The past year proved to be a dramatic time for US energy executives, who faced unprecedented market and political upheavals.
And with 2002 marking the start of a new US congressional election cycle, industry is anxious to gain closure on key issues before lawmakers lose interest.
The new administration under President George W. Bush should be given great credit for addressing issues such as market volatility "head on" and demonstrating that the country can't afford to stall any longer, said Red Cavaney, president of the American Petroleum Institute.
"We've benefited lately by good weather and the recession, which has kept energy plentiful," Cavaney said. "So many of those challenges we know that are still out there have been swept off the newspapers. But it's up to this Congress to keep things going; it is no longer prudent to play politics with the issue. We want to work with various players so we can have more-stable markets when the next cycle starts."
Just in the space of 1 year the oil and gas industry has seen prices gyrate from record highs to record lows. And for power marketers, 2001 was, to put it charitably, unpredictable.
"The year 2001 was truly a tumultuous year for the energy industry with extraordinary bookends on both sides," Tom Kuhn, president of the Edison Electric Institute said. "First you have at the beginning of the year the electric power breakdown in California and then at the end of the year the collapse of Enron [Corp]."
Yet with these crises has come the promise of some kind of momentum for addressing energy issues that have languished on the sidelines for far too long, notes Sheila Slocom Hollis, a veteran energy attorney in Washington.
"In 2001 there was the recognition for better or worse that a national energy policy is a core, significant issue that must be addressed for us to have a cohesive foreign and domestic economic policy." Hollis chairs the Environment, Energy and Resources Law section of the American Bar Association and is managing partner of the Washington office of Duane Morris & Hecksher LLP.
"There also was a realization that although we had many of the basic ingredients needed to monitor Enron, a huge and important new player dictating many of the market rules, we never got the recipe together to prevent or at least mitigate the disaster."
How long the political fallout from the Enron morass will last, and what impact, if any, it will have on Congress passing a comprehensive energy bill this year is still mainly a guessing game, said trade association officials, congressional staff, and administration officials.
"We 're obviously not sure about what kind of reaction Congress will have in the wake of the Enron bankruptcy," said a spokesman with the Interstate Natural Gas Association of America (INGAA).
Nevertheless, most industry experts expect Congress to deliver some kind of comprehensive energy legislation to the White House this year to avoid being preempted by President Bush.
"I am optimistic some action will take place, because to have nothing go forward after all the work would be embarrassing to all involved," said Hollis. "The sense of forward momentum is critical for the Senate; as important as all the other issues are, energy remains an essential pillar of all our national economic and defense strategy. I think the legislative package may shift also to at least nod at the Enron situation, the national strategic importance of safe and secure energy, and concern for environmental issues."
Energy legislation differences
The Republican-controlled House passed a sweeping energy reform bill, HR 4, in August 2001 that includes two controversial provisions supported by industry and opposed by environmental groups. It would lease the coastal plain of the Arctic National Wildlife Refuge and would provide greatly expanded tax incentives totaling $8 billion over 10 years to expand marginal oil production. A Senate Democratic leadership bill, S 1766, recently introduced but not yet debated, does not have an ANWR provision but is expected to include tax incentives early this winter, although not as generous as the House proposal.
ANWR supporters say they have enough votes to pass a leasing measure if Senate leaders agreed to a simple up or down vote and provided no senators tried to stall the debate indefinitely. But leasing advocates also concede they do not have the 60 votes required to stop the other side from talking the issue to death with a filibuster.
With ANWR such a controversial issue, its mere presence could stall or block passage of an energy bill indefinitely, say some lawmakers who oppose drilling.
But API's Cavaney insists that all issues, including ANWR, belong on the negotiating table.
"I don't think we should jettison anything. The whole reason to have an energy debate is to get good and bad ideas and give them a chance to pass the 51-vote test. But the idea of taking ideas off the table is not the way to do policy."
But even with the ANWR debate and other controversial issues, such as Corporate Average Fuel Economy (CAFE) standards, expected to be battled in early spring, industry groups remain optimistic a balance can be struck.
The road to consensus remains long, however.
