Big oil in the united states industry influence on institutions, policy, and politics

Acknowl edgments ix2 Onshore Oil and Gas Resource Development 15 3 Oil and Gas Development in the Outer Continental Shelf 47 4 Representing the Interests of Industry 73 5 Representing

Big Oil in the United States

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Big Oil in

the United States

Industry Influence on Institutions, Policy, and Politics

Jerry A McBeath

All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or other wise, except for the inclusion of brief quotations in a review, without prior permission in writing from the publisher.

Library of Congress Cataloging- in- Publication Data

Names: McBeath, Gerald A., author.

Title: Big oil in the United States : industry influence on institutions, policy, and politics / Jerry A McBeath.

Description: Santa Barbara, California : Praeger, [2016] | Includes bibliographical references and index.

Identifiers: LCCN 2016005285| ISBN 9781440837425 (hard copy : alk paper) | ISBN 9781440837432 (ebook)

Subjects: LCSH: Petroleum industry and trade—Political aspects— United States | Gas industry—Political aspects—United States | Business and politics—United States | Big business—Political aspects—United States.

130 Cremona Drive, P.O Box 1911

Santa Barbara, California 93116-1911

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This book is printed on acid- free paper

Manufactured in the United States of Amer i ca

For Jenifer, Bowen, and Rowena

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Acknowl edgments ix

2 Onshore Oil and Gas Resource Development 15

3 Oil and Gas Development in the Outer Continental Shelf 47

4 Representing the Interests of Industry 73

5 Representing the Interests of the Land 109

6 How Institutions Matter: Oil and Gas Regulatory Regimes 145

7 National Energy Policies and Big Oil 183

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In April 2014, Jessica Gribble, Praeger’s acquisitions editor, asked if I might be interested in writing a book on the topic of big oil in the United States Set to retire in a few months after 44 years of college teaching,

I thought a large research/writing proj ect would be a nice transition Although I’d done research on Alaska oil and gas issues since 1980, there was much to learn about the other oil- and gas- producing states and national energy policy, so I viewed Jessica’s proposition as a welcome challenge

Many helped me find good sources of information and the right people to talk to in the next year and a half Because for 30 some years I’d participated in the annual states’ bud get roundtable at the Western

Po liti cal Science Association, that’s where I turned first Helping me develop contacts in California were John Korey (emeritus professor, California State Polytechnic University, Pomona), Ted Lascher (professor

of public policy and administration, Cal State University, Sacramento), and James Goldstene (previously the executive officer of the California Air Resources Board) In Colorado, Tom Cronin (president emeritus, Whitman College, and professor of American institutions and leader-

ship at Colorado College) and Bruce Finley (writer for the Denver Post)

shared their contacts and insights In Wyoming, Bob Schuhman fessor of public administration, state/local government and associate dean) introduced me to colleagues in economics and energy Robert Godby, associate professor, and Ben Cook, visiting assistant professor, both in economics and finance at the business school put me in touch with several oil and gas regulators Two professors at the University

(pro-of New Mexico School (pro-of Law, Denise Fort and Alex Ritchie, facilitated

my finding good respondents in their state

Acknowl edgments

Law professors in other states were equally gracious At the versity of Houston Law School, Jacqueline Weaver and Tracy Hester introduced me to members of their faculty who had extensive experi-ence in the oil/gas industry and in government, including stints with the Texas Railroad Commission and the Texas Commission on Envi-ronmental Quality Owen Anderson of the Oklahoma University Col-lege of Law provided an entrée to his state’s Corporation Commission David Saxowsky (associate professor of agricultural economics with an affiliation at the school of law) seemed to know all the players in the North Dakota Industrial Commission Fi nally John Callahan, pub-lic information officer of the Bureau of Ocean Energy Management (BOEM), and Maureen Clark, public affairs specialist at the Bureau of Land Management (BLM), both in Alaska, alerted me to national offi-cials and those in other states who were knowledgeable about the issues

chap-in several ways Professor Todd Sherman, Dean of the College of eral Arts (UAF), arranged for office space UAF Summer Sessions pro-vided a travel grant for one of my research trips Breehan Yauney in the Dean’s office and Laura Schneider, administrative assistant in his-tory and northern studies, taught me how to deal with errant program files and word pro cessing glitches Kacy Roach aided in the prepara-tion of the bibliography

Lib-From the start of the research to the final corrections of the script, Jessica Gribble was an attentive and highly positive editor She satisfied the need of authors to know that every attempt to improve the manuscript is requited Also at Praeger, I thank Robin Tutt in edito-rial operations and Elana Palace, the editorial assistant Both Michelle Scott and Uma Maheswari in production were im mensely helpful in answering my questions and in dealing deftly with my prose

manu-Unlike the other research proj ects of my career, this one was a family affair My wife Jenifer (a plant pathology/biotechnology professor at UAF) took phone messages, provided advice in tracking down difficult- to- reach respondents, and urged me to find in ter est ing stories to tell in the book My son Bowen (professor of social work and public admin-

Acknowl edgments xiistration at Portland State University) commented constructively on each chapter and rooted out lapses in logic (and facts) My daughter Rowena (an orthopedic surgeon at the Philadelphia Hand Center) opened her home for my research on the Pennsylvania case study Even my grand-daughter Cora assisted by redrawing the maps.

My heartfelt thanks go to all who assisted this proj ect For any ing errors and omissions, I alone am responsible

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WHAT INFLUENCE DOES THE OIL AND GAS INDUSTRY HAVE

IN U.S POLITICS AND WHY?

This is the thesis we pursue throughout the book At the outset, we describe what the oil and gas sector contributes to the United States—

to the economy, to national security, and to po liti cal stability The tory of oil, from Drake’s 1859 discovery of oil in Pennsylvania to the pres ent (2016), and increases in production through technological inno-vation are treated as well Definitions clarify the size and power of the oil and gas drivers

his-This study differs from most other volumes on the energy sector because it looks at oil and gas development through the lens of the com-plex regulatory regime, and we discuss this in a special section, using layman’s terms We then introduce the study conducted to collect data, including original qualitative research and standard social science investigation into existing sources of lit er a ture The next section pre-views the six substantive chapters and unwraps the argument In a final note, we consider the unusual context during which the study was done: sharp drops in both oil and gas prices from late 2014 through 2015

ECONOMIC AND POLITICAL SIGNIFICANCE OF THE AMERICAN OIL AND GAS INDUSTRY

The U.S economy is the world’s largest, at a 2015 value of nearly $18 trillion Amer i ca is resource rich, and the speed of the industrial revo-lution in the post– Civil War generation depended on ready access to abundant sources of energy Initially, coal fueled factory boilers but

1

Introduction

then oil and natu ral gas reduced coal’s contribution (to, in 2015, only about 30  percent of utility generation) We explore throughout this volume the concept of “energy in de pen dence,” which described energy resources in the U.S economy until the early 1970s Then for four

de cades, the United States imported more oil than it exported until, entering the shale revolution, the balance turned Although the rela-tionship is considerably less than direct, the slowdown in economic growth in that period was related to declining domestic oil and gas production Clearly the state of the oil and gas industry in the United States is a significant factor in economic development, stability, and change

