How does another $25 billion in the State Treasury sound?
Got your attention?
GNO, Inc., the 10-parish economic development advocacy organization centered in New Orleans, has put forth an agenda for the Legislature that includes dramatic reforms to the energy sector in Louisiana—reforms that utilize new technology and that GNO says are sure to bring energy companies (back) to Louisiana.
Dubbed “REEL” for Renewed Energy Economy for Louisiana, GNO, Inc.’s program includes three crucial elements: deep gas exploration, enhanced oil recovery and gasification. The energy sector, long taken for granted as a staple of the state’s economy, may actually be among the most neglected.
“When we looked at Louisiana and at what we have in abundance, that’s what we’re wasting,” says Andrea Bland, GNO Inc.’s senior vice president for business development. “Most states would die for what we have here. Our neighbors get it, and we could if we had the political will.”
The first component of GNO, Inc.’s plan—deep gas exploration—avers that more than 30 trillion cubic feet of natural gas remain unexplored in Southern Louisiana, but all at a depth below 15,000 feet—deeper than 99% of the wells yet drilled. And more than 90% of active natural gas exploration companies have left Louisiana in the last four years, according to a GNO, Inc. summary.
Problem one: A lot of that gas is under water.
“We’re dealing with water, so the cost is dramatically higher,” Bland says. “But as the industry has advanced, it has gone offshore for this kind of exploration.”
Problem two: the state’s tax structure.
“We looked at tax competitiveness. We looked at costs. And we developed REEL,” Bland says. “Drilling a deep well in South Louisiana can cost $20 million. And it’s taxed at 40% of $20 million. That’s huge.”
Solutions, please? REEL calls for the state to reduce the royalty from drilling on state property to 12.5% from its current rate of 22%. REEL also proposes that the state eliminate ad valorem taxes paid to local parishes—a tax that is assessed on the cost of drilling—and for the state to eliminate the parish sales tax of 2% to 3% on equipment used to drill and produce. In exchange, parishes would receive 20% of the state’s royalty payout, double what local governments receive now.
The second element of the REEL plan is an effort to bring Enhanced Oil Recovery to the state. EOR involves the pumping of carbon dioxide into inactive reservoirs, changing the viscosity of the oil and bringing it to the surface for collection. The CO2 can then be recycled and used again.
Primary methods of oil harvesting reap only about 15% of a reservoir’s contents. Secondary methods—steam—add about 10% more. That means 75% of oil in Louisiana’s underground reservoirs remains uncollected. EOR would ameliorate that loss.
“It’s risk-free to the extent that you know the oil is there,” Bland says, citing U.S. Department of Energy estimates that at least two billion barrels of oil remain unharvested from onshore Louisiana reservoirs. “But you can’t get it without tertiary means.”
The setup for CO2 harvesting of those two-plus billion barrels costs in the tens of millions of dollars—per field. Add to that the cost of constructing or extending CO2 pipelines and the price tag is … well … staggering. To ease the impact, REEL includes provisions to reduce its severance tax rates from 12.5% at payout to 3.1% initially, rising to 6.2% over time. In comparison, Mississippi currently charges a 3% severance tax, while Texas levies only 1.15%.
“That 12.5% severance tax is a deal-breaker,” Bland says. Even with the proposed reforms, “we’ll still be higher than our neighbors, but the holiday until payout will level the field.”
Additionally, the third element of GNO’s plan—gasification—would help produce some of the CO2 that could be used in EOR. Pet-coke, a waste product from oil refining, is one of Louisiana’s underutilized cash cows. The state produces an eighth of the world’s supply of pet-coke, which usually is shipped overseas and burned for gas production in nations with less stringent emissions regulations. But through gasification here at home, pet-coke could be used to produce synthetic natural gas, hydrogen, ammonia—and CO2.
“Gasification is good,” Bland says. “It takes a dirty substance and makes it usable and clean. Over 30 years, 3% of stranded barrels of oil could be produced through gasification. The economic benefit to Louisiana is $7 billion in mineral revenues.”
Combining gasification with EOR—and throwing in deep drilling to make the deal even sweeter—might result in increased revenues, job creation, and more oil collection and production, the GNO Inc. plan contends.
Bland says state Rep. Nickie Monica (R-LaPlace) and state Sen. Dan “Blade” Morrish (R-Lake Charles) have agreed to file and carry necessary bills through the 2009 Legislative session to make REEL a reality. Monica did not respond to requests for an interview, and Morrish was circumspect on some elements of the plan.
Morrish, who recently attended a meeting of the National Energy Council in Washington, said not all of REEL’s elements are as desirable as GNO, Inc., might think.
For starters, Morrish says the idea of deeper drilling for natural gas isn’t bad, but isn’t necessarily desirable in an economic sense. Although GNO’s plan suggests that offshore natural gas drilling will be a boon, it isn’t the senator’s favorite element of REEL.
“On a national perspective, it doesn’t look like that’s accurate,” Morrish says. “The (existing) pipelines are already so full of natural gas. I’m not saying we shouldn’t do this, but that ought to give it another look. I don’t know the tax credits for 15,000-foot depths aren’t a good idea, but I question if anybody is going to use it at all. The pipeline capacity is full. ?I’m not sure going down 15,000 feet will be economically feasible for companies if they can go somewhere else.”
What does excite Morrish is the inclusion of EOR in the plan.
“Enhanced oil recovery through CO2 is the one I’m more excited about,” Morrish says. “It’s an unbelievably good use of the CO2 that’s already being manufactured. But it’s an expensive process and it has to be delivered by pipeline. The good news is natural gas is good, clean energy. It’s very reasonable for industry, for production and for residential consumers.”
Morrish says he will file two bills dealing directly with EOR.
“I feel the CO2 enhanced oil recovery and enhanced pipeline are the ones I’m on board with and comfortable with right now.”
And as for the other elements of REEL?
“We’ll have more dialogue,” the senator says.
If all three elements of REEL were to be enacted, GNO, Inc. estimates an additional $25 billion in state coffers over the next 30 years, with an average of more than 6,500 jobs and $270 million in personal income created each year.
Although no one has yet organized in op-position to the REEL proposals, that might be because the bills haven’t been filed yet.And Bland says the aspects of the plan that reduce parish income by eliminating or deferring the collection of ad valorem and sales taxes may, indeed, bring some chatter from the as-yet-nonexistent “other” side.
“You’ll never expect to see the Assessors Association or Louisiana Sheriffs Association standing side-by-side with economic developers,” she says.
If the project in its totality gets a green light, certain things are already in place to make it work—not counting the oil and natural gas resources themselves.
Two shovel-ready gasification sites in South Louisiana—Leucadia’s Lake Charles Cogeneration project and a yet-unnamed plant in the New Orleans region—can link east and west, capturing an estimated 7.7 million tons of CO2 to harvest oil reserves. And pet-coke is already here in abundance, providing feedstock to create even more CO2.
One thing is certain: What happens when the Legislature convenes for its abbreviated session at the end of April will have a real impact on the future of energy production in Louisiana.
