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    Document Summary
    - Report Published -

    House Document No. 22
    PUBLICATION YEAR 2006

    Document Title
    Study of the Possibility of Exploring for Natural Gas in the Coastal Areas of the Commonwealth

    Author
    Secretary of Commerce and Trade

    Enabling Authority
    HJR 625 (Regular Session, 2005)

    Executive Summary
    The Virginia General Assembly, in House Joint Resolution 625 directed the Secretary of Commerce and Trade to study the possibility of exploring for natural gas in the coastal areas of the Commonwealth. The Secretary convened an advisory group representing the natural gas industry, environmental advocacy groups, and the General Assembly to assist with this study. Although HJR 625 called for a study only of exploration for natural gas, the evidence presented to the advisory group made clear that if commercially recoverable reserves of natural gas or oil were found in the gas exploration process, then those reserves would in all likelihood be commercially developed. Accordingly, this report is written as if the Secretary was asked to study the possibility of the exploration, development, and production of natural gas and oil in the coastal areas of Virginia.

    Natural gas supply and demand

    Development of offshore energy resources is being proposed to increase domestic supplies of natural gas and petroleum in response to demand growth and diminishing production in other areas. World and domestic demands for natural gas have grown steadily over the past few decades. Natural gas consumption is projected to increase by approximately 2-3% per year into the future. Supplies of natural gas have not grown on pace with demand. This has caused the price of natural gas to increase in the United States from around $2-4 per thousand cubic feet during the 1990s to $8-12 per thousand cubic feet today and into the near future. The price is expected to remain high until demand is lessened or supplies are increased.

    These supply and demand problems should be addressed as part of a comprehensive energy policy for Virginia and the nation. Increased energy efficiency offers the only realistic short-term opportunity to bring supply and demand into better balance. In contrast, new offshore energy exploration will not yield additional energy supplies to Virginia or the nation for at least another decade, and probably longer. Nevertheless, the diversification of our energy supplies through development of new and enhanced sources of natural gas and other fossil fuels, and research and development of new clean and alternative energy supplies must be critical parts of our long-term approach to energy problems.

    Virginia’s offshore petroleum resources

    The areas in Virginia being considered for offshore development are on the outer continental shelf, continental slope and continental rise. The areas are located about 50 miles offshore and beyond in the federal Exclusive Economic Zone. The area is in the United State’s Minerals Management Service (MMS) Mid-Atlantic Planning Area. This area has been prohibited from development since 1990 through congressional and presidential moratoria. The Minerals Management Service manages outer continental shelf natural gas and oil development under 5-year leasing plans. The MMS is now developing the 2007-2012 leasing plan.

    Virginia’s outer continental shelf (OCS) areas have been subject to limited federal, state, and industry resource assessments. These studies show the geology in Virginia’s OCS area to be gas prone, although the presence of economically recoverable supplies is not assured. In addition, the presence of oil cannot be ruled out. Further geophysical exploration and drilling will be necessary to determine affirmatively whether economically recoverable natural gas or oil exists. The federal MMS estimates that there may be 33.3 trillion cubic feet of natural gas and 3.5 billion barrels of oil (called undiscovered conventionally recoverable hydrocarbon resources) in the Atlantic OCS. On a pro rata basis, this would total to about 11.7 trillion cubic feet of gas and 1.2 billion barrels of oil in the mid-Atlantic area. Based on MMS’s January 3, 2006, identification of offshore administrative boundaries, Virginia’s OCS area makes up about 11% of the mid-Atlantic OCS prospective production area. This percentage is considerably less than the percentage of the OCS area that was anticipated during the advisory group discussions. Royalty estimates depend on the amount of resources recoverable and the cost of gas or oil. There could be from zero to over $10 billion in total value of natural gas in the MMS’s Virginia offshore administrative boundary areas.

    The offshore development process

    Exploration and development of OCS resources takes place in four phases:

    • Five-year leasing program.
    • Individual lease sales.
    • Exploration plan.
    • Development and production plan.

    Under current law, coastal states have the opportunity for input into each phase of the development process through the National Environmental Protection Act (NEPA) reviews and through Coastal Zone Management Act consistency reviews. The public also has the opportunity for comment and involvement at each of the four phases of the development process. Each phase typically takes from one to two years to complete. There are proposals being considered in the federal Congress to allow states to opt out of the federal moratorium on offshore drilling and receive a percentage of federal revenues from any resulting development.