Oil and gas resources are subject to taxation by the state, but taxes

at the national level (as a percentage of all national revenues) are far lower than those at the state and local levels Several states, including most of the 10 case study states we pres ent, are dependent on severance taxes, royalties, corporation taxes, and other taxes and fees assessed

on the industry At the local level, we have “oil” towns from east to west; in fact, the place where oil was first discovered in the United States is now called Oil City, Pennsylvania Some towns (e.g., from small [Barrow, Alaska] to large [Houston, Texas]) are heavi ly depen-dent on the availability and price of oil and gas When fiscal- year bud-gets (spending and revenue plans) are crafted in these cities and states, the price of oil is a critical revenue variable During the last generation

in Alaska, legislators would wait until the spring revenue estimates before finalizing the bud get, and at times of extreme price volatility would even post the crude oil numbers on their office doors.1

Politics and policy are equally influenced by the oil and gas try Amer i ca’s two global wars showed this influence The United States broke the Eu ro pean logjam in World War I, and its coal and then oil resources were essential to the victory over Germany and its allies Denial of oil resources to Japan was a precipitating factor to Pearl Harbor and the American entrance into World War II; supply of American oil

indus-to allied forces was a crucial ele ment in the defeat of Italy, Germany, and Japan Following World War II, as global conflict in the Cold War placed the United States in proxy warfare with the Soviet Union, Amer-

i ca’s petroleum resources continued to play an impor tant role: they provisioned large numbers of forces in the Korean conflict (1950–1953) and supported American allies in the Vietnam War (1964–1975) Amer-

i ca’s support of Israel was a catalyst in the Yom Kippur War (October 1973) of Arab states with Israel, leading to the first oil shock when Arab oil- producing states stopped sales to the United States and the Nether-lands This qua dru pled oil prices and indicated the dependence of the United States, for the first time, on global oil supply Intra- Mideast

Introduction 3conflict and specifically the Iran- Iraq War brought about the second oil shock (1979–1981) and further sharp increases in oil prices and asso-ciated turbulence.

Oil shocks produced uncertainty and instability (e.g., very high inflation) in the United States, and were a factor in po liti cal upsets, such as the 1980 election in which Ronald Reagan defeated an incum-bent president, Jimmy Car ter They also confirmed to Amer i ca’s allies, especially Japan, the value that reliance on U.S power had in troubled times of resource scarcity The international position of the United States continued to depend on both domestic supply of oil and gas resources and protecting energy imports to the United States and its allies from the Middle East, Africa, and Latin Amer i ca

CONVENTIONAL AND UNCONVENTIONAL OIL AND

GAS DEVELOPMENT

The terms “conventional” and “unconventional,” in the context of oil and gas resource exploration and development, have several mean-ings To put it at the simplest, “conventional” oil and gas are resources close to the surface, which can be exploited without great cost by existing technology, specifically vertical drilling Edwin Drake’s 1859 discov-ery of oil in Pennsylvania is an example of a conventional exploration and development of oil resources

What has been “unconventional” about much oil and gas ment from the 1980s to the pres ent concerns location of the resource, the formation in which it is located, and technology The oil, gas, or combined resource is found at a considerable distance from the sur-face—in some cases more than 10,000 feet underground It is located

develop-in shale formations, which conventional drilldevelop-ing develop-in most cases is unable

to penetrate in order to extract the resource Fi nally, advances in oil/gas field technology, beginning in the 1980s, allowed wells to be drilled in

a downward- sloping horizontal direction This meant that drilling ciency could be enhanced, because from one large well pad, pipes could

effi-be sent to resource deposits located anywhere under the surface.2Horizontal drilling was the major innovation, but pipes sent below ground carried chemicals (combined always with water and usually with sand) designed to fracture the shale formations This led to the name of the unconventional oil and gas development: hydraulic frac-turing (HF), often shortened and simplified to “fracking.”3

This technological advance is responsible for what is called the

“shale revolution,” which dramatically increased U.S oil and gas duction in the first and second de cades of the 21st century As one of

pro-our respondents from the oil/gas patch said: “With fracking, we do not expect to run out of oil and gas for a century.”

BIG OIL

The term “big oil” is also used in several senses One meaning refers

to the integrated nature of the firm, which is quite large in size An integrated oil and gas firm has upstream, midstream, and downstream components Upstream typically means a component engaged in explo-ration for and production of the oil and/or natu ral gas resource (E&P), typically involving drilling The midstream component involves trans-portation of the oil or gas from the site of production to refineries, by pipelines, barges, oil tankers, railroads, or trucks Fi nally, the down-stream component represents refineries, which refine crude oil or pro-cess natu ral gas into gasoline, propane, ethanol, kerosene, heating oil, lubricants, and other products readily used by consumers The down-stream component also includes marketing and distribution of refined products

Most integrated oil/gas firms are publically traded and operate internationally; all are multinational corporations and are huge in size

In 2014, six vertically integrated oil/gas firms dominated global markets Three are headquartered in the United States: ExxonMobil (formed

by a merger in the 1990s between Exxon and Mobil); Chevron (formed from the merger of SoCal and Texaco); and ConocoPhillips (formed from the merger of Conoco and Phillips Petroleum).4 The remaining three integrated firms have headquarters in Eu rope but do a great deal of business in the United States: Royal Dutch Shell (created by a merger

of Royal Dutch and Shell Petroleum); BP (formed from a merger of British Petroleum and the much smaller Amoco; and Total (the prod-uct of a merger of Total, Fina, and Elf)

Associated with this definition of “big oil” as major (even jor), integrated petroleum firms are a negative connotation The word

superma-is used by some in a pejorative sense to object to the concentration of economic power in a very small number of business organ izations and wielded against the public interest This usage connects histori-cally to the populist opposition to trusts at the end of the 19th century.Another meaning of “big oil” is large in de pen dent producers A conventional classification of in de pen dent petroleum firms is large, medium, and small The bound aries to the three classes differ among observers, but the small firms are in the nature of “mom- and- pops,” which employ few if any individuals outside the family and produce limited amounts of oil/gas— perhaps no more than a barrel of oil a

Introduction 5day, week, or month Medium- sized in de pen dents may be privately held or publically traded firms, and have as many as several hundred employees They are large enough to employ geologists, engineers, and perhaps even hire environmental con sul tants Nearly all the large in de-pen dents are publically traded corporations, with thousands of employ-ees (including specialized management staff).

Three examples of large in de pen dents convey a sense of their ference from medium- and small- sized firms Chesapeake Energy has operations in 15 U.S states and economic interests in more than 40,000 wells (most of which are gas wells) Its revenue in 2010 was larger than

dif-$9 billion Anadarko has operations in all of the oil- and gas- producing regions of the United States as well as in Africa, Latin Amer i ca, and Asia Its reserves are divided nearly equally between natu ral gas and oil; in 2010, its revenue was about $11 billion Fi nally, Devon Energy operates in many unconventional gas areas, such as the Texas Barnett Shale Too, it has offshore operations in Angola and Brazil Altogether, these produced revenues of $10 billion in 2010

In this volume, we group the integrated oil/gas firms together with the large in de pen dents, referring to them all as “big oil,” majors, or in some cases, supermajors We also pay attention to the medium- and small- sized in de pen dents, which have played a strong role in the development of oil and gas fields in the United States

