleum

▪ Petroleum-based energy constitutes 33 percent of Virginia energy consumption. While the U.S. imports only about one-third of its petroleum-based energy, Virginia imports virtually all petroleum products with nearly half (49%) coming from non-U.S. sources.

▪ The majority of petroleum-related consumption (61% by volume) is as gasoline. To meet 2007 requirements, Virginia could be self-sufficient if it produced approximately 206 milllion barrels of crude oil each year, or the equivalent from coal resources which would require 103 million tons of coal per year.

|Virginia Prime Supplier Sales Volumes | |

|  |2007 |Millions of Barrels needed to produce 2007 petroleum |

| |Mil Gal / yr |product |

|Gasoline |3,941 |206 |

|Kerosene-(including Jet Fuel) |712 |186 |

|Propane |201 |117 |

|Fuel and Diesel Oil |1,522 |139 |

|Residual Fuel Oil |55 |31 |

|Total |6,456 | |

Source:

▪ Every barrel of crude (42-US-gallons) provides a little more than 44 gallons of petroleum products. One barrel produces:

o 19.15 gallons (72.5 liters): Gasoline

o 3.82 gallons (14.5 liters): Kerosene (including jet fuel)

o 1.72 gallons (6.5 liters): Propane (Liquefied Petroleum Gases (LPG))

o 10.96 gallons (6.6 liters): Heating, Fuel and Diesel Oil

o 1.76 gallons (6.6 liters): Heavy Fuel Oil (Residual)

o 7.27 gallons (27.5 liters): Other products (feedstocks for petrochemical plants, asphalt, bitumen, tar, etc.)

▪ Every ton of coal can produce two barrels of synthetic fuels.

Petroleum and Coal Resources

▪ Southwestern Virginia has 15 billion tons of recoverable coal resources.[1] A standard conversion rate of two barrels of synthetic fuels from one ton of coal indicates those resources are equivalent to over 100 years of coal and coal-to-liquids production, combined. The rate of return for CTL is 22-25 percent at $50 per barrel and existing subsidies.[2]

▪ The Federal government has estimated that Lease Sale 220, a 2.9 million acre area, could contain 130 million barrels of oil.[3] This would supply Virginia’s needs for 7.5 months. They caveat this estimate as based on 1970’s data and badly out of date.

▪ Oil companies have made their own estimates which they have not made public. Their representatives have, however, suggested that the reestimation of reserves done on Georges Bank and on the Scotian Shelf east of Nova Scotia provides a metric for a better estimate of the reserves in the Sale 220 area.[4]

▪ Updating the U.S. Federal estimates, using the Canadian metric, the reserves in the Sale 220 area may likely be 924 million barrels, and off the Virginia Coast perhaps two billion barrels. The later figure would supply Virginia’s needs for more than 14 years.

▪ Updating the U.S. Federal estimates, using the Bakken oil field experience in North Dakota and Montana,[5] Virginia’s Sale 220 area may contain 3.25 billion barrels and off the Virginia Coast perhaps 7 billion barrels. The later figure would supply Virginia’s needs for more than 50 years. Neither this estimate nor the one immediately above is any more certain than the Federal estimate based on 1970-era data but does represent a likely upper bound.

▪ Notably, the federal government’s initial estimates have been dramatically conservative, frequently underestimating the amount of actual resources. For example, Alaska’s Prudhoe Bay oilfield has produced more than 15 billion barrels of oil and natural gas liquids, and is still producing. Government agencies forecast the region would produce no more than 9 billion barrels, total. In the Bakken Formation of North Dakota and Montana, the U.S. Geological Survey now says 3 billion to 4 billion barrels of undiscovered oil are available – 25 times more than the original estimate made in 1995. And, in 1987, the government estimated that there were 9 billion barrels of oil in the Gulf of Mexico. By 2006, after major advances in seismic technology and deepwater drilling techniques, the federal estimate for that area had ballooned to 45 billion barrels.

▪ The potential oil productivity from Lease Sale 220 will be best measured by gauging the level of interest oil drilling companies show in purchasing the leases. Until there is additional test drilling, the expected oil and gas reserves off Virginia’s shores is simply unknown.

▪ Using current offshore drilling technology, producers would need approximately three oil platforms to produce 206 million barrels per year, the current Virginia crude oil consumption.[6]

Virginia Natural Gas

▪ Natural gas-based energy (321 billion cubic feet) constitutes 34 percent of Virginia energy consumption. The U.S. imports slightly more than one-quarter of its natural gas energy[7], Virginia imports 66 percent of its natural gas production.[8]

▪ The Federal government has estimated that Lease Sale 220, a 2.9 million acre area, could contain 1.14 trillion cubic feet of natural gas. This reserve, alone, would supply Virginia’s needs for 3.6 years. They caveat this estimate as based on 1970’s data and badly out of date.