"Senate Democrats apparently would rather daydream about the day our cars and fighter planes run on wood chips and geothermal heat than roll up their sleeves and help Republicans solve America's energy and economic problems," said House Committee on Resources Chairman James Hansen (R-Utah) when S 1766, authored by Senate Majority Tom Daschle (D-SD) and Senate Committee on Energy and Natural Resources Chairman Jeff Bingaman (D-NM), was introduced in December. "Our energy bill reduces our reliance on foreign oil and creates badly needed jobs. By contrast, Senate Democrats don't care that we are getting more and more of our oil from the most unstable region of the world. Instead of creating new jobs, their bill sends American jobs to Canada along with the natural gas pipeline. "
Authors of both bills aim to increase domestic production and reduce demand through conservation (see chart). When Congress returns later this winter, the bills could be further amended with an eye toward tighter regulatory oversight of energy derivatives in a nod to the recent Enron crisis.
Senate bill views
Bingaman said the Senate plan "strikes a good balance" between conservation and supply-oriented measures. And he said there several items unique to the Senate bill aimed at boosting marginal well production.
Under Title 6 of the bill, there is a federal onshore leasing program for oil and gas that authorizes more funding for additional personnel at the Department of the Interior's Bureau of Land Management to review and issue required environmental permits in a timely manner, Bingaman said in an interview. Responding to consolidation in the domestic oil and gas industry, the bill also alters the acreage cap for oil and gas leases on federal lands so that producing leases are not included in the existing statewide acreage limitation. This provides an incentive for producers to keep domestic acreage in production or to turn the leases over to another operator at will, Bingaman said.
It also seeks to broaden a successful state program, first instituted by Oklahoma Sec. Of Energy Michael Smith, now the Department of Energy's top fossil fuels official, on orphaned and abandoned wells. It directs DOE to provide technical assistance to oil and gas producing states to address environmental problems associated with those wells.
Independent producers are "encouraged" that Democratic leaders introduced a bill but say the legislation does not go far enough to expand domestic production.
"We view the bill as a necessary step toward Senate debate on comprehensive energy legislation," said Lee Fuller, vice-president of government relations for the Independent Petroleum Association of America. "While it addresses a number of issues related to domestic oil and natural gas production, we believe that a number of additional issues need to be considered with regard to land access and royalty policy. And it will be important to see the anticipated tax policy proposals from the Democratic majority."
Looking at the demand side of the picture, Bingaman's bill does not yet include CAFE standards. But environmental groups predict automakers may fight as hard over the issue as the Alaskan congressional delegation has done with ANWR.
"You would think tougher fuel economy standards would not only make economic sense but would give us the chance to show the American flag and lessen our dependence on the Middle East," said Frank O'Donnell, executive director of the environmental group Clean Air Trust. "But the car companies may block meaningful improvements."
Automakers say CAFE standards are too prescriptive and do not do the job they were designed to do-encourage consumers to drive fuel-efficient vehicles.
Enron impacts
Industry trade association officials such as Kuhn, Cavaney, and Dave Parker, president of the American Gas Association, say they remain hopeful policy-makers won't indict the entire energy business because of the apparent financial failings of one company.
However, there is an uneasy acknowl edgement that the fate of any future energy reform legislation may be entangled in some way, rightly or wrong ly, with the troubled energy marketer's troubles.
The administration and several congressional committees are already sifting through Enron's records, and the issue is expected to dominate the congressional agenda throughout the first half of 2002. In particular, House Energy and Commerce Committee Chairman Billy Tauzin said his committee was "profoundly disturbed" by the events surrounding Enron's fall, notably the loss of retirement savings by Enron employees.
"We believe Enron is more of a financial story more than an energy story. The problems were financial, but the bulk power markets worked. There were no price spikes, no interruptions, no chaos," Kuhn said.
"There are grounds for congressional oversight on Enron. But it's still troubling that you hear conversations that [energy] deregulation doesn't work," said Cavaney. "Let's be careful not to throw out the baby with the bathwater. Deregulation has been a big benefit to consumers."
Cavaney added that when looking at how low US gasoline prices have fallen, due to the normal market mechanisms of supply and demand, the savings are being passed on to consumers.