    Environmental impact of offshore exploration and development

    The Virginia Coastal Program agencies identified potential environmental impacts from natural gas exploration and development. Existing Virginia Coastal Program goals include providing for the appropriate extraction of energy and mineral resources consistent with proper environmental practices. Coastal Program agencies identified environmental issues related to exploration, offshore drilling and associated large vessel traffic, and new infrastructure and pipelines (offshore and onshore). They also identified state needs for assessment of the impact from development under the NEPA and Coastal Zone Management Act reviews. Lastly, the agencies identified data gaps to be addressed during any evaluation of offshore exploration and development.

    Other issues

    Offshore exploration and development could spur increased economic activity in the Hampton Roads area. Local governments would have to address the effects of near and onshore development associated with the offshore activities, including potential impacts on tourism. Any development would need to account for impacts on civilian and military shipping. Virginia would need to be particularly careful that offshore development would not negatively affect military facilities in Hampton Roads.

    Experience in other areas with offshore natural gas development

    Analysis of experience with offshore hydrocarbon exploration and development in other areas may help Virginia assess potential impacts on the Commonwealth. In 1990, North Carolina completed an extensive environmental impact review of the Manteo, North Carolina proposed exploration well. North Carolina found the development to be inconsistent with its Coastal Zone Management Plan.

    There is a mixed history of environmental protection and local economic impact from development in the U.S. Gulf of Mexico waters and in other countries. In recent times, the industry has been able to operate safely in areas with harsh weather, such as the North Sea and Georges Bank, with a very low incidence of environmental impacts. There were only a limited number of incidents causing minor environmental damage from the 2004 and 2005 Gulf of Mexico hurricanes.

    Conclusions and Recommendations

    The current market conditions for natural gas show there is an imbalance between natural gas demand and the supplies needed to support Virginia’s and the nation’s economy. While this study finds that Virginia OCS offshore exploration of natural gas and, perhaps, other hydrocarbon resources can be safely undertaken with the proper controls, such activity must be one part of a comprehensive response to our energy needs. Improved energy efficiency – better and more prudent use of our existing energy resources -- is our only viable short-term means of reducing our nation's need for new energy supplies. In the medium to long term, we must supplement our drive for greater efficiency with a continued effort to diversify and enhance our energy supplies through development of new environmentally responsible sources of and distribution infrastructure for natural gas, electricity and other fossil fuels, and the development of alternative energy sources that do not rely on fossil fuels.

    Therefore, Virginia, if given the opportunity, should allow exploration of natural gas in its OCS areas contingent on the conditions set forth below being satisfied. This recommendation is being made in full recognition that recoverable reserves of gas and oil may never be found in Virginia’s OCS areas. Accordingly, the Commonwealth should not have unrealistic expectations about the likelihood or the amount of potential revenue or economic activity to be derived from the development of such potential reserves.

    • Virginia and the nation develop a broad-based energy policy with energy efficiency as the backbone of our response to energy problems, coupled with increasing supplies of conventional and alternative energy resources.

    • Ample opportunity is provided for public involvement in the environmental assessment process for offshore energy development. The environmental impact assessment process for the initial exploration efforts in Virginia OCS areas should follow the process used to evaluate environmental issues related to the Manteo, North Carolina proposed exploration well to allow adequate time to evaluate issues related to such development. Any such environmental assessment should assume exploration and development of both natural gas and oil.

    • If commercially recoverable reserves of oil are discovered, Virginia must more carefully consider the increased risk of a large oil spill. Therefore, additional environmental assessment, with appropriate opportunities for public involvement, of the potential for and consequences of oil spills and ways to mitigate the risk of spills must be completed. This should include assessment of the oil spills arising from Hurricanes Katrina and Rita and other incidents in the Gulf of Mexico and from offshore oil production in the North Sea, Australia, and Nova Scotia. This analysis should be an integral part of the environmental assessments in phase 4 of the OCS development process.

    • The final decision whether to allow exploration and production of hydrocarbons in Virginia OCS areas must be contingent on the MMS and lease holders showing that the development will be undertaken in a manner protective of the environment and public safety.

    • Any offshore operations must use best available technologies and practices to control operations and minimize risks to the environment and public safety.

    • No wells should be drilled closer than 50 miles to the Virginia shoreline.

    • Any development of pipelines or support facilities in state waters or onshore areas must be consistent with Virginia’s Coastal Zone Program requirements.

    • No onshore facilities should be located on Virginia’s Eastern Shore.

    • All facilities located on- or near-shore must be consistent with local zoning and land use plans and not conflict with other land uses near the facilities. Facilities should not be located to intrude on areas critical for tourism or military operations in the region.

    • Revenue from OCS leases must be shared with the Commonwealth and affected localities. Revenues should support state response to other energy and environmental impacts, such as the cleanup of Chesapeake Bay and research into alternative energy sources.