OIL AND GAS REGULATORY REGIMES

This volume has a practical and applied orientation; nevertheless, it is based on a generation of research in international relations and po liti-cal science concerning “regimes.” The concept of international regimes entered study of international relations in 1975 when mentioned by John Ruggie.5 As Krasner defined it several years later, the concept reflected the “princi ples, norms, rules and decision- making proce-dures”6 concerning an area of common interest for several nations in the international community These newly formed rules focused on par tic u lar areas of the international system in which relations among nation- states were un regu la ted, for example, nuclear proliferation They were agreements, which over time became routine and institu-tionalized In what is largely a “self- help” system of nations, hundreds

of agreements have been developed among nation- states with common interests, making the IR system more orderly than other wise would

be the case

The somewhat more specialized field of international po liti cal omy (IPE) also asks how conflict among nations can be resolved in

econ-specific areas of resource development One area of conflict is the role played by multinational corporations in lesser- developed countries (LDCs), which because of power disparities often are able to exploit oil and gas resources without sufficient regulation respecting human and environmental risk or extensive corruption Global attempts to create

“codes of conduct” for multinational corporations through such national governmental organ izations as the United Nations largely have failed.7

inter-However, what could be called “protoregimes” have developed in several areas from the bottom up Dannreuther points to the “Extrac-tive Industries Transparency Initiative,” founded at the initiative of the British government and NGOs and signed by a score of countries It commits signatory countries to disclose payments governments receive from oil companies as a means to increase accountability and reduce corruption.8 A second example is the corporate social responsibility (CSR) movement of firms leading to, in the case of oil and mining com-panies, reports to the public and corporate codes of contact These include princi ples to be observed regarding, among others, pledges against corruption and in favor of environmental care

In U.S society, the concept of regulatory regime grows out of erations in study of business- government (also known as state- market) relations, which also could be called domestic po liti cal economy Having

gen-a cgen-ap i tgen-al ist economy gen-and libergen-al society, the prevgen-alent belief of icans is that the “ free market” is the best allocator of resources and that actions by individuals and firms should not be controlled by govern-ments until they violate the public interest The common interest of the public typically has been defined through crises and popu lar mobi-lization, reflected in the populist and progressive movements of the late 19th/early 20th century.9 The po liti cal and legal expression of the movements was the first wave of regulation— for example, creation

Amer-of the Interstate Commerce Act (and Commission), the first regulatory commission in U.S national history, followed by the Sherman Anti- Trust Act (directed against Standard Oil) The Great Depression was the impetus for the second wave of regulation in a drive for economic recovery, represented by the New Deal co ali tion and a series of such economic regulations as the formation of the Securities and Exchange Commission and Federal Deposit Insurance Corporation

Economic regulations as seen in the first two waves sought to counter concentrated economic power: they were attacks on mono poly, with the intent of making the economy more competitive The third and most con-troversial wave of regulation has been called social, and it addresses

“negative externalities,” a justification for government intervention These are such phenomena as air, water, and land pollution, caused

Introduction 7when a willing seller (for example, a pulp mill– producing paper) sells

to a willing buyer (e.g a newspaper chain) without absorbing through increased prices the costs of cleaning up sludge transmitted to adja-cent harbors, rivers, or landfills Government through its regulations attempts to “internalize” (make producers and/or consumers pay) the costs of mitigation.10

This is the conceptual and theoretical explanation for the tory regimes that arose in many sectors of American life, up to the elec-tion of Ronald Reagan as president in the 1980 election Reagan came

regula-to office promising regula-to “get government off the backs” of the American people, and during his presidency, the deregulatory movement (to reduce or eliminate regulations), which began with the Airline Dereg-ulation Act of 1978, gained speed While some re- regulation occurred

as a consequence of failures of deregulation in the savings and loan and financial ser vices sector, changes in the nature of regulatory review

at the presidential level (through a new cost- benefit pro cess in the Office of Management and Bud get) drew attention to the regulatory burden

In the oil and gas industry where investment costs are high, both economic and social regulations have been applied to operators and firms and for the purposes originally envisioned: to ensure that extreme concentrations of economic power did not limit access (or significantly raise costs) to natu ral resource production and to ensure that risks of market failure and negative externalities were brought to a minimal level This kind of regulatory regime was developed in the American context; those who compare and contrast national styles of regulation consider it distinctive.11 Unlike Eu ro pean and some Asian systems

or regulation that emphasizes cooperative relationships between ness and government, the American system tends to be relatively adver-sarial, and the relationship of the parties is more likely to be distant than close

busi-We provide more detailed information about the oil and gas latory regimes as applied to onshore production in Chapter 2 and Outer Continental Shelf (OCS) development in Chapter 3 and return to the general theme in Chapter 6

regu-STUDY DESIGN

This study relies on two sources of knowledge The first is the ing lit er a ture on the oil and gas industry, on its regulatory regimes, on its contributions to American economic growth, on its accomplish-ments as well as flaws and pitfalls Overall the lit er a ture is large Parts

exist-of it are nonfiction books that have made it to best- seller lists, such as

Daniel Yergin’s The Quest and The Prize and Steve Coll’s Private Empire.12Nearly a dozen books explain the HF (or fracking) revolution, and some

such as Russell Gold’s The Boom and Nissa Darbonne’s The American Shales are popu lar too The scholarly lit er a ture is found in such books

as Robert Engler’s The Politics of Oil and David Prindle’s Petroleum Pol­ itics and The Texas Railroad Commission, but most of the scholarly work

is published in academic journals and law review articles Reports of such regulating agencies as the interior department’s Bureau of Ocean Energy Management (BOEM) and the Bureau of Land Management (BLM), which contract with scholars and other con sul tants to provide studies of regions in the OCS and onshore lands where leasing may

be conducted, are voluminous These studies and reports, along with those of other federal, state, and local regulatory agencies, are public documents Because they are not necessarily peer reviewed, we call them “gray lit er a ture.” Interest groups and environmental NGOs with interests in oil and gas exploration and development compile newslet-ters, fact sheets, and reports as well

Specialized newspapers and newsmagazines focus on oil and gas developments too Relied on most in this study was the online publica-

tions Energy & Environment News (including Energywire and Climatewire) The New York Times and Wall Street Journal report carefully on national issues The Oil and Gas Journal and Houston Chronicle feature good sec-

tions on technological developments in the industry and changes in industry structure These newspapers and newsmagazines were the best source of information on changes in the industry when oil and gas prices dropped precipitously in late 2014 and remained relatively low during 2015 Fi nally, social media swarmed to report on such eco-

logical disasters as Deepwater Horizon, and blogs often had insightful

observations

The second source is knowledge based on experience, provided generously in response to the author’s questions in more than 200 interviews, conducted from October 2014 through October 2015 The respondents fell loosely into three groups: 1) regulators in government agencies at multiple scales— federal, state, and local They comprised those working in the OCS and onshore areas, including BOEM, BSEE, EPA, BLM, ACE, USFWS, and USFS officers; directors and permitting supervisors in state departments of natu ral resources or conservation, environmental protection (or quality), and fish and game departments;

a few state legislators and local councilpersons; 2) oil and gas try representatives Only a few were leaders of energy firms; most industry representatives were trade association officers at the national

indus-Introduction 9and state levels; and  3) environmental NGO, advocacy, and public interest representatives, both at the national and state levels.

