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Business Observer Thursday, Nov. 12, 2009 10 years ago

Cracking the Code

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While legislators look for a science-based, politically acceptable plan for oil drilling, new technology for extracting natural gas is aligning with state and federal energy policy to potentially unlock Florida waters and the eastern Gulf.
by: Jay Brady Government Editor

We're not exactly pulling our weight when it comes to energy production.

Florida is the third highest user of oil and gas among the 50 states. Yet, the state produces less than 12% of the energy it consumes and less than 1% of the total energy produced in the U.S.

But just offshore in the eastern Gulf of Mexico there could be billions of barrels of oil and trillions of cubic feet of natural gas.

And that has state legislators, who are staring at multi-billion dollar future budget deficits thinking more seriously about at least seeing what's out there. A $147 million mid-year budget gap is forecast this year by the Center on Budget and Policy Priorities and the next few years look far worse. And those come after two years of sharp cutbacks.

State Rep. Gary Aubuchon, R-Cape Coral, understands the need to see the bigger picture, saying, “Much of the focus ends up being on oil because of the environmental concerns, and what typically gets lost in the discussion are the potential reserves of natural gas and the economic benefits to the state.”

Aubuchon sits on the House select policy council on strategic and economic planning, which is now holding a series of hearings on drilling for oil and natural gas in state waters.

Florida only has dibs on a seven-mile zone that begins three miles out, but proponents of exploring those waters claim the state could benefit to the tune of up to $12 billion a year in energy severance taxes and royalties. More conservative estimates put the figure at $2.3 billion a year, but supporters say that's enough to increase funding for the state university system by half, provide health insurance to more than a million children or educate almost 300,000 school kids.

Under the Gulf of Mexico Energy Security Act revenue sharing program, Gulf states get 37.5% of oil and gas revenues.

For Texas, Louisiana and Alabama, oil and gas royalties are integral parts of their respective budgets. Texas earns $46.5 million a year in royalties from state waters along its coast, while Alabama collects $50 million to $300 million annually from severance taxes and royalties. In Alabama, lease payments and oil and gas severance taxes make up nearly 12% of the state general fund.

None of these states is on the list of 26 states projected to have mid-year budget deficits.

The potential for a big boost to Florida's economy has also been laid out by economist Hank Fishkind, of Orlando-based Fishkind and Associates. Fishkind estimates a $7 billion economic impact that would come with nearly 20,000 workers in direct energy sector jobs and more than 40,000 jobs overall. And that's his low estimate.

The upper range of Fishkind's estimate for an established Florida-based energy sector is $41 billion to the state's economy and 231,000 new jobs, including high-wage jobs such as geologists, petroleum engineers and roustabouts.

One Gulf Coast entity sure to benefit is the Tampa Port Authority, already “the energy gateway for all of west central Florida” according to Richard Wainio, port director and CEO.

“From a Port perspective, if we're geographically positioned to those offshore areas then we could be jumping off points for all the service related activity both during construction phase and during production,” says Wainio.

Port Manatee also stands to benefit as the only other major port on the Gulf Coast of Florida.

A look at Florida's 2008 gross domestic product, estimated at $329 billion (down 1.6% from 2007), shows just how big an economic impact the new industry would bring to the state: an eye-popping one-eighth increase in state GDP, which could finally be a major diversifier of the economy.

The sales tax revenue and corporate income tax revenue derived from all this new economic activity must make state bean counters salivate in anticipation. For legislators and the governor, it means revenue increase without tax increases, and a means to driver the state's 11% unemployment rate way back down.

“Shale gale”
Oil gets much of the public's attention, but it's natural gas that's becoming the energy source of choice both for its cleaner burning and power producing properties.

This could be an alignment of political will and market forces, thanks to new and better extraction technologies arriving just in time to help cut greenhouse gas emissions. Natural gas emits less carbon than oil.

The power companies — perhaps most notably Florida Power and Light which bills itself as “the largest renewable energy business in the nation” — stand to gain a competitive advantage over other electric utilities by reducing reliance on oil and coal. By doing so, FPL, for one, hopes to obtain valuable carbon credits should a national cap-and-trade system be mandated by the federal government as many expect to happen in 2010.

Already, natural gas powers 44.5% of Florida's electricity capacity. The next highest is coal at 30.1%. Petroleum comes in fourth at 9%, behind nuclear's 13%.

