Senate bill's carbon collection point for gas may create big problems

A global climate change bill which is expected to reach the Senate floor in June is already generating some heat of its own. The measure, S. 2191, which Sens. Joseph I. Lieberman (I-Conn.) and John W. Warner (R-Va.) introduced last year, would generate $1.21 trillion in federal taxes from 2009 through 2018, the Congressional Budget Office said on April 10.

It also would impose private sector mandates under its cap-and-trade program participation requirements that would exceed the Unfunded Mandates Reform Act's ceiling ($136 million in 2008, adjusted annually for inflation), reaching more than $90 billion annually from 2012 through 2016, CBO said in its analysis.

Critics of the Lieberman-Warner bill warn that its provisions also could lead to some serious problems because it was pushed quickly through the Environment and Public Works Committee. "It was not written until late October and was then rushed through the legislative process, when the oil and gas industry was included. The majority did not provide a summary of changes. Each time a new hearing was held, you had to read all 300 pages of the bill to find out what words had been changed," one insider told me.

Industry groups have been concerned about potential impacts under the bill's carbon cap-and-trade program for some time. Some are especially worried now that a provision involving natural gas carbon collection points could potentially reduce domestic production significantly by driving costs substantially higher in the near term.

"This has eclipsed all our other issues. If Congress makes the wrong choice for climate change and natural gas, the impacts could be devastating not only for our sector but for the general economy," said William F. Whitsitt, president of the American Exploration & Production Council.

Moved upstream

"The issue is where the point of regulation is for the natural gas industry. Originally, it was at the larger industrial facility or electricity generator," explained Paul Wilkinson, vice president for policy analysis at the American Gas Association. Then Sen. Frank R. Lautenberg (D-N.J.) introduced an amendment which was designed to add more entities by moving the collection point upstream. Putting it at the wellhead was considered too complicated so lawmakers placed it at the gas processing level, Wilkinson said.

Producers would need to spend billions of dollars already to buy carbon allowances, Whitsitt said. The amount could jump by a factor of 30 if processors build their additional cap-and-trade costs into their processing rates, which would bite into producers' budgets and force many of them to cut back sharply, he told me.

"The people who wrote the legislation believe that it really doesn't matter. They assume that the cost of the allowances will be added to the cost of the gas and the ultimate consumer will see that. Upstream entities believe they would not be able to pass on the entire costs, which could reduce money their exploration and production budgets," said Wilkinson.

Since most of its members are local distribution companies, AGA's main concern about the provision is that it will increase costs for commercial and residential customers when they have made major progress in using gas more efficiently already, he continued. "We believe that with this bill or any other significant climate change legislation, there will be increased demand for gas, particularly to generate electricity and particularly for the next 10-15 years when nuclear, solar, wind, carbon capture for coal and other technologies won't be as readily available. Including commercial and residential customers means they will be subjected not only to higher gas prices, but also the cost of allowances," he said.

Back to original point

AGA has proposed that the carbon allowance collections be moved back to the industrial and power generation point and not involve residential and commercial customers before 2020, according to Wilkinson. At that time, the Environmental Protection Agency would analyze availability of technologies other than gas and further efficiency gains by residential and commercial customers, he said. "This also would solve upstream entities' problems with the point of regulation," he noted.

"Increasingly, the senators and staff people we explain this problem to say we may be right and this situation wasn't their intent," said Whitsitt. "So the question is whether they have the political will to do a 90-degree, if not 180-degree, turn now that this bill is so far down the road in the Senate. They'll need to, since what they approve will heavily influence the House."

It's critical that they do so, maintained Paul N. Cicio, president of the Industrial Energy Consumers of America. "All costs, including allowances, will be passed on to us. They're incredibly high in this bill and it could move more manufacturing out of the United States. Natural gas is the low-carbon fossil fuel alternative. We should be encouraging, not discouraging, its production," he told me.

Contact Nick Snow at nicks@pennwell.com

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