US energy policy outlook an enigma in wake of terrorist attacks

The outlook for Congress and the White House reaching consensus this fall on energy legislation is a giant enigma, given the horrific wave of terrorism that unfolded in Washington, DC, and New York City last week.

Any predictions on what the final package will look like now are pure speculation, say experienced Washington lobbyists.

"Even President George W. Bush is probably at a loss for what will happen next," said one industry association executive. "There's a lot more on his and Congress's plate right now."

At the very least, any such legislation has been postponed while the US government regroups in the wake of the worst terrorist attack on US soil.

At presstime, most speculation on those behind the attacks on the World Trade Center in New York City and on the Pentagon still was focused on a group led by Osama bin Laden, the elusive Saudi financier sought by the US for alleged terrorism and believed to be hiding in Afghan- istan. Bin Laden's Al Qaeda group claimed responsibility for the 1998 bombings of two US em- bassies in Africa and is suspected in a bomb attack on the USS Cole destroyer at a Yemeni port last year.

Some analysts have expressed concern that even a tenuous connection between the terrorist attacks and the worsening conflict between Israelis and Palestinians could contribute to upward pressure on oil prices in the weeks to come. At least one key Persian Gulf oil exporter, Iraq, has publicly praised the terrorists' acts, according to press reports.

With Bush declaring the terrorist attacks "acts of war" while vowing to pursue and punish the terrorists and making "no distinction between the terrorists who committed these acts and those who harbor them," speculation was rife last week over the possibility of a Middle Eastern nation sympathetic to the Pal- estinian cause somehow being connected to the attacks in the US. While no link to another nation had surfaced nor seemed likely to at presstime, any worsening of the Middle East crisis could contribute to higher oil prices, some analysts and government officials noted, while bolstering efforts to boost US oil and gas production.

However, if US retaliation is limited to Bin Laden's group and Afghanistan-whose role in global oil production is negligible-then any oil market repercussions are likely to be minor and short-lived (see related article, p. 28).

Meantime, US oil companies last week scrambled to implement heightened security measures for fear of terrorist attack on facilities with national strategic importance (see Newsletter, p. 7). At the same time, they sought to allay fears over possible shortages of oil or oil-based fuels while fending off scattered reports of alleged price-gouging at some service stations in the US (see related article, p. 32).

New agenda

One day after the terrorist attacks, the White House and Capitol Hill were open for business, although the agenda has shifted from budget rhetoric and energy legislation to national security concerns.

Congressional leaders Sept. 12 said they were postponing most legislative action, although a joint session was expected to issue a resolution condemning the Sept. 11 terrorist attacks.

Postponed until further notice was the Senate Committee on Energy and Natural Resources markup of comprehensive energy legislation. Chairman Jeff Bingaman (D-NM) had planned for the committee to work on a portion of the bill that would have clarified and expanded federal authority over interstate electrical transmission lines.

Similarly, the House Energy and Commerce Committee postponed a Sept. 11 hearing on electric transmission authority.

The Senate markup and the House hearing will be rescheduled after consultation with committee members, spokesmen said.

All legislative activity was suspended Sept. 11 after an airplane crashed into the Pentagon.

The US military escorted lawmakers to an undisclosed bunker about 75 miles west of Washington for security reasons.

After intelligence reports indicated the threat had passed, congressmen returned to Capitol Hill, where leaders from both the Republican-led House and Democrat- ic-controlled Senate told reporters they supported President George W. Bush's promise to punish the terrorists.

US energy plan impacts

The terrorist attacks, with their apparently implicit connections to the oil-rich but long strife-torn Middle East, may have given US producers leverage in their efforts to expand access to oil-rich public lands in Alaska and elsewhere in the US. With radical Islamic elements antagonistic to the US Middle East policy a strong suspect in the recent attacks, there may be an even more willing climate to expand tax incentives as well, some policy-makers speculated.

There also could be more dramatic and immediate actions taken, if fuel prices increase too quickly this fall; with or without evidence of a supply disruption, the political pressure may mount on Congress and the White House to draw down oil from the country's crude oil stockpile, the Strategic Petroleum Reserve.

However, early indications from market-watchers are that an SPR release is unlikely because price increases may be short-lived. The Organization of Petroleum Exporting Countries has already indicated it is prepared to step in and boost production to stabilize prices. Meanwhile, major oil companies almost immediately said they planned to freeze their wholesale prices to avoid retail price gouging and limit artificial supply shortages brought on by fear.

