Barack H. Obama ran for US president on a platform that emphasized change. Washington-based oil and gas trade associations are expecting exactly that as his inauguration approaches and a Congress with a bigger Democratic majority goes to work. Many also think that deteriorating economic conditions will temper energy and environmental policy changes, at least in the near term.
“Clearly, the changes for the worse in our economic situation should cause us all to reflect on how best to restore a strong economy, coupled with sound energy policy and a thoughtful effort to address environmental concerns,” observed Jack N. Gerard, the American Petroleum Institute’s new president. “The focus today on economic recovery should remind us all that the economy will be adversely affected if we don’t balance energy and climate policy.”
Barry Russell, president of the Independent Petroleum Association of America, commented that “2009 will be challenging. The Obama administration and the 111th Congress will confront critical issues, both economically and in energy terms. Falling prices present a challenge for producers, in the short term particularly. We’ve already met with the Obama team several times and tried to explain where we might fit not only in terms of energy security, but also economically. They’ve been very receptive,” he said.
Brian T. Petty, senior vice-president for government affairs at the International Association of Drilling Contractors, said, “I think 2009 is fraught with disappointment and danger. It all depends on the tack the new administration takes in developing new hydrocarbons, and also the market, which is very much up in the air, for my association’s members.”
“I’m not a pessimist,” said Charles T. Drevna, president of the National Petrochemical and Refiners Association. “Even with the advent of the new administration and a more Democratically controlled Congress, I believe sound judgment will always overcome pandering to special interests at the end of the day.”
In a tight spot
“Make no mistake, though,” Drevna added. “This industry is in a tight spot, as are all industries. It has to decide how it’s going to look in the future, and it can’t base business decisions on election cycles. What we need is certainty and cooperation. What we don’t need are policies that are politically expedient but are detrimental to the consumer and the economy,” he added.
Skip Horvath, president of the Natural Gas Supply Association, anticipates major philosophical changes, not only involving oil and gas, but in regulation overall. He likened regulation to a clock’s pendulum, which growing economic uncertainty has caused to swing harder and further. Regulations won’t be the same as before, he ventured.
“We expect much more scrutiny, much more transparency on markets, and much more suspicion of whether markets are appropriate, such as for carbon trading. All of these questions will be viewed differently under a Democratic administration. It won’t be bad, just different,” Horvath said.
They and other officials from seven oil and gas associations spoke to OGJ in early-to-mid-December, following Obama’s election but before he made all of his energy and environmental appointments. While their observations reflect events only to that point, they also spotlight general trends that will have a major impact on industry-government relations in 2009.
Many of these resulted from dramatic occurrences in 2008. “Certainly, it was a monumental year in terms of moving the issue of access into the forefront of public thought and policymakers’ concerns,” said Tom Fry, president of the National Ocean Industries Association. “Not only did Congress not extend the congressional [US Outer Continental Shelf] appropriations moratoriums, but the president also lifted the presidential withdrawal.
“That doesn’t mean there are not hurdles that we still have to jump over in the future,” he cautioned. “There’s the question of what’s in the 5-year plan and lease sales there. Agencies in the government have to get their permits out in a timely matter. Litigation can slow down or stop various forms of energy activity. So just because moratoriums are gone doesn’t mean other access questions don’t need to be answered. But we’ve made some real progress,” he continued.
For economic recovery, we need a sound, comprehensive energy policy. “Now is the time to…move away from the all-or-nothing extremes of the past.”—Jack N. Gerard, API president
Obama and natural gas
The energy plank of Obama’s campaign platform emphasized promoting alternative and renewable energy sources, noted Donald F. Santa, president of the Interstate Natural Gas Association of America, “but there also were references to natural gas, including addressing infrastructure impediments to bringing more gas to market.
“While it is not a headline issue for the new administration, there is recognition that no matter how much you try to accelerate the transition to a new energy economy, gas will play a major role for a significant period because it’s available in North America. But it will need a bigger infrastructure to produce the resource, get it to markets, and distribute it to end users,” Santa added.
Horvath told OGJ that he had not seen evidence that most Democrats consider gas as anything more than a bridge fuel while alternative and renewable energy technologies are being developed. “They embrace it, but they still see it as a bridge. We’re fine with that, because it’s a thick and substantial bridge, which will need to carry a lot of traffic,” he said.