"A $10/bbl decrease in oil translates to $79 billion in energy savings to American consumers," Cavaney said. "Net, that is equivalent to a $40 billion tax savings to consumers. That equals more purchasing power. That flexibility underscores that we don't need to throw other artificial barriers where consumers did not get the benefits of an efficient market," Cavaney said.
"It's simple. Energy markets worked when there was record cold and now record warm," said AGA's Parker.
High expectations
It's unlikely anyone in the energy business could have predicted a year ago that they would be forced to defend restructured energy markets for oil, gas, and electricity.
At the start of the year, companies had high expectations for the new administration. President Bush, his vice-president, Dick Cheney, and several of his top advisors had been in the energy business and kept a campaign promise to develop a national energy plan that would encourage domestic production.
Helping to keep energy foremost on the White House's policy agenda were retail fuel prices.
Last winter, US homeowners were paying 70% more for their heating costs compared with the prior winter because of record natural gas prices. And high gasoline and heating oil costs were putting political pressure on the White House and Congress to take action.
The White House released an energy plan in May that called for expanded interagency cooperation for expanded access to public lands, a key item of interest to API, which represents larger multinational companies, and to smaller-company groups such as IPAA (OGJ, May 28, 2001 p. 20). Nearly 75% of the White House's energy blueprint can be pursued without Capitol Hill intervening, although most if not all the controversial issues such as leasing ANWR and retooling clean fuel rules, need legislation.
But right around the time the White House began implementing its own blueprint, the Sept. 11 terrorist attacks on the World Trade Center and the Pentagon occurred.
Now timetables on various interagency panels, including one investigating new research money for climate change, have since slipped as homeland security issues have been pushed forward. Policy-makers expect energy infrastructures, including refineries and pipelines, to get funding during the upcoming annual budget process to address security concerns.
Yet more work still needs to be done to bolster the nation's fuel delivery systems that were in need of repair before Sept. 11, industry says.
Outside of homeland security, the administration this year is expected to slowly restart the task of implementing its energy policy. Last fall, the Environmental Protection Agency said it would finalize a rulemaking on reformulated gasoline (RFG) rules with regard to timetables and reporting requirements.
NSR
EPA also is moving forward with ways to reform enforcement of emissions limits on power plants and refineries through New Source Review and control a variety of smokestack emissions through proposed multipollutant legislation.
NSR and multipollutant legislation are likely to be key items for 2002 because of the wide impact those two issues have across the energy sector, whether it's a power plant or an oil refinery, industry officials say.
"I fully believe that a wide variety of people think it has to be reformed, and the administration has worked on that. They are making progress on this and under the context of a multipollutant strategy," said Kuhn. "The NSR issue affects many other industries, and we should move forward."
NSR is not just a power company issue, added Cavaney.
"I don't know what ultimately will take shape, but there is an acknowledgement that a lot of things that were just routine maintenance were penalized.
"A lot of companies that looked at the size of agreements [between companies and EPA] that had been worked out and penalties given froze their own plans until it became more clear. We need more clarity and a bright line and expect the administration to address that.
"There were periods of time at the EPA where they let things go and then-all of a sudden overnight-the rules changed without public notice. Companies were 'caught' doing a practice they were doing for 20 years that EPA had not even raised an issue about before. Companies are not interested in breaking the law or doing things they shouldn't be doing. They just need to know what to do," Cavaney said.
Shifting attentions
Despite assurances from congressional leaders and trade association executives that Congress will indeed pass a comprehensive bill, policy-makers concede that there is a danger that today's lower fuel prices will once again give lawmakers an excuse to postpone making some hard choices on energy policy until the next market upswing happens. Trade groups admit that cheap energy prices do make it tempting for lawmakers to sidestep the debate, but industry leaders say they will continue to press the issue.
"We've seen this movie once before in late 1990s, when gas or oil prices were extraordinarily low over an extended period of time," said Cavaney. "You dry up investment opportunities particularly for smaller companies that are not heavily capitalized. They need to move product and get cash to make more investments. These things need to be looked at as part of a national energy plan that looks broadly and gets the nonmarket mechanisms out of there."