The interviews were qualitative and conducted in- person or by phone (and in three cases by e- mail) Background information was col-lected from nearly all respondents on their education and training, previous work experience, primary job responsibilities, collaborative and other relationships The main part of the interview used the lens

of the regulatory regime to ask detailed questions about historical and recent oil and gas development in the subject state or OCS region and

to ascertain regulatory challenges and opportunities Because most respondents preferred to comment anonymously, references to respon-dents in the text are generic The appendix lists all respondents by name and position title in the state where they were contacted (or, in a few cases, worked but did not reside)

PLAN OF THE VOLUME

The first two substantive chapters flesh out the regulatory systems for off shore and onshore oil and gas development Chapter 2 consid-ers onshore development and begins by presenting brief vignettes of oil/gas development in the 10 major producing states: Pennsylvania, Louisiana, Oklahoma, Texas, North Dakota, Wyoming, Colorado, New Mexico, California, and Alaska For several reasons, we would expect convergence of these states’ regulatory systems because of common federal requirements and an increased nationalization in the system of rules, as well as vertical diffusion from national compacts and regional councils and horizontal diffusion from other states Still, we find that there remain differences among the states because of special geological

or topographic conditions, dif fer ent degrees of state economic dence on the oil/gas industry, dif fer ent degrees of concentration in the state’s oil/gas industry, differences in po liti cal culture and orientation, and constitutional or legal differences The question is whether these differences affect outcomes, and we provide examples of situations in which they have

depen-Chapter 3 treats the four OCS regions: the Gulf of Mexico, Pacific, Alaska, and the Atlantic, illustrating pres ent as well as future poten-tial for hydrocarbon development A section briefly describes the three largest U.S environmental disasters in off- shore waters: the Santa Bar-

bara oil spill in 1969, ExxonValdez in 1989, and Deepwater Horizon in 2010

Each disaster precipitated significant changes in environmental lation It is the federal government that is responsible for management

regu-of risk in the OCS, and we analyze its dominance through the leasing and environmental review pro cess Yet because the United States is a federal system, coastal states attempt to influence federal OCS policy and seek distributive decisions favoring their own interests Big oil pays attention to the OCS because it is the last remaining area of the United States where they can establish “reserves” essential for the purpose of attracting investment for continued exploration and development A raft of geopo liti cal concerns also influences U.S OCS development.Chapter  4 considers how the interests of the industry are repre-sented in the formation and “life” of the oil and regulatory regime It first clarifies differences among four categories of be hav ior: 1) degree

of formalization and or ga ni za tion (e.g., size of staff, degree of ization), 2) connectedness to other groups (e.g., does group operate as

special-a lone wolf?), 3) nspecial-ature of group members, its constituency, special-and 4) is the group engaged in advocacy and involved in the legislative pro-cess? The chapter then treats both national- and state- level trade asso-ciations, and also introduces royalty owner associations formed in recent de cades to advance their mineral rights The chapter concludes with analy sis of the money connection of industry and politics in

po liti cal action committees (PACs) and contribution of individual firms

to campaigns for federal, state, and local office

Chapter  5 introduces the groups representing the interests of the land At the start, we pres ent a sample of national (mostly mainstream) environmental NGOs, considering the same four criteria used in the previous chapter We look briefly at advocacy organ izations working

in regions of the United States only Then we turn to grassroots izations that function at the state or local level only Because this chap-ter focuses on the land broadly, it examines also organ izations falling outside the purview of most environmental NGOs, such as farmers, ranchers, and landowners As in Chapter 4, we conclude with an eval-uation of the ability of NGOs to raise money to influence their objec-tives and to apply craft as well as money to reach them The chapter ends with an example of how organ izations always in search of finance can win on noneconomic grounds

organ-In Chapter 6, we return to the 10 major oil- and gas- producing states and examine their regulatory regimes in greater detail We inquire into the origin of rules, tracing some sets of rules to model statutes of the Interstate Oil and Gas Compact Commission Then we compare and contrast recruitment through election, gubernatorial appointment, and indirect appointment, and use an in ter est ing case of exceptional places in North Dakota to show the importance of the recruitment method Regulatory regimes coordinate governments at multiple scales, and in this chapter we review relationships between EPA and several

Introduction 11states, and then between state health and environmental agencies (with delegated powers from EPA) and the oil/gas regulatory regime The most difficult area in coordination is state- local relations, and here we pres ent a second case, the task force established by the Colorado gov-ernor to make recommendations to mitigate adverse effects of fracking

on local communities The chapter concludes with analy sis of the cability of the capture thesis in a review of the revolving door phe-nomenon and industry funding of government positions and with consideration of ways in which capture can be avoided

appli-The final substantive chapter (7) discusses national energy policies and their susceptibility to influence by big oil The first section of the chapter asks whether Congress, the national legislative branch, is bro-ken; how extreme partisanship and divided government affect inter-est groups; and whether undemo cratic procedures (e.g., Senate holds and appropriations riders) provide advantages to the oil/gas industry surpassing those available to environmental/advocacy groups In the second section, we see how Republican victories in the 2014 midterm election made regulatory agencies particularly impor tant for President Obama’s agenda by tracking the EPA, BLM, and the transportation department’s Pipeline and Hazardous Materials Safety Administration

We also note opposition to proposed regulatory changes by the oil and gas industry, and the likely venue(s) where resolution will occur The third section returns to Congress and the energy issues not under con-sideration (the “Halliburton loophole” and changes to subsidies and tax breaks for industry) Then, focusing on the two committees working

on new energy legislation actively in 2015— House Energy and merce and Senate Energy and Natu ral Resources—we explore the four topics on Congress’s issue list: 1) energy efficiency, 2) improvement

Com-of energy infrastructure, 3) supply focusing on renewables, and  4) accountability

The final chapter reviews the book’s subtitle: institutions, policy, and politics (in reverse order) The first section emphasizes the size of Big Oil’s footprint on  U.S politics, through direct contributions to campaigns and PACs The second section examines industry’s impact

on policy and not only discusses par tic u lar benefits industry has gained, but also some cases where the broader public benefits from the enlightened self- interest of industry The third section expands on the

“agency capture” thesis and practices developed to avert it, as well as strategies to improve coordination among government and nonstate actors to improve legitimacy of oil and gas regulatory systems The last section places these three sets of influences in the changing con-text of American federalism

PRICE VOLATILITY AND THE CONTEXT OF THE INDUSTRY

IN 2014/2015

The price of oil (and to a lesser extent, natu ral gas) is determined

by the global market, and during the period of research and writing

on this volume, the price has declined significantly From an average oil price of more than $90/barrel in 2013 and early 2014, prices fell

to an average price for North Sea Brent crude oil to $48/barrel in October 2015 (and $4/barrel lower for West Texas Intermediate [WTI]

or approximately $44/barrel), representing a drop in price of more than

50  percent.13 For natu ral gas, the price decline was less precipitous The Energy Information Administration estimated that the Henry Hub natu ral gas spot price would average $2.59/million British thermal units (MMBtu from October 2015 to March  2016), as compared to