The federal Mineral Management Service estimates that 48% of the combined volume of oil and natural gas in the Gulf of Mexico's outer continental shelf (OCS) is natural gas. (Natural gas can be expressed in terms of its energy equivalence to oil because 5,620 cubic feet of gas is equivalent in energy terms to a barrel of oil.)

In the Eastern Gulf of Mexico, natural gas is about 50% of the volume on an oil-equivalent basis, referred to as “barrel of oil-equivalent,” or BOE. The total energy resources are estimated to be 7.7 billion barrels of BOE, with 3.8 billion barrels of BOE estimated for natural gas.

New technologies for extracting natural gas have brought about “America's Natural Gas Revolution,” the title of a Nov. 3 Wall Street Journal opinion piece by Pulitzer Prize-winner Daniel Yergin and Robert Ineson.

Yergin and Ineson call natural gas “(t)he biggest energy innovation of the decade,” noting that unconventional natural gas — derived from shales, coal-bed methane and “tight” formations — grew from just 10% of total U.S. production in 1990 to about 40% today. They also point out that it's growing fast and that shale gas is the biggest contributor to the gains — what they label the “shale gale.”

The combination of advances in horizontal drilling and hydraulic fracturing technologies allowed explorers to crack the shale rock code for a major new resource.

Horizontal drilling can now extend up to eight miles to within six feet of a target site. Fracturing uses water and sand at high pressure to free the trapped gas to flow into the well. Together, the two techniques get the gas to flow at greater volumes, but also much more economically than had been thought achievable.

According to data cited by Yergin and Ineson, U.S. reserves of natural gas increased from 177 trillion cubic feet in 2000 to 245 trillion cubic feet by 2008 — a volume equivalent to more than half of Qatar's reserves, which are the third largest in the world.

Cracking the political code
The major business organizations, including the Florida Chamber of Commerce and Associated Industries of Florida, see drilling as a no-brainer given the state's 11% unemployment rate, an economy overly dependent on non-industrial sectors, and a state budget crisis. The chamber's caveat is that the rigs not be visible from shore.

But what might seem like an odd coalition of environmental groups and a sprinkling of mostly Gulf Coast and panhandle chambers of commerce, are teaming up in an attempt to keep Florida mired in what many complain is a low-wage, undiversified tourist economy.

The state's recent three-year financial outlook predicts a $2.6 billion deficit for the 2010-11 fiscal year without big budget cuts or tax increases.

Huge increases in future Medicaid expenses from a predicted 50% increase in Medicaid-eligible residents could further drag down the budget on top of the expensive class size amendment requirements kicking-in next year. Any revenue salvation from the Seminole Indian gaming compact appears iffy at best, so drilling royalties appear more critical to filling future budget gaps.

While there's no certainty any oil or gas in economically recoverable volumes will be found in state waters, the Destin Dome, 25 miles off Pensacola, offers encouragement. It is estimated to contain three trillion cubic feet of dry natural gas, but political fights have kept any of it from being extracted.

Although the Florida House is holding hearings on legislation that would allow the governor to initiate lease sales, Senate President Jeff Atwater, R-North Palm Beach, has made it clear he has no intention of putting any proposed bill on a committee agenda this year.

Atwater happens to be a candidate for state chief financial officer, so nothing's likely to happen until Sen. Mike Haridopolos, R-Melbourne, takes the reins after the 2010 session. Haridopolos supported the bill that was passed in the final days of the 2009 session and is taking a lead role in committee meetings and forums seeking scientific surrounding drilling in state waters.

Atwater and others could start seeing the issue differently after more scheduled hearings. Two more hearings are set for December and January.

Rep. Aubuchon, for one, says he's open to the issue even after voting against the House bill last April. “Clearly there's an economic benefit to Florida in terms of jobs and employment and the royalties can also fund critical operations at the state and also help advance our renewable energy policy.”

So while the technology code has been cracked, it may take at least until 2011 to crack the political code.

REVIEW SUMMARY
What. Oil gets the press, but natural gas could seal the deal for drilling.
Issue. Will big advantages of natural gas discoveries trump oil concerns?
Impact. The state's gross domestic product could increase by one-eighth.

To see how natural gas is a major part of eastern gulf energy resources, download the numbers here. BytheNumbers.pdf

Jay Brady covers state and local government issues. He can be reached at [email protected], or at 941-362-4848.

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