But what will the impact of the attacks have on President Bush's energy plan?

Some analysts see a chance for consensus on what have been, in the past, controversial proposals to boost US energy supplies.

"We expect these attacks to increase the desire for energy independence, particularly for supply. This could mean more political support for a gas pipeline from Alaska and increased drilling from restricted land in the western US, the Gulf of Mexico, and perhaps even Alaska's Arctic National Wildlife Refuge," said Adam Siemenski, global energy strategist for Deutsche Banc Alex. Brown. "From the demand side, we believe the attacks could lend momentum to a move toward increased automobile fuel economy and other measures designed to promote conservation and efficiency."

Before the attacks

Before the Sept. 11 attacks in Washington and New York City, congressional leadership from both the US House of Representatives and Senate had promised to send President Bush a bill to sign this fall, even though energy policy was just one of several issues on a short and increasingly crowded legislative calendar.

Many of the recommendations from the White House's own energy policy blueprint coordinated by Vice Pres. Dick Cheney's office last May could be done administratively.

The document emphasizes interagency cooperation on energy policy and calls on regulators to streamline environmental and drilling permits whenever possible.

But about one third of the president's recommendations do require legislative action, some controversial, some not so. Some of the larger legislative items sought from Congress include expanding tax credits for alternative energy supplies, allowing oil companies to lease a portion of the ANWR coastal plain, and creating a "multipollutant" market-based emission program for power plants.

Congressional staff members, whether Democrats or Republicans, see major legislation before yearend that will be on the same scale as the Energy Policy Act (PL 102-486), signed into law by the president's father, former President George H.W. Bush, in 1992.

Known as EPACT, the legislation sought to lower US dependence on foreign oil through a variety of measures most, but not all, of which involved reducing demand for traditional fossil fuels. Measures included new tax incentives for alternative fuels and vehicles, mandatory efficiency standards for a wide range of consumer products and commercial buildings, and oil tax incentives that effectively eliminated alternative minimum taxes for many marginal producers.

Past is prologue

Reviewing EPACT provides some valuable clues to solving the mystery of what future energy policy will look like this time around. That's because EPACT became law in a legislative climate not terribly different from today's. It was passed by a Democratic-controlled Congress and signed by a Republican president after months of debate and weeks of committee revisions.

Increasing domestic supplies of traditional fuels while encouraging energy efficiency also were espoused policy goals. The war with Iraq was still fresh in the public's mind, as was growing concern over the impact fossil fuels have on the environment. In 1990, President George H.W. Bush signed into law landmark clean fuel legislation creating the reformulated gasoline program to combat ground-level ozone in a major revision to the Clean Air Act.

Ten years later, the same debates that faced policy-makers then still are asserting themselves today. Dependence on foreign oil remains high, despite provisions in the 1992 EPACT law designed to encourage the use of alternate-fuel vehicle fleets.

Favorable treatment for clean-burning fuels used in utility generation has not resulted in the dramatic use of renewables intended under the original law.

Nevertheless, the mixed successes of past energy legislation are not deterring today's policy-makers. They are, after all, driven by what the public demands. Ten years ago, the worry was about energy security and the environment. Today, those twin concerns remain and will be tackled for better or worse in Washington again.

This time around, boosting supply of domestic fuels has been given a larger emphasis than in past legislation. Pending proposals by Democrats and Republicans address virtually every segment of the energy business: upstream, downstream, infrastructure, tax treatment, and environmental compliance.

Also on the table will be "four-pollutant" legislation-which possibly may be included in a final energy bill. Senate Committee on Environment and Public Works Chairman Jim Jeffords (I-Vt.) is seeking mandatory caps on emissions of carbon dioxide and three other power plant emissions: nitrogen oxides, sulfur dioxide, and mercury.

The White House supports emission caps on all but carbon dioxide; however, growing support for CO2 caps by Republican leaders may lead to a compromise, lobbyists note.

The Republican-led House has already passed its own comprehensive bill, HR 4, that is widely supported by industry. A version in the Democratic-controlled Senate should begin to emerge in late September. After the Senate votes on its own version of the bill, the congressional leadership will have to iron out the differences before sending the final document to the White House.

Budget clouds

Leaders from both parties have pledged that energy policy will top the legislative agenda.

Despite those reassurances, the foremost concern for congressional leaders on their recent return is how much money is available to fund programs near and dear to their constituents.