▪ Applying the Canadian metric, based on the Scotian geophysical similarity to Virginia, the reserves off the entire Virginia coast may likely be 36 trillon cubic feet of natural gas, supplying Virginia’s needs for over 100 years. Although we consider 36 trillion cubic feet as a high-end estimate, we note that others have suggested that the reserves may only be as large as 30 trillion cubic feet,[9] an amount roughly similar to application of the Scotian-based estimate.

Time to Production

▪ The Department of Interior announced in July, 2008, a new 5 year plan that will allow leasing to start in 2010, implying production from currently unleased areas could begin as early as 2015.[10] The Department has indicated it will complete the bidding process but it remains to be seen whether the new Administration will allow actual sales.

Environmental Implications

▪ The current MMS Lease Sale 220 includes a request for comment on environmental risks. Additional environmental studies would have to be made prior to construction of oil drilling rigs.

▪ An Independent Scientific Review of offshore oil production in Australia found that environmental impacts from offshore exploration and production are negligible.[11]

▪ The U.S. National Academy of Science reports: “New estimates indicate that the overall amount of petroleum released to the marine environment may be lower than earlier thought. This reflects, in part, advances over the last decade in marine transportation and oil and gas production techniques. Spillage from vessels in North American waters from 1990 to 1999 was less than one-third of the spillage during the prior decade, and, despite increased production, reductions in releases during oil and gas exploration and production have been dramatic as well.”[12]

▪ Texas A&M, Department of Oceanography, reports similar findings, indicating, for example that oil spills in the opening years of this century are 1/20th the size of spills in the 1970’s.[13]

Revenue Potential

▪ States receive 27 percent of the revenue collected from offshore oil and gas activity within a band that is 3 to 6 miles off their shore, as specified in section 8(g) of the OCS Lands Act. In 2008, states received about $64 million in royalties for off-shore production.[14]

▪ If Virginia produced 321 billion cubic feet of natural gas from off-shore reserves, thus supplying all of the Commonwealth’s annual needs, it would receive about $29 million per year in royalties. Current rates of state royalties (2007) are $92.65 per million cubic feet.

▪ If Virginia produced 206 million barrels of crude oil from off-shore reserves, thus supplying all of the Commonwealth’s own needs, it would receive about $40 million in royalties. Current rates of state royalties (2007) are $0.195 per barrel.

▪ If Virginia became a net exporter of oil and gas, State revenues would grow proportionately, based on the per cubic foot and per barrel rates above. Because estimates of oil and gas reserves and production potential are highly uncertain, this brief offers the state royalties per production unit, allowing others to calculate their own estimates of potential state revenues.

▪ There is a large diversity of opinion on the potential value of potential gas and oil production to Virginia state coffers. If Virginia had 36 trillion cubic feet of natural gas reserves and produced that amount over a 50 year period, it would produce 720,000 million cubic feet (mmcf) per year. Assuming Virginia could sell that amount,[15] at $92.65 per million cubic feet (the federal 2006 disbursement rate to states), 720,000 mmcf would provide Virginia $66.7 million. Some have suggested this level of production would generate more than three times that amount ($200 million)[16]. Neither the level of production (36 trillion cubic feet) nor the highest royalty estimate ($200 million per year) appear credible in light of data cited in the factsheet.

▪ The Coastal Impact Assistance Program (CIAP)[17] provides an additional source of federal funds associated with off-shore oil and gas production and authorizes funds to be distributed to Outer Continental Shelf (OCS) oil and gas producing states to mitigate the impacts of OCS oil and gas activities. Congress establishes the distribution formula which is based on the percent of total off-shore production within a state’s coastal lease area. Virginia would not likely receive more than about $2.5 million a year, all of which must be expended on coastal and marine environmental programs and 25 percent of which would go to local governments.