$3.35/MMBtu for the same period in 2014 to 2015.14

The cause of this price decline had roots in both reduced demand for energy and a glut in supply On the demand side, slowing of economic growth in China and nearly zero growth in the Eu ro pean Union (and only somewhat stronger growth in the United States) reduced the need for oil and natu ral gas On the supply side, OPEC announced it would increase oil production among its member states with Saudi Arabia taking the lead (and aiming through higher OPEC production

to challenge U.S shale production) Too, the agreement of UN powers and Iran over its nuclear power program seems likely in the near term

to further increase global production

Some consequences of price declines affected all firms in the oil and gas business Because firms cut sharply (to nearly 40  percent) their expenditures on exploration and production (E&P), the number of drilling rigs used fell by nearly half (and firms cancelled outstand-ing contracts for drilling); some recently drilled wells remained “on standby,” leaving the oil and gas in the ground The price environment provided incentives for reducing drilling and production costs, which spurred such innovations as an increase in lateral drilling (allowing operators to reach widely spread deposits) and refracking of exist-ing formations Other consequences varied by size and function of firm We explore briefly the effects of this price volatility on firms (majors, medium- and small- sized in de pen dents, and oil field ser vice companies), effects on the oil/gas workforce and communities, and effects on the economy

For the integrated firms and very large in de pen dents, cuts affected the pres ent and the near term ExxonMobil, Shell, Chevron, and BP made cuts in capital spending, slicing through their lists of megaproj-ects to reduce costs University of Texas Energy Institute Director

Introduction 13Michael Webber noted: “What makes more sense in this environment: drill a $100 million well in the deep water Gulf that might come up empty, or poke lots of holes in West Texas where you already know there’s oil for a few million apiece?”15 In addition, all of the majors except ExxonMobil promised cost reductions of 30  percent or greater Along with cuts in capital spending and megaprojects, they promised

to reduce drilling costs for single wells in some jurisdictions from the

2014 figure of $8.5 million to $6.5 million.16 Rapidly falling oil prices had the reverse effect of the immediate past’s rise in prices, which had led to inflated costs at the drilling site When the super majors posted their quarterly earnings reports in late October 2015, they revealed steep losses Among them, ExxonMobil’s profitability fell by 47  percent,

to $4.2 billion for the third quarter; while Chevron’s earnings fell

63  percent to $2 billion.17 While production of oil increased from just

7 million barrels/day to 9.4 million by mid-2015, overall oil output declined somewhat later in 2015 Shale gas production, however, increased Overall, the situation of Big Oil was not bad given the sever-ity of the price declines

For medium- and small- sized oil/gas firms, however, the situation was dif fer ent They were hard hit by price declines At the least, they needed to restructure their debt, and the financial markets paid more scrutiny to their credit ratings than previously, declining to renew funding for the marginal firms (with B- level credit scores) Some small firms, such as Dune Energy, went bankrupt Against expectations, a wave of mergers and acquisitions had not consolidated the industry, because, one suspects, the time was not ripe for Big Oil Still, small

in de pen dents remained the most entrepreneurial force in the industry, moving quickly to take advantage of opportunities as they arose

A disproportionate share of the costs in downsizing the industry in

2014 to 2015 was paid by oil field ser vice firms At the start of the price slide, Halliburton (#2 in this area) started motions to acquire Baker Hughes (#3), a deal consummated in 2015 at the cost of several billion dollars The oil field ser vice firms laid off, on percentage terms, the largest number of employees— approaching 40  percent of their collec-tive workforce They reported significant drops in earnings; yet they also reported reduced costs of operation, making their ser vices of con-tinued value to the majors and in de pen dents and improving competi-tiveness of the U.S industry The objectives of big shale firms had been

to shave costs by 15 to 20  percent and raise productivity, and these objectives seemed likely to be accomplished.18

The effects of the price downturn on those working in the try and their communities were mostly adverse Well over 100,000 employees were laid off or lost their jobs outright Although take- home

indus-pay was not reduced at the start of the price decline, within six months employees could see the negative effects on their salaries As typically occurs, executive pay was slower to respond to this significant market change than that of operators and their assistants in the field and firm offices A telling indicator of the seriousness of the price impact was a decline in hiring and almost the elimination of the job category of “land-man.” This is the person who scours county court houses in the oil/gas patch to identify owners of development prospects It is a mea sure of the long- term future of the industry An individual as well as commu-nity effect of the price downturn was a sharp decline in property values

in the energy hub areas, including such large cities as Houston

One would expect that price volatility as great as that occurring in

2014 to 2015 would have a large impact on the U.S economy, given the close connection historically between energy price movements and economic growth or decline Clearly, consumers nationwide appreci-ated the fall in gasoline prices to their lowest levels in many years, but the reduction in energy costs was not registered in an increase of eco-nomic productivity The price volatility did encourage majors and large in de pen dents to reduce deficit spending and aspire toward a sit-uation of cash- flow neutrality Then, early productivity gains started

to flatten in the Permian Basin, Ea gle Ford, and Bakken plays.19

The response of industry to price volatility in this instance moved observers to won der about the longer- term energy security situation The fear they report is that as investments fall in upstream develop-ment, global reliance on a small number of very low- cost producers in the Middle East will increase The director of the International Energy Agency, Faith Birol, remarked: “(A) period of low oil prices is the moment to reinforce our capacity to deal with future energy security threats.”20 The IEA director’s report came shortly before the convening

of the UN Paris summit on green house gas emissions (for which the Obama administration sought EPA rule changes on power plant emis-sions, discussed in the penultimate chapter of this volume) The IEA report referred to “unmistakable signs that the much- needed global energy transition is underway,” by which is meant the decoupling of economic growth from energy use in the United States, as “CO2 emis-sions from power generation are set to grow at only one- fifth of the rate at which power output rises to 2040.”21 This judgment may be based

on questionable assumptions

Energy events in the middle of the second de cade of the 21st century

in the United States have global significance We begin our analy sis by investigating the current status of U.S oil and gas production onshore (Chapter 2) and in the OCS, Chapter 3, and we also introduce the oil and gas regulatory regimes

Countries with abundant natu ral resources in oil and gas begin ration and production onshore, and that has been the pattern in the United States In this chapter, we start with vignettes of Amer i ca’s lead-ing oil and gas production states and then turn to a description of the oil and gas regulatory systems

explo-We explore the pressures leading toward convergence of state tory systems, both vertical (from the nation or regional forces) and hori-zontal (from other states) We find that notwithstanding considerable convergence, states continue to display differences in their regulatory systems We explore the reasons for these differences— geographical, economic, po liti cal, and constitutional— and conclude with observa-tions on implications of the differences for future oil and gas explora-tion and development in the United States

regula-THE 10 MAJOR OIL- AND GAS- PRODUCING STATES

Because the focus of our study is on both oil and natu ral gas, we fully reviewed  U.S Energy Information Administration (EIA)1 data going back to before the onset of the shale revolution (2005–2006) The data we considered contained values computed in British thermal units (Btus), to make the natu ral gas output comparable to that of oil The analy sis produced a list of 10 states ranked in terms of production, for the period 2005 to 2015 Figure 2.1 pres ents the list

care-While most readers will have no difficulty with the top six- seven states on the list, there may be questions about those close to the cut-off point This is because of the dif fer ent volumes in production of

2

Onshore Oil and Gas Resource Development

Onshore Oil and Gas Resource Development 17 either oil or gas Thus, the list of the top 10 oil- producing states in Jan-uary 2015 had Kansas as #10, but not Pennsylvania (which produced more gas than oil), which was #18 And the list of the top 10 natu ral gas– producing states in 2015 lists in positions 8 to 10 Arkansas, West Virginia, and Utah, but not Alaska, California, and North Dakota— which produce disproportionately more crude oil than natu ral gas.2