The annual sparring over the government budget has not yet played out, and several energy policy questions will likely be handled through the appropriations process. The new fiscal budget in theory starts Oct 1; Congress is scheduled to adjourn for the year Oct. 5. Both dates are paper, not concrete, deadlines. Most lobbyists expect lawmakers to be working on legislation through October and possibly into November.

The shrinking budget surplus will help make for an even more contentious political climate between Congress and the White House and may be the cause of Congress's likely tardy retreat from Capitol Hill this year.

The government says the budget surplus for the fiscal year ending Sept. 30 will be about $160 billion. That's the second-largest surplus in US history. But it's far below the $275 billion projected earlier in the year. And that means it will be much tougher for special interest groups, oil producers among them, to win support for new government spending.

Supporters of tax adjustments aimed at independents argue that such measures will stimulate investment, leading to a more robust economy that will expand, not shrink, budget surpluses (OGJ Online, Editor's Opinion, Aug. 24, 2001).

Industry successfully argued that point in the wide-sweeping House energy bill. Outside of expanded access to public lands, reforms in the tax code designed for independents are considered by industry supporters to be an integral part of the legislation. The Senate's position on oil and gas tax incentives is still a work in progress. The Senate operates under stricter fiscal rules than the House when it comes to new tax spending, so the approved House version may not be adopted in its full form because of budget concerns, real or imagined.

Under the tax portions of the House bill, there are marginal-well production incentives that congressional budget officers say will cost $8 billion in new spending over 10 years. White House officials this past winter said that price tag was too high. Under the administration's energy plan, there would only be a study of marginal production. The White House said it would continue to support retaining existing tax incentives that the Department of the Treasury says will cost $9.8 billion for fiscal years 2002-06. These include the enhanced oil recovery credit, percentage depletion allowances, the exception from the passive loss limitation for working interests in oil and gas properties, and the expensing of intangible drilling and development costs. The Bush administration also told Congress in May it would support a 1-year extension of the provision suspending the 100% net income limitation for marginal wells.

A new view?

Republican House leaders insist the White House has now warmed to the tax package. House Committee on Ways and Means Chairman Bill Thomas (R-Calif.) in early August said the White House "was very pleased" with the tax portion of the energy bill; White House officials have not specifically endorsed the incentives, although it lobbied lawmakers heavily to pass the overall energy package before the summer break (OGJ Online, Aug. 1, 2001).

Expanded tax breaks in the House bill include a new $3/bbl credit for the production of crude and a credit of $0.50/Mcf for qualified natural gas production from marginal wells. The maximum amount of production on which credit could be claimed would be 1,095 boe. And the credit could be claimed only when prices fell below $18/bbl (or $2/Mcf for gas).

The bill also would allow producers to currently deduct delay-rental payments incurred in connection with the development of oil and gas. In addition, it would change the limit on percentage depletion to no more than 65% of the taxpayer's overall taxable income, which would be suspended for taxable years beginning after Dec. 31, 2001, and before Jan. 1, 2007. The suspension of the 100% net-income limitation for marginal wells would be extended an additional 5 years. Another item passed by the committee would allow geological and geophysical costs incurred in connection with oil and gas exploration to be deducted currently. The bill also would allow net operating losses from oil and gas properties to be carried back for up to 5 years, allow "business energy credits" applied against the alternative minimum tax, repeal the AMT preference for intangible drilling costs, and repeal the minimum tax limitation on enhanced oil recovery credits.

As in the House, a bipartisan group of Senate lawmakers from oil-producing states want new tax incentives to boost domestic production, but the leadership is not expected to endorse the sweeping changes suggested by Rep. Thomas.

Under pending legislation sponsored by Sen. Jeff Bingaman (D-NM), chairman of the Senate Committee on Energy and Natural Resources, independents would get "credits for domestic drilling when the price of oil is extremely low to maintain stable gas supplies and to ensure the service industry is able to retain a technical workforce, and [for] investments in research and development to ensure a full range of fuels and technologies is available for the future, from advanced coal and nuclear to fuel cells and renewable technologies," according to committee documents.

Bingaman's plan to offer credits when prices are low is similar to a proposal by his Republican counterpart, Frank Murkowski (R-Alas.) But Bingaman has said that he does not support the kind of tax incentives endorsed by Murkowski and House Republican leaders.

Outside of the potentially explosive tax incentive question, Bingaman and Mur- kowski each have comprehensive bills that contain several areas of common agreement.

