The US oil and gas industry is entering 2007 with much the same fervor as a year ago, according to industry and trade association executives.
Although 2006 was a year when energy played a prominent role in the nation’s politics, industry leaders believe this year’s political scene could be every bit as unpredictable and exciting.
And this wouldn’t be just because Democrats now control both the House of Representatives and Senate for the first time in 12 years, they said.
“The Democrats have been in charge before. Bipartisan participation still is needed to adopt major proposals, said William F. Whitsitt, president of the Domestic Petroleum Council. “I believe that in the end, a lot of Democrats and Republicans are concerned about major energy issues.”
Several Washington, DC-based trade association officials began meeting with federal lawmakers and their staffs soon after November’s election. “Our mission hasn’t changed because the gavels have moved from the Republicans to the Democrats,” said Charles T. Drevna, executive vice-president at the National Petrochemical & Refiners Association.
Drevna said the first 100 hr of the 110th Congress, during which incoming House Speaker Nancy Pelosi of California said the new majority would make significant changes, might not be as encompassing as originally thought. But he and other industry association officials also said they lacked specific information about the Democrats’ plans when they spoke with OGJ in mid to late-December. “That’s only the beginning of the 110th Congress. I expect it to look hard at our industry,” Drevna said.
“The Democrats have kept their plans secret,” said Brian T. Petty, senior vice-president for government affairs at the International Association of Drilling Contractors. “They could hold investigatory hearings, but it’s still not certain what they’ll do beyond that.”
‘Hard-pressed’
Petty also has not seen specifics for the Democrats’ first 100 hr, but he expected an effort to repeal geologic and geophysical expense amortization on successful wells and other provisions in the 2005 Energy Policy Act (EPA) favorable to oil and gas. “Even our Blue Dog friends will be hard-pressed not to vote for a gigantic bill that plants the flag for the Democrats,” Petty said.
The Independent Petroleum Association of America is drawing on the political expertise of its staff, some of whom have worked in Washington for decades. “We’ve already spent time meeting with new members and committee staffs,” said IPAA Pres. Barry Russell, who noted that 65 contacts were made from early November to mid-December.
“But it’s also very important for the industry to speak with one voice,” Russell said. “Our grassroots network lets us work with other associations, such as landowners and drilling contractors, as well as state and regional oil and gas groups.”
IPAA Chairman Mike Linn anticipates the group will need to defend independent producers from potentially damaging legislation more than it did when Republicans controlled Congress.
“We’re reaching out to Democrats who have helped us in the past, such as incoming Senate Energy and Natural Resources Committee Chairman Jeff Bingaman of New Mexico. He understands independents and their commitments, particularly reinvesting 150% of their profits,” said Linn, who also is president and chief executive officer of Linn Energy LLC of Pittsburgh.
Lee O. Fuller, IPAA vice-president of government relations, said congressional Democrats’ plans for their first 100 hr may have evolved from repealing the 2005 EPA’s provision dealing with geologic and geophysical expenses to removing all Republican-enacted oil and gas incentives.
Other possibilities
“It’s somewhat of a shifting target,” Fuller said, adding that the 110th Congress also could examine domestic producers’ inclusion in a manufacturers’ tax cut and trying to recover federal royalties believed lost from the omission of price thresholds from those 1998 and 1999 deepwater leases. “It’s an issue that’s going to be addressed. We expect some formulation to pass,” Fuller said of the latter issue.
Whitsitt said he hoped progress was being made on convincing House and Senate members not to repeal the tax exemption for intangible drilling costs, which he suggested “would be a killer for the industry.”
Whitsitt said, “To their credit, very senior Democratic staff members have been very receptive. In some cases, they’ve gone out of their way to hear what we have to say.”
Other industry associations expect to be less directly affected by 2007 congressional actions. “This next Congress will do some things differently, such as exercise more oversight, said Tom Fry, president of the National Ocean Industries Association. “But our issues traditionally have been more regional than partisan.”
Association executives also believe federal legislative deliberations over global climate change this year could have longer-term impacts on their members’ businesses. “The ground was shifting before the elections, even though there were some members of Congress in denial,” said Donald F. Santa Jr., president of the Interstate Natural Gas Association of America. “But the change in committee chairmanships will accelerate the discussion.”
‘Fully participate’
Discussions in 2007 could help set the stage for consideration of mandatory carbon controls or other major steps in 2008 and beyond, Santa said. “The main drivers involve constructing a program to deal with oil, gas, and coal. Gas produces less carbon dioxide than the other two, but its companies still need to be part of the discussions,” he said.
“The main issue involves mechanics. How do you put together a program that discourages greenhouse gas emissions and encourages alternatives while fully considering economic consequences?” said Martin E. Edwards III, INGAA vice-president for legislative affairs.
Santa raised some specific questions: “At what point do you regulate emissions? To which segments do you assign responsibility for allowances? Who absorbs the cost?”