We introduce the 10 states from east to west and north to south: Pennsylvania, Louisiana, North Dakota, Oklahoma, Texas, Wyoming, Colorado, New Mexico, California, and Alaska First, impor tant facts about size of land, population, ethnic distribution, and income are mentioned, followed by federal/tribal land owner ship, the history of oil and gas development, and then location of most recent oil/gas devel-opment activity

Pennsylvania

The estimated population of the Keystone state in 2014 was 12.8 lion, and it covered 44,743 square miles (a density of 283.9 persons/square mile).3 Racially and ethnically, Pennsylvania is diverse in its largest city, Philadelphia, but smaller cities and rural towns are much more homogeneous The per capita income total of $28,502 is some-what higher than the national average

mil-Pennsylvania was one of the 13 colonies and was the second state

to ratify the U.S Constitution (written in Philadelphia in 1787) within three months after it was drafted; like the other older states, it has limited federal land owner ship Only 2.1  percent is federal public domain, and most of that is managed by the U.S Forest Ser vice.4 About

13  percent of the Pennsylvania land mass is owned by the state5; the remaining 85  percent is in private owner ship

In the oil- and gas- producing states, indigenous peoples and early explorers had noticed oil seeps before the 19th century, but lacked the technology to drill for oil and gas successfully The first gas discovery in the United States was in New York State in 1821, but the first commer-cially feasible oil was discovered near Titusville (on Oil Creek), Pennsyl-vania, in 1859.6 It was “Col o nel” Edwin Drake who drilled and promoted this well, which attracted investment into oil drilling and marketing.7While not an industry leader through most of the 20th century, Pennsylvania was an impor tant source of natu ral energy production

in the eastern United States, based on work in the Appalachian Basin.8Discovery of feasibility in drilling for natu ral gas in the Marcellus Shale

in the first de cade of the 21st century upgraded all previous estimates The foundation for Marcellus lies under much of southern New York,

Pennsylvania, West Virginia, eastern Ohio, and far western Mary land, and has been estimated to contain from 50 to 500 trillion cubic feet of natu ral gas.9 Pennsylvania has been a major beneficiary of the shale revolution.

Louisiana

The Cajun state had an estimated population of 4.6 million in 2014, and they lived on 45,204 square miles (at a density of 105 persons/square miles) The African American population of Louisiana is more than twice the national average, but other minorities, especially Lati-nos, are fewer in number The per capita income of Louisianans, at

$24,442, is several thousand dollars lower than the national mean.Louisiana too has a relatively small amount of federal public domain—4.6  percent These lands are divided among the U.S Forest Ser vice, BLM, and the U.S Fish & Wildlife Ser vice, which manages national wildlife refuges State- owned lands comprise just over half this amount, 2.67  percent; and there are few tribal lands in the state.10The history of oil/gas development in Louisiana is almost as long

as that in Pennsylvania Drilling for both oil and gas occurred in the 1860s and 1870s, but attempts to find commercial quantities of oil were unsuccessful Then in 1901, the owner of a rice field near Jennings sus-pected there was natu ral gas in the area Placing an old stovepipe over the source of bubbles in a wet field, he “threw a lit match into the source To his delight, the bubbles ignited.”11

Oil and gas developments have occurred in both the north and south

of the state, and Louisiana is at the midpoint of the Central planning area for Gulf of Mexico production In most of the last century, the state has been within the top five national producers of both oil and gas.12 Writers on Louisiana thought that its dependence on oil had lessened after the price shocks of the 1970s and plummeting prices of the 1980s and 1990s (when state oil- and gas- related revenue dropped from 40  percent to less than 10  percent by the end of the century).13 This judgment proved to be premature, however, as the shale revolution brought new life to old rocks, and the economy’s de pen dency on fossil fuels continued

North Dakota

This state covers 68,001 square miles, but with a population estimated

at only 739,482 in 2014,is sparsely populated (9.7 persons/square mile)

Onshore Oil and Gas Resource Development 19Percentages of racial/ethnic minorities are significantly lower than the national averages, with the exception of American Indians who com-prise 5.4  percent of the state population The per capita income, at

$29,732, is about $1,000 higher than the national norm

North Dakota too has few lands under federal control, 3.9  percent

In the federal category, U.S Forest Service– managed lands are most numerous, followed by USFWS- managed lands in wildlife refuges The state has 214,600 square miles in Indian reservation lands.14 State- owned lands amount to only 1.84  percent of the territory, leaving pri-vate interests in charge of 94  percent of the lands

North Dakota is the outlier in our group of top oil/gas- producing states, because of its relatively short history of energy development This was not because of a lack of interest in the geological formations, especially those in the Badlands In the 1930s, a good deal of drilling work occurred where, by geological knowledge, oil seemed likely to be pres ent, but the efforts produced only dry holes It was not until shortly after World War II that a former chief geologist of an Oklahoma oil com pany, who had served in the war and returned to North Dakota, convinced Amerada Petroleum of Tulsa that it would find oil in an area

50 miles northeast of Williston.15 They struck oil within a year.16

Oil production from North Dakota was relatively modest in its early years, even after the location of primary activity moved five miles from the discovery site to a formation that became known as the Bak-ken formation The first well, and the formation itself, was named after the landowner, Henry Bakken; it occupied approximately 200,000 acres

in the Williston Basin, and is one of the largest domestic oil resources

of the United States The combination of horizontal drilling and lic fracturing technology pushed North Dakota to the number two position in U.S oil production.17

hydrau-Oklahoma

The Sooner state population stood at 3.9 million in 2014, in a land area

of 68,595 square miles (a density of 54.7 persons/square mile) ages of African Americans, Asians, and Latinos are lower than in the general U.S population, but the American Indian population, at 9.0  percent, is considerably higher Per capita income is about $4,000 lower than the national mean

Percent-Like the previous states, Oklahoma has a tiny amount of federal lands, about 1.6  percent, including 99,000 square miles of tribal lands The largest amount of federal lands are managed by the Army Corps

of Engineers, which has responsibilities for lakes around which there

is recreational activity; following this are lands in national wildlife refuges and forest ser vice lands.18 State lands are few as well, comprising just 2.2  percent of the total land surface Thus private lands occupy

96  percent of Oklahoma

Oklahoma has a long history of oil/gas development as it sits on rich geological formations, such as the Anadarko, Arkoma, and Ard-more basins The first commercially viable well was drilled in 1889, but it produced only a half barrel a day Seven years later, operators completed a discovery well for the Bartlesville- Dewey field, and this ushered in the oil age when Oklahoma was still a territory.19 By the turn of the century, drilling encompassed 26 major oil fields and Okla-homa became, until 1934, the leading producing state in the United States.20

The state had three major drilling booms, the first occurring just after statehood, lasting through 1930; the second reached its peak in the period 1953 to 195621; the third and most recent boom was the product

of increased oil prices toward the first de cade of the 21st century.22The shale revolution benefited Oklahoma greatly, both in extracting new oil and gas from existing formations and expanding into rich but complex basins, due to the advances in drilling technology.23

Less than 2  percent of Texas lands are in the hands of federal agement authorities, and these are distributed to the National Park Ser vice, then the Army Corps of Engineers, U.S Forest Ser vice, and the National Wildlife Refuge system A very small amount of lands, just 0.49  percent, are state owned The Lone Star State is a model of a state in which all lands are privately held with the exception of about 2.3  percent

man-Several wells producing small amounts of oil were drilled in the 1860s in Nacogdoches county, but the first oil well with commercially significant quantities was not discovered until 1894 at Corsicana How-ever, it was not until seven years later, in 1901, that oil prospector Captain Anthony Lucas drilled a discovery well at the Spindletop field

Onshore Oil and Gas Resource Development 21near Beaumont in the upper Gulf of Mexico coast, which transformed the state into a major oil producer.24 Gulf coast oil fields soon began to develop; then within a few years, developments spread to north Texas Oil booms became common in many parts of the state before the Great Depression.