Both endorse White House proposals to study ways to eliminate barriers to emergency energy technology.

Bingaman's committee also passed with full bipartisan support $9 billion in new money for a wide range of energy research in fiscal year 2002; the money reflects spending already approved by Senate budget-makers in the appropriations process. Of that total, $460 million in FY 2002 would be earmarked for oil, gas, coal, and transportation fuel programs, reaching $558 million in FY 2006.

Climate change research would also get a major boost: $130 million in FY 2002 to $230 million in FY 2006 for the Department of Energy's climate change science program; and another $4 billion/ year from 2002 through 2011 to mitigate postulated human-induced climate change. The budget also provides for a new agency, the Center for Strategic Climate Change Response.

The White House has not specifically endorsed this portion of Bingaman's bill, although policy-makers have pledged to endorse new funding for climate change research. In addition, the White House appears to have given up earlier efforts to cut oil and gas research money from DOE's budget.

ANWR redux

With the relatively noncontroversial issues out of the way, various Senate committees now must tackle the same issues already faced by their House counterparts. Clearly, major challenges remain before a large comprehensive energy package can be cobbled together. When compared with the House, more compromises will have to be made between warring factions, given the makeup of the closely divided body. And each senator has the power to stall or block debate, thanks to the parliamentary rules of the chamber.

What will survive after the political horse-trading is complete? For now, it is still a guessing game. Recent speculation among industry lobbyists is that the White House may be willing to endorse mandatory controls on carbon dioxide if it can have assurances that ANWR leasing will be part of the Senate bill. Limited leasing provisions won in the House by a 223-206 margin-not nearly as slim a victory as the environmental community had hoped for. The Teamsters Union joined forces with pro-industry interests to move ANWR legislation forward in the House. ANWR supporters are predicting they have the votes to carry a leasing provision through the Senate energy committee, although the floor vote is still uncertain. Along with labor groups, industry officials who want greater access to public lands also are reaching out to minority groups such as the National Association for the Advancement of Colored People.

Industry officials argue that environmental groups often try to block companies from investing in minority-dominated areas with high unemployment that could see a direct benefit from development. Many times, those mineral-rich areas could easily be part of a multiple-use land strategy, lobbyists say.

Several of the House Democrats who voted for ANWR leasing come from districts with high unemployment rates; they see expanded drilling as a way to boost living standards.

Meanwhile, environmental groups argue that the boost in jobs is exaggerated and relies on suspect data furnished by industry-supported groups.

ANWR is not the only public land debate facing this Congress. Along with ANWR leasing, the House bill offers provisions seeking to streamline public land management, provides royalty holidays in the Gulf of Mexico to stimulate domestic production, gives the Secretary of the Interior a voice in controlling how and when the US Forest Service should allow drilling on some public land, and expands the authority of the Department of the Interior to direct funds toward royalty in-kind programs.

The bill's public land and royalty measures are largely supported by the Bush administration, although Interior has not committed to fully supporting all the deepwater royalty provisions.

It's uncertain how much latitude Congress really wants to give the White House when it comes to public land management, however. Recent legislative action has sent mixed signals to industry. The House energy bill seeks to give Interior and oil-producing states more discretion. Nevertheless, the House in a separate action sought to delay a lease sale in the eastern part of the Gulf of Mexico. It also approved two largely symbolic provisions: one provision in the Interior spending bill seeks to block a gas pipeline from being built to Florida, and another amendment to the energy and water spending bill is designed to discourage drilling in the Great Lakes region.

The Senate, meanwhile, agreed to preserve an eastern gulf sale (although the Bush administration scaled it back dramatically). It also approved an amendment to discourage Great Lakes drilling. Both the House and Senate included provisions in spending bills that would bar new drilling in national monument areas.

Pipelines

Bingaman's pending energy proposal does not include ANWR leasing, but it does include incentives to expedite construction of a pipeline to bring natural gas stranded on Alaska's North Slope to the Lower 48. Alaska officials say that, without federal incentives, prospective pipeline backers are reluctant to build a line that could cost $20 billion (OGJ Online, Aug. 31, 2001). Both Democratic Gov. Tony Knowles and the state's lawmakers in Congress also want the US government to mandate a route following the Trans-Alaska Pipeline System to Fairbanks and then the Alaska Highway to Canada, and not the "over-the-top" route across the Beaufort Sea to Canada's Mackenzie Delta and then down the Mackenzie Valley.