Trying to identify potential costs of a program driven by environmental considerations can be difficult, however. “We’ve had some significant increases in oil and gas prices, but they haven’t made a long-term economic impact,” said Terry D. Boss, INGAA senior vice-president for regulatory affairs.
Yet not doing anything and sticking with established technologies also poses a risk, Santa said. He noted that one INGAA member company, which has a local distribution division, found that 40% of its load growth is at established sites as consumers buy more computers and other high-technology appliances.
“The challenge becomes producing more energy and finding more ways to deliver it,” Santa said.
Special interests
Drevna expects a lively global climate change debate in the Senate, where incoming Environment and Public Works Committee Chairwoman Barbara Boxer (D-Calif.) has decided that two subcommittees will need to take jurisdiction. But the NPRA official also said it will be imperative to keep some special interest groups with powerful lobbies in check.
“When the president talked about a US addiction to oil, that did more politically to create uncertainty and a push toward unsound policies,” Drevna said, adding, “If this country is addicted to oil, ethanol is not the methadone.”
At the same time, Drevna said, Congress should become more aware that petrochemical and other industries are finding it hard to compete worldwide because domestic gas prices are higher than those in other countries.
“There are politicians who are dismayed about overseas outsourcing of computer technology jobs. That will pale in comparison if we allow the same thing to happen to the petrochemical industry,” Drevna warned.
Producers also are concerned that not enough attention is being paid to finding supplies to satisfy additional demand. “We’re on borrowed time,” said Whitsitt. “We haven’t seen the necessary long-term supply response. Regardless of who’s in charge, Congress can either do things that make this situation better or impede the progress we’re making.”
Whitsitt and some other association officials don’t expect more radical proposals to get far this year. But DPC’s president warned that they could send the wrong signals to markets and discourage investment.
“We’re trying to point out to the new leadership and our friends in Congress that we take the natural gas supply situation very seriously. To some extent, their proposals may affect decisions, even if they aren’t adopted,” Whitsitt said.
Fund programs
IPAA wants to preserve recently enacted or launched programs that help its members produce more domestic oil and gas. Fuller cited the US Bureau of Land Management’s drilling permit processing pilot program, which is reducing backlogs in the Rocky Mountains but needs to keep its funding in the 2005 EPA as well as the $50 million designated for oil and gas research and development.
“The administration will have many matters competing for its attention,” Fuller said. “It also will be dealing with a Democratic Congress that will probably be more aggressive in its oversight. That, by itself, will make it less appealing to make a controversial decision.”
Hardly any industry association official in Washington expects additional Outer Continental Shelf legislation in Congress during 2007, largely because the bill which passed late in 2006 was very significant.
“Those 8.3 million acres represent about a 20% increase from the areas already under lease,” NOIA’s Fry said. “That’s pretty big, but challenges need to be overcome. It’s a long way from shore, but infrastructure is fairly close. We look forward to the first lease sale as soon as possible.”
But the 2006 bill also established a precedent of sharing federal OCS revenues with coastal states, which must absorb the impact of such activity and provide support services, Fry said. Virginia’s interest in possibly participating, and its inclusion in the US Minerals Management Service’s 5-year plan, now being prepared, may encourage other states’ policymakers to consider acting, he said.
“The first bill in Virginia was vetoed for procedural reasons in 2005, but it stimulated both of its US senators to become vocal supporters where they’d previously been ambivalent,” Fry said. “This showed us the importance of working even in noncoastal states such as Utah or Tennessee in getting legislatures to pass resolutions of support. In other coastal states, we’ve tried to build coalitions with chemical and other manufacturers to promote similar actions.”
‘Signal for future’
Petty sees the comprehensive energy strategy bill-which includes possible OCS activity off Virginia-that the state’s legislature passed in 2006 and Gov. Timothy M. Kaine signed into law, as “a signal for the future, at least for the eastern seaboard states.”
Petty thinks Georgia and South Carolina are likelier to consider similar steps than Florida, which the IADC official considers closer to California in its attitude toward offshore oil and gas activity. But he also said that some Floridians might press for change if Cuba exercises its sovereign rights and starts exploring and developing resources off its coast, particularly if it’s with financial assistance from China.
Petty also anticipates that foreign energy confrontations, such as that of Belarus and Russia’s OAO Gazprom, will have an increasing US impact if Europe and other consuming areas decide to diversify their resources and compete more aggressively for other supplies.
“The world outside the US will increasingly drive domestic oil and gas issues. There’s no way to stop it,” Petty said.
Whitsitt conceded that the Senate, with its more deliberate approach in which 60 votes are still needed to stop a filibuster, probably would stop more radical proposals that may pass the House.
“But just because there’s that institutional ability, I think it’s incumbent to not look simplistically at energy issues,” Whitsitt said. “I think we need to be focused on energy policy questions from the beginning, whether it’s in the Senate, the House, or the administration. We need to keep talking about things that matter to domestic producers and to the rest of the country.”