The discovery of oil in Texas had effects similar to those in other parts of the United States Po liti cal scientists Mora, Ruger, and Mihal-kanin point out three major consequences for the socioeconomic development of the state: 1) oil production initiated the transition from

an agricultural to an industrial economy; 2) it led to increased lation growth, which attracted mi grants to the state from other states and countries; and 3) oil and gas development stimulated the transi-tion from a rural to an urban society.25

popu-In 1930, wildcatter “Dad” Joiner drilled the Daisy Bradford No 3 well near Tumertown in East Texas, and it became the largest field in the lower 48 states of the United States.26 Texas’s vast oil and gas resources

by the time of World War II were vital to war supply As Childs notes:

“Texas held more than 50  percent of the nation’s petroleum reserves and produced between 34.5 and 44.6  percent of domestic petroleum during the war.”27

In the postwar era, Texas remained a leading oil and gas producer, but the role of petroleum in the state economy declined considerably Indeed, superior production of oil and gas resources had enabled much

of the economic diversification occurring after the war The shale lution particularly benefited Texas because of several large basins, such

revo-as the Barnett, the Permian and Ea gle Ford, seeming to produce less volumes of natu ral gas.28

end-Wyoming

With just 584,153 residents in 2014, Wyoming is the least populous state, but its population density, at 5.6 persons/square mile (for a terri-tory of 97,093 square miles) is about the same as North Dakota’s The population is not very diverse racially or ethnically The numbers of American Indians are somewhat more than twice the national aver-age, but African Americans, Latinos, and Asians are considerably less numerous Per capita income is slightly above the national average

As the discussion moves west, we find that the amount of federal owner ship of land increases In Wyoming, some 48.2  percent of the land is in federal hands BLM manages most of Wyoming’s federal lands, followed by the U.S Forest Ser vice; the National Parks Ser vice

is a distant third landlord.29 About 6  percent of Wyoming’s land estate

is state owned and managed The remainder of the lands is in private hands.

Wyoming’s first oil well was drilled at Dallas Dome in the ter formation in 1883, well before the territory neared statehood In the 1890s, significant oil finds were made in the northern Natrona area In the years before widespread owner ship of automobiles with gas com-bustion engines, there were few incentives for exploration efforts How-ever, by the early 1920s, a number of very productive wells had been drilled in the Big Horn Basin including such areas as the Oregon, Grass Creek, and Elk Basins, which remain among the state’s largest The most significant oil find in this era was in northern Natrona County, the Salt Creek oil field, one of the most productive in the nation.30

Chugwa-Wyoming’s oil and gas fields are aging, and the shale revolution has brought new life to several The state has a longer history of coal production than oil and gas, and as their contribution to economic development wanes, a new energy product has emerged— coal bed methane (CBM) As several of our Wyoming respondents pointed out, technological innovations have made recovery and distribution to market of CBM feasible, benefitting the regions of the southwest (Sub-lette County) and northeast (Powder River Basin).31

Colorado

This western state has a growing population that reached, in 2014, 5.4 million In a land of 103,410 square miles, density was 48.5  persons/square mile The Latino population of Colorado is several points higher than the national average, but African Americans and Asians are fewer

in percentage terms; American Indians are close to the national age Colorado is relatively rich on a per capita basis, about $3,000 greater than the national average

aver-About 36  percent of Colorado’s lands are under federal government control In this case, the U.S Forest Ser vice manages the majority of federal public domain; BLM has about 8.3 million acres in its charge; the National Park Ser vice has just a half million State lands comprise only 4.4  percent of the total area of Colorado.32

Like many of the top oil/gas- producing states, Colorado has a long history of oil and gas exploration and development In the 1860s, entre-preneurs drilled wells near Canon City (in Florence), but oil was not discovered until 1881 Some consider the Florence oil field (on Coal Creek) the second oldest commercial oil- producing region in the United States.33 It covered 14 square miles Following this development, a dis-

Onshore Oil and Gas Resource Development 23covery was made (with a dowsing rod) in Boulder in 1901, and then from there the development spread to the Salt Creek field in Wyo-ming.34

The shale revolution brought renewed interest in Colorado’s portion

of the Niobrara Basin in the northeastern part of the state As Weiner remarks, because of horizontal drilling and hydraulic fracturing, the Niobrara shale increases prospects for retrieving shale gas from the Denver- Julesburg basin (especially the Wattenberg field), the San Juan basin in the southwestern part of the state, and the Raton in southcen-tral Colorado.35 A recent assessment of Colorado’s oil/gas prospects opines: “[T] here could be the equivalent of 1.5 to 2 billion barrels of new oil in Colorado.”36

New Mexico

Just over 2 million inhabitants populate New Mexico on a land expanse

of 121,298 square miles (with a density of 17 people/square mile The state is among the most diverse in the West Nearly 48  percent of the population is Latino, and 10  percent is American Indian, and thus it is a

“majority- minority” state (Numbers of African Americans and Asians are smaller than national averages.) The state’s per capita income is rel-atively low, about $4,400 less than the national average

The status of lands in New Mexico is complex The federal ment owns outright about 35  percent of the land expanse BLM is in charge of the largest amount, some 12.8 million acres, followed by the U.S Forest Ser vice, supervising 9.3 million acres National Park Service– managed lands and those in National Wildlife Refuges together com-prise about 1.4 million acres.37 New Mexico has a relatively complex pattern of Indian lands— some are in allotment status, some are reserves, and some are leased by tribes with an uncertain legal status— and this makes it difficult to ascertain the status of the remaining 7  percent of lands in the tribal category

govern-New Mexico shares mineral resources with two adjoining states: Colorado and Texas The San Juan Basin (shared with Colorado) was the site of the first oil/gas discovery, but development in the area was irregular and lagged 10 years behind that in the southeastern part of the state Notwithstanding relatively early discoveries, after a produc-tion peak in 1969, oil production began a long decline, for 40 years Then, the shale revolution brought horizontal drilling and hydraulic fracturing to the state, and two counties, Eddy and Lea (in the Perm-ian basin [shared with Texas]) experienced a boom in production

Authors of an analytical piece on the place of the oil and gas industry

in the New Mexico economy comment: “[P]roved reserves seem to increase each year despite increases in production.”38

California

With 38.8 million residents in 2014, California is Amer i ca’s most ulous state, and increasingly people live close to their neighbors Although the third largest state in land area (155,779 square miles), the population density is 239 persons/square mile Populations of some minorities are significantly larger than the national average— Latinos comprise 39  percent and Asians 14  percent, but African Americans are just half the national average (and American Indians about the same

pop-as the national rate in percentage terms) The per capita income of the state is $29,527, which is more than $1,000 larger than the norm