Public Support

▪ As of April, 2009, Sixty-three percent (63%) of adults now say finding new sources of energy is more important than reducing the amount of energy Americans currently consume.[18] Several other surveys of voters, conducted over the past 6 months, indicate strong support for off-shore development of oil and gas resources.[19]

▪ The March 2009 survey results shown below indicate 72% of South Carolina voters agree with the first of two statements between which they were asked to choose.[20]

(Some/other) people say that offshore drilling is critical to reduce gas prices and help reduce American independence on foreign oil. They say that new methods of offshore oil exploration are safe for the

environment and that we should make full use of our own natural resources to help with America’s energy crisis. (72% support)

(Some/other) people say that offshore drilling could harm the environment, and that there is a risk of an oil spill. They say that it would be years before Americans saw any reduction in prices because of offshore drilling. (20% support)

Support for Off-Shore Drilling by Gender and Age:

o 77% Men 18-44

o 69% Men 45-64

o 68% Men 65+

o 79% Women 18-44

o 67% Women 45-64

o 74% Women 65+

Support for Off-Shore Drilling by Race:

o 76% of White voters

o 66% of African-American voters

o 60% of Hispanic voters

Support for Off-Shore Drilling by Earnings:

o 74% of those earning under $40,000/year

o 67% of those earning $40-80,000/year

o 72% of those earning $80-100,000/year

o 65% of those earning over $100,000/year

David Schnare

Dr. David Schnare serves (pro bono) as the Director of the Center for Environmental Stewardship at the Thomas Jefferson Institute, Virginia’s premier independent public policy foundation. He is a Senior Attorney and Environmental Scientist in the Office of Regulatory Compliance at the United States Environmental Protection Agency (EPA). He held an appointment to the Environmental Quality Advisory Council of Fairfax County, the largest urban county in the nation. He is CEO of Schnare and Associates, Inc., a professional corporation providing legal representation, legal and policy analysis and is Chairman of the Environmental and Land Use Committee of the Occoquan Watershed Coalition, an organization of 143 homeowners associations in western Fairfax County, Virginia..

Bringing his “balanced” environmental views to his community, Dr. Schnare Co-Chaired the Occoquan Watershed Task Force, a group appointed by the Chairman of the Fairfax County Board of Supervisors to make a thorough assessment on the status of the watershed and to make recommendation on how to ensure its continued protection.

Dr. Schnare’s honors include: Two Gold and four Bronze Medals from the Administrator of the U.S. Environmental Protection Agency, the Vice President’s Hammer Award and multiple U.S. Department of Justice Certificates of Commendation. His academic achievements include Law Review at George Mason University School of Law; Inns of Court (GMUSL); Sigma Xi (Science Honorary); Delta Omega Service Award (Public Health Honorary); National Science Foundation Research Fellowship; LEGIS Fellowship; and the U.S. Public Health Fellowship. He is an Honorary Member of the Water Quality Association.

Dr. Schnare earned his JD in 1999 from George Mason University School of Law. While attending law school (and working full-time at EPA) he was the Hogan (Environmental) Essay winner and served on the Law Review and the Inns of Court. He graduated Cum Laude (Order of the Coif). He holds his PhD in Environmental Management from the University of North Carolina-Chapel Hill, a Master of Science in Public Health-Environmental Science from the University of North Carolina School of Public Health, and a Bachelor’s Degree from Cornell College in Mt. Vernon, Iowa where he majored in chemistry and mathematics.

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[1] Virginia Tech, Estimated Southwest Virginia Coal Reserves, Publication Number 460-139, posted June 2000, see, (accessed January 10, 2008)

[2] Money Week (2006), see, (accessed January 10, 2008).

[3] U.S. Minerals Management Service. See, (accessed January 10, 2008).

[4] Canada-Nova Scotia Offshore Petroleum Board, see (accessed January 10, 2008).

[5] United States Geological Survey. See,

[6] Institute for Energy Research (2008). See, . (accessed January 25, 2009)

[7] American Petroleum Institute, see (accessed January 25, 2009).

[8] Energy Information Administration, see, (accessed January 25, 2009).

[9] See, (accessed January 25, 2009).

[10] Institute for Energy Research, see (accessed January 10, 2008); and see, Department of Interior Press Release (2008), (accessed Jan 25, 2009).

[11] Earth Science Australia. See, (accessed January 10, 2008).

[12] National Academy Press, “Oil in the Sea” (2002), see, (accessed January 11, 2009).

[13] Texas A&M (2008), see, (accessed January 11, 2009).

[14] Minerals Management Service distributed $ $47,911,233.03 in 2006 state royalties (see, ) as payment for 517,121 million cubic feet in 2006 natural gas sales from gas and oil wells in state off-shore waters , see ) (accessed January 25, 2009). Dividing disbursements in dollars with production in million cubic feet produces state revenues of $92.65 per million cubic feet of natural gas production.

[15] Marketed volumes are approximately 82 percent of total production. In this example we assume all 750,000 mcf is sold, a liberal assumption.

[16] See, (accessed January 25, 2009).

[17] See, 43 U.S.C. 29.1356a.

[18] See, .

[19] See, e.g.,





 

[20] See,

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51%

49%

Virginia Baseline in Circles

12%

33%

34%

21%

17%

15%

25%

43%

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