The House bill does not provide federal incentives for a pipeline but does include a prohibition on construction of the over-the-top route. Canadian officials say the amendment violates international trade laws and is unenforceable.

Both the House bill and pending Senate proposals endorse a White House plan to streamline natural gas pipeline permitting, including the use of an interagency task force to consider the way environmental reviews are performed.

Updating pipeline safety legislation may also be wrapped into a comprehensive bill. The Senate in February passed pipeline safety legislation (S. 235), but the House has not yet acted.

Downstream debates

Industry lobbyists expect Congress to seek moderate increases in fuel efficiency standards for cars and sport utility vehicles. In the House, Democrats, joined by moderate Republicans, failed to raise fuel efficiency standards of SUVs to those of cars. The current House bill would modestly increase fuel efficiency for cars.

The Senate is expected to be generally more sympathetic to higher fuel standards. Pending legislation would require the Department of Transportation to increase the fuel efficiency of all light-duty vehicles.

Looking again at reformulated gasoline (RFG) rules is also a high priority.

A coalition of House Democrats and moderate Republicans unsuccessfully sought to allow states to opt out of the RFG oxygen requirement. The proposal came in reaction to an EPA decision to deny California's request to waive the oxygenate standard for clean fuels (OGJ Online, June 12, 2001). California has banned the fuel oxygenate methyl tertiary butyl ether because of groundwater concerns, and other states are in the process of taking similar action. But California does not want to rely too heavily on the most commonly available alternative, fuel ethanol, to meet clean fuel specifications. Ethanol is not as fungible to transport as MTBE and may not be available in enough quantities to meet the needs of large markets outside the Midwest, such as Califor- nia, industry officials say.

In a related issue, the dozens of different specifications EPA requires for clean-fuels programs have put strains on the country's already constrained fuel delivery system, industry officials say. Unexpected refinery problems in the Midwest, for example, recently led the agency to allow limited modifications to the gasoline blendstocks used to make RFG.

But industry wants permanent changes.

Over in the Senate, Majority Leader Tom Daschle (D-SD) is a strong fuel ethanol supporter and has indicated that streamlining RFG rules is a top priority. Sen. Bingaman's bill would require EPA to propose streamlined vehicle fuel specifications to ease distribution problems and reduce price spikes. The Senate Committee on Environment and Public Works is also expected to look at the issue.

The White House energy blueprint also calls on EPA to consider retooling RFG rules, but the agency has already told lawmakers clean air legislation must be re- written to comply fully with that request.

Electricity

Lawmakers in the Senate led by Bingaman say they will seek to include legislation clarifying the federal government's role in wholesale electricity markets within a comprehensive energy bill. The House says it will take up the issue in separate legislation.

The Senate Committee on Banking passed legislation to repeal the Public Utility Holding Company Act, a Depression-era law designed to prevent utilities from monopolizing entire regions of the country. Many industry analysts say the law is outdated, given ongoing federal and state restructuring of power markets. PUHCA repeal is one small part of the electric restructuring debate; other issues on the table include when or if the federal government should impose price caps on wholesale prices and whether the Federal Energy Regulatory Commission, instead of individual states, should have authority to site electric transmission lines.

International policy

The White House energy plan calls for a review of existing sanctions to see how effective they are in promoting US foreign policy goals. Pending Congressional legislation does not address the issue in any substantial manner. Early indications are that Congress still considers the use of economic sanctions an effective tool in international relations.

Overwhelming bipartisan support to renew for a full 5 years the Iran Libya Sanctions Act demonstrated this sentiment. Possible sanctions against companies that invest in Sudan are also being considered by this Congress.

It's possible-although far from certain-that various sanctions proposals could be included in comprehensive energy legislation.

Gales of November

While there is no shortage of opinion on what Congress should seek to accomplish this year, there was a consensus, before the terrorist attacks, that revamping energy policy legislation was overdue.

"This is a unique time," notes the Independent Petroleum Association of America on its website. "It is rare when high oil prices so closely follow the devastatingly low prices of 1998 and 1999. It also is rare when producers can point so clearly to the cause of high prices and to the failures to recognize the consequences of low prices for both oil and natural gas."

Much will depend on what House and Senate leaders determine is the public's mood on energy issues in general. It is entirely possible that policy-makers in Congress and the White House will now decide to work together decisively to help mitigate what is expected to be a very unstable energy price environment this fall.