Between 40 and 48  percent of the lands in California are under eral control, and the lack of certainty prob ably is explained by the dif-fer ent accounting systems of our sources The rank order of federal supervisors begins with the U.S Forest Ser vice (14.5 million square miles), followed by BLM (8.4 million) and a smaller portion managed

fed-by the National Park Ser vice (less than 0.6 million) State- owned lands are 4.3  percent of the total land estate The majority of lands remain

in private hands

Initial efforts to explore for oil and gas occurred in southern fornia (in the 1860s) Also, drilling activity occurred in Humboldt county, where the first productive well was drilled in 1875.39 But close

to the start of the 20th century, a number of discoveries pushed fornia to the top of Amer i ca’s oil- and gas- producing states A notable discovery was the Summerland oil field in the 1890s, which was the world’s first offshore oil well This discovery was made near Santa Barbara in 1899.40 In the next three de cades, most exploration activity occurred along the Santa Barbara Channel Later, discoveries were made in adjacent regions at Huntington Beach, Seal Beach, and Wilm-ington

Cali-A moderate amount of oil/gas production activity takes place in the Pacific Outer Continental Shelf (OCS) region, offshore southern Cali-fornia Onshore, the center of activity is Kern county, in the southern region of the state For reasons mentioned throughout this volume, the stars are not well aligned for oil and gas developments in California,

or for that matter in other regions of the traditional West Coast.41

Onshore Oil and Gas Resource Development 25

Alaska

Our final state is Alaska The land area of Alaska is vast, about one- fifth the size of the contiguous 48 states at 570,640 square miles; how-ever, only an estimated 736,732 Alaskans were pres ent in 2014, making population density (1.2  persons/square mile) the lowest in the  U.S Numbers of African Americans and Latinos are much lower than one sees in the national average, but the Asian population has increased to

a rate slightly above the national average Most significant is the size of the Alaska Native/American Indian population Some 14.8  percent

of the public claimed this identity, but if one adds some of those who said they were from two or more races (7.1  percent), we see the highest percentage of indigenous persons in the United States Alaska is also a relatively rich state with a per capita income of $32,651, $4,000 higher than the national average

About 60  percent of the Alaska surface estate is federal public domain, and only a small part of this is controlled by Indian tribes The Alaska Native Claims Settlement Act of 1971 allocated approximately

11  percent of the state’s surface and subsurface estate to Native tions; this settlement did not include the previous Indian reserve at Metlakatla Approximately 103 million acres in Alaska are under direct state control, which is the largest land grant given any American state

corpora-Of the federal lands, BLM controls 69.1 million acres Some 75.3 million acres are in national wildlife refuges, and 52.7 million are managed by the National Park Ser vice Fi nally, 22.2 million acres are under care

of the U.S Forest Ser vice As Alaska’s po liti cal leaders do not tire to point out, federal dominance on lands issues affects every resident of the state

The Alaska Native population was well aware that its lands tained valued mineral resources, and they used the oil seeps for several purposes during the early history of contact and during the colonial and territorial periods Rus sian residents in Alaska also commented on the state’s natu ral bounty of fossil fuels Shortly after the American purchase of Alaska from Rus sia in 1867, entrepreneurs sought to take advantage of these resources Their activity ranged from the interior to southcentral and southeast Alaska and included drilling of a large number of exploratory wells They produced many dry holes, but the rec ord of their activity showed enough success to justify continued exploration One observer of the diversity of speculators, investors, and explorers who sought oil and gas then said:

con-Speculation on Alaska’s oil prospects attracted hundreds of individual Alaskans, limited partnerships, a large number of in de pen dent investors

from the contiguous forty- eight states, and a bevy of national and tinational oil corporations, including the parents of today’s global oil giants.42

mul-No discovery well indicated the presence of hydrocarbon resources

in large quantities until the mid-1950s Then, in 1957 Richfield Oil Com pany discovered marketable quantities of oil on the Kenai Penin-sula The Swanson field there produced oil in good quantities, and this became a strong argument in the Alaska Statehood battle: the terri-tory, upon becoming a state, would be able to sustain itself The state’s largest oil field, however, is Prudhoe Bay on the North Slope Discov-ered in 1968, this supergiant field has an estimated recoverable volume

of more than 16 billion barrels, the largest in the Western Hemi sphere During the late 1970s, 1980s, and 1990s, it produced most of the oil flow-ing through the Trans- Alaska Pipeline System (TAPS) For that period, Alaska produced about one- fifth of the U.S oil needs.43

All these states have systems of rules governing the exploration, development, and production of petroleum resources, and that is the subject to which we now turn

THE ONSHORE OIL AND GAS REGULATORY SYSTEM

The regulatory regime for onshore energy development is more plex than that developed for the OCS, because states have constitu-tions and sovereign powers (and these differ from one another), which must be considered in addition to the federal government We consider first the government agencies and their authority to regulate oil/gas exploration and production, and then the government policies and permits.44

com-Government Agencies and Authorities

We do not consider state agencies in the discussion of OCS ment (Chapter 3),45 because they lack authority to influence leasing, environmental analyses, safety and compliance determinations How-ever, they are the primary structures for regulation of onshore oil and gas activities, and we review them first Then we turn to federal agen-cies, but focus just on those with missions relevant to onshore oil and gas development and to environmental protection

develop-Onshore Oil and Gas Resource Development 27

State Authorities and Agencies

Each state, through its constitution, statutes, and regulations, directly affects oil and gas development activities In most cases, there is a con-stitutional mention of how state natu ral resources are to be handled and then designations in state statutes (for example, Chapter 78 of Pennsylvania statutes), where limits are mentioned and directions determined All states have constitutional prescriptions and statutes

on health and safety as well as environmental protection, which are broader objectives than those pertaining to any such industrial sector

of the economy as oil/gas Suffice it to say that at the state level, there are authorities for regulation in abundance, but they do vary with

re spect to their implementation

In most states, one agency has relatively clear prominence on issues regarding oil and gas development This may be a commission, such

as the Texas Railroad Commission or the North Dakota Industrial mission It may be a department, such as the California Department

Com-of Conservation Or it may be an agency with a department ized to administer petroleum development, such as the Office of Oil and Gas management in Pennsylvania’s Department of Environmen-tal Protection.46

special-Then, because oil and gas development influences human health and that of nonhumans (i.e., nonhuman animals and other species as well

as the ecosystem as a whole), other state agencies become involved These include in nearly all cases a state department of health and an environment department (with vari ous names through the United States); in a few cases, these functions are combined as seen in the Colorado Department of Public Health and Environment They include

as well state departments of fish and game (or game and fish, ing on which species is most valued)

depend-Other more specialized agencies may be involved in the regulatory scheme, for example, units focusing on parks and recreational activi-ties or on historical preservation Too, some states have experimented with special offices or departments dedicated to the coordination of dif fer ent offices involved in the oil/gas development pro cess This was attempted in Alaska for many years, ultimately without success.47 In the absence of special coordination offices, many states have used the modality of interagency agreements (memorandum of understanding [MOU] or memorandum of agreement [MOA]) to facilitate coordina-tion, both among state agencies and between one or several state agen-cies and a federal government agency

Local governments in each U.S state are instrumentalities of the state government and lack sovereign powers While some states (e.g., Alaska) attempt to fortify the power of local governments by providing