API's view is shared by nearly all its sister trade groups.
"We believe national energy legislation is desperately needed, especially in light of our need for national security," Skip Horvath, president of the Natural Gas Supply Association said. "However, given that neither the House nor Senate version contains language that allows access to gas-prone government lands, one of our key issues appears missing."
"While the needs of many energy sectors may well be met by the coming legislation, natural gas producers are concerned that without this key piece of the puzzle, long-term natural gas production levels are uncertain." The rest of the natural gas industry continues to tout a growing gas market, but the pieces needed to satisfy that market are not falling into place from our perspective. "
Looking at the offshore perspective, some of that gas production could come from untapped areas of the Gulf of Mexico now under a drilling ban put in place by President Bush this year. The White House severely restricted an eastern Gulf of Mexico sale late last year because of political pressure. The House also sought to restrict the sale, although the measure was later dropped due to a lack of support in the Senate.
Tom Fry, president of the National Ocean Industries Association, says it's unclear what an energy policy bill will look like. But his members want to see strong commitments in Congress for royalty relief, along with research and development for industry.
His group would also like more interagency coordination of coastal zone management issues and is hoping Interior will reconsider its 5-year lease plan to at least consider expanding drilling in the eastern Gulf.
"Let's just keep our options open," Fry said.
Pipelines optimistic
The nation's interstate natural gas pipelines also expect a busy year for energy policy.
"We're optimistic about the chances of success, and we hope that a final bill will include such items as the creation of a memorandum of understanding on the permitting process for new pipeline construction, incentives for the construction of an Alaskan natural gas pipeline, and actions to increase the domestic supply of natural gas," INGAA said.
Pipeline safety also remains a top priority, INGAA said, both in terms of completing reauthorization legislation and working with the Office of Pipe line Safety on completing that agency's natural gas pipeline integrity rule.
"We want to see both these items done in 2002," INGAA noted.
Downstream issues
API says it is committed, if flexibility is given with regard to oxygen content in RFG by Congress, not to "backslide" on fuel quality.
Meanwhile, fuel supplier associations such as the Society of Independent Gasoline Marketers of America are calling for the adoption of tax incentives, such as an environmental upgrade tax credit, to assist companies with small refineries in making mandated environmental upgrades.
At a minimum, SIGMA said, it wants incentives for "small refiners"-companies with 155,000 b/d in refining capacity and 1,500 or fewer employees. In addition, SIGMA suggests that this definition of "small refiner" be clarified to assure that only employees engaged in a company's refining operations are included in the employ count under the definition.
"It would be an absurd result if a refiner with two 25,000 b/d petroleum refineries that employ 1,000 workers is excluded from taking advantage of these tax incentives simply because the refiner also operates 25 retail gasoline stations that employ 20 workers each," the group said. SIGMA also says the definition of small refiner should be clarified to exclude those employees who are not engaged in the refining portion of the company.
Sanctions reform
With homeland security now an ever-present issue, the question of sanctions reform may resurface on the energy policy front as the US reshifts alliances in its war against terror. Congress last year renewed the restrictive Iran Libya Sanctions Act, which seeks to punish foreign companies that invest in the petroleum sectors of either Iran or Libya.
The US has from time to time threatened, but never implemented, sanctions under that law. But industry officials are closely watching whether recent encouraging comments from Iran's moderate president in the post- Sept. 11 geopolitical environment may translate into future business opportunities. Administration officials say it's way too soon to start mapping oil fields.
Still, relations between the two countries are the best in decades and could improve further depending on what the US chooses to do next in the volatile but oil-rich Middle East.
ILSA gives the president broad powers to waive or exempt allies from sanctions without congressional approval. There also separate but related executive orders in place the president could rescind that currently prevents US companies from making investments in Iran or Libya.
Similarly, the US and Russia have signaled they will work together to bring a sanctions reform package to the United Nations that would retool the sanctions-bound Iraqi oil-for-food program provided Iraq allows weapon inspectors back in the country. But some in Congress may try to interject their own foreign policy goals depending on where the war on terrorism leads. The administration remains divided over what it should do with or to Iraq.
