A Barrel in Hand Is Worth Two From Bush

With Senate Energy Chairman Frank Murkowski, R-Alaska, introducing a comprehensive energy plan backed by the Bush administration, special interests are lining up and digging in for what promises to be a contentious battle. The proposal includes opening 19 million acres of protected Alaskan territory to oil and gas exploration.

Republicans support the plan; Democrats oppose it. Pro-business groups such as the Chamber of Commerce support it, with old-line rhetoric suggesting it removes the shackles of foreign oil dependency; pro-environment groups such as the Sierra Club oppose it with age-old oratory about threats of species extinction and environmental degradation.

Putting the political rhetoric aside for a moment -- as the "truth" likely falls somewhere in between -- let's talk about the impact of the proposed energy policy on supply and the energy industry.

In simple terms, there is likely a heck of a lot of oil and gas in Alaskan land currently off limits to exploration and drilling. Estimates suggest somewhere between 10 to 20 billion barrels of oil could be extracted from the tundra.

Yet, in real terms, that alone is not a lot of oil -- only about a year's supply based on current U.S. demand. Sen. Murkowski said opening the Alaska refuge -- known formally as the Alaska National Wildlife Refuge, or ANWR -- would reduce oil imports to about 50% of consumption from today's 56%. How significant such an incremental dependence reduction might be depends on your perspective.

Moreover, Alaska provides little short-term relief from an acute demand squeeze. Even the most bullish forecasts suggest production and delivery from Alaska wouldn't begin until 2005, more likely 2006 and beyond. Energy prices could go full-circle before Alaska has any impact on supply.

"The cycle will probably change three or four times between now and the time real ANWR production occurs," says G. Bryan Dutt of Ironman Energy Capital and a member of the TSC Energy Roundtable. "However, this is also a long-term problem because of long-term inactivity and a lack of a long-term energy policy. ANWR is likely part of that solution."

Part of the solution, yes, but claiming that ANWR is the elixir for the energy supply crunch is hyperbole. Yet, the public criticism of the energy-policy void in the Clinton years gave Murkowski the opportunity to shape Alaskan drilling as a revolutionary cure to our energy blues -- something even rational supporters of the policy think is a stretch.

"There really is nothing revolutionary or exotic about this plan because there is nothing revolutionary or exotic about the problem," Dutt says. "It may be one of a number of solutions, but it isn't a panacea."

It isn't even clear whether projects in ANWR will prove to be cost-effective. While research and estimates from the U.S. Geologic Survey suggest there is plenty of oil in Alaska, analysts continue to take a cautious view until more experimental drilling data are available.

"The industry hasn't drilled enough wells to really know how big the opportunities are with ANWR," says Dan Pickering, director of research at Simmons & Co., a Houston energy investment boutique and also a member of the TSC Energy Roundtable. "Geologically, it should be significant, but you have a lot of people who are broke from drilling based on geology and probability."

As for companies that stand to benefit from opening ANWR, it may be a surprising few. Because the bidding process is likely to be competitive and complex, a handful of large oil companies are likely to control new Alaska drilling. Under that scenario, the size and resources of super-majors like ExxonMobil (XOM Quote - Cramer on XOM - Stock Picks) and BP Amoco (BP Quote - Cramer on BP - Stock Picks) would give those companies material advantages in securing contracts.

"From an oil industry standpoint, it would almost be better if ANWR isn't developed," Dutt says. "It stands to benefit a handful of majors and sub-majors and maybe some service companies. It isn't going to benefit 90 to 95% of the independent players in the U.S."

ANWR may be an important source of new, incremental supply. And, while it will have little impact on short-term supply, it may hold long-term promise. Claiming any more than that would elevate its status over more promising near-term exploration and production projects -- from West Africa and the Caspian Sea to Brazil and the deepwater Gulf of Mexico -- which would be placing politics above pragmatism.

More importantly, the debate over the need for such supply is likely to reinforce the reality that oil remains a scarce resource. Says Pickering, "The debate draws attention to the fact that [oil supply] is not a 'turn-the-valve' game anymore." Should the U.S. Allow Drilling in the Alaska National Wildlife Refuge? Yes No

Forgetting California?

The theory that if you wait long enough, people will forget, appears to be true with the California energy crisis.

With a lack of rolling blackouts and the continued slide in the Nasdaq occupying the headlines, "California has fallen off of investors radar screens big time," says Pickering.

Well, it might pay to pay attention.

The news that Gov. Gray Davis is close to an agreement to purchase the transmission assets of Edison International's (EIX Quote - Cramer on EIX - Stock Picks) Southern California Edison division for $2.76 billion is somewhat encouraging. The state also will support a bond issue to help the utility pay off the balance of its $4 million-plus in debt. In exchange, Edison agrees to $420 million in write-downs against the debt and will drop its suit against the California Public Utility Commission, or CPUC. Edison is asking a federal court to force the CPUC to raise rates and let Edison recover the costs of buying power at skyrocketing prices on the spot market.

"We are now ready to be confident buyers of Edison," Morgan Stanley Dean Witter analyst Kit Konolige told clients in a Monday morning note.

Not so fast.

If you read a little further, there is a big if. "Assuming [PG&E (PCG Quote - Cramer on PCG - Stock Picks)] can be brought into the tent, the deal effectively takes bankruptcy off the table," Konolige wrote, noting the downside. "The deal won't be closed, according to Davis, unless PG&E can be brought along."

So far, PG&E isn't along for the ride. While negotiations with PG&E continue and Davis claims he will report progress by Friday, others aren't sure. "It is surprising that PG&E hasn't come to an agreement yet," says one source close to the negotiations. "There are clearly unresolved issues."

And, there is another big if. The Federal Energy Regulatory Commission, or FERC, must approve any transfer of transmission assets, something that may prove difficult. FERC Chairman Curt Hebert has called California's plan to purchase transmission assets nationalization, and has hinted he would oppose the transfers.

While Davis says he believes he will win support from the Bush administration, Hebert's opinion is likely to carry significant weight in the White House. If so, it could be lights out for Davis' plan.

Then it would really be time to pay attention again.