We must explain our role in energy security to “folks who think we can turn the light switch immediately from fossil fuels to renewables.”—Barry Russell, IPAA president
But the NGSA president also said that many Democrats have not yet made the connection between relying more heavily on gas and providing greater access to domestic supplies. “I think we haven’t got the message to Democrats that if they’re going to embrace natural gas as a bridge fuel, you need to have access to supplies. We’re making progress in helping them understand that they’ll need to allow exploration to get natural gas out of the ground,” he said.
IPAA’s Russell added, “In a general sense, we know that the Obama administration and folks up on the Hill generally are interested in renewables and alternatives. We’re trying to get across the important role of fossil fuels over the immediate future. Frankly, there are still some folks who think we can turn the light switch immediately from fossil fuels to renewables. They’re the ones to whom we need to explain our role in energy security,” he said.
A long bridge
Lee O. Fuller, IPAA vice-president of government relations, said several environmental organizations have identified gas as the key bridge fuel to future energy choices. “We think it’s going to be a very long bridge before those future fuels will be able to replace natural gas,” he said.
At the same time, groups such as the Natural Resources Defense Council have been difficult to deal with on access issues, he told OGJ. “NRDC has been active in lawsuits involving construction requirements and hydraulic fracturing. If you look at the natural gas supply structure, certainly the role of shale gas is essential to allow the growth of that supply going forward,” Fuller said.
Convincing more state and federal lawmakers to see a connection between more access to supplies and growing reliance on gas is a continuing challenge for the industry, according to Martin E. Edwards, INGAA vice-president for legislative affairs. “The growing opposition to shale gas development and the use of hydraulic fracturing is a growing problem. It will be an ongoing debate; no question about it. You have to balance local opposition with the importance of having domestic gas supplies that can partner with renewable and energy-efficient technology,” he said.
The domestic gas market is in fairly good shape, INGAA’s Santa said, because production from shale and other new sources has been fairly prolific, and prices have dropped precipitously from their $13 level in mid-2008. “I’m not so sure that the need to address the economic downturn will have an impact on natural gas production policies,” he said. “What I do expect is that, as part of a stimulus package, there will be spending and incentives for energy efficiency to accelerate the energy economic transition. That could be the strongest step in addressing the economic downturn.”
Congress and the new administration could try to put some new restrictions on OCS development in place, Edwards suggested. But he said he does not expect a push to reinstate all the moratoriums, which expired Sept. 30.
Inviting political peril
“Even we were surprised by the potency of the issue once it got some traction last year and how quickly there was an about-face on it. While it occurred when gasoline prices were $4/gal, it still struck a chord in Washington. To do a 180° turn on it would invite the kind of political peril and vulnerability that neither Congress nor the new administration wants,” Santa said.
Daniel T. Naatz, vice-president of federal resources and political affairs at IPAA, told OGJ there was a sea change in the public’s perception of the OCS oil and gas issue in 2008. “Some of it was driven by gasoline prices. Beyond that, the public was willing to discuss offshore policy for the first time in a long time and they questioned the wisdom of placing moratoriums everywhere but the Central and Western Gulf of Mexico,” he said.
He still expects producers to face challenges as they seek more access to supplies. But he also expressed hope that Obama will stick to his pledge to look seriously at offshore energy potential and not simply reinstate moratoriums. “We want to continue to capitalize this. We’ve seen reports that people walking out of the voting booth rated energy as still one of the top issues. Even with the price of gasoline and other forms of energy going down, the American public is very much aware of this,” Naatz said.
“The current state …of the global economy is much more than the 800-pound gorilla in the room: It’s the whole primate portion of the zoo.” It must be considered.
—Charles T. Drevna, NPRA president
“It is clear that when the public’s attention was overwhelmingly focused on needing energy, it came out overwhelmingly for developing more,” said API’s Gerard. “There may be some who want to hold onto the policies of the past. But in looking ahead, if we’re serious about economic recovery, we’re going to need a sound, comprehensive energy policy. Now is the time to find the middle ground and to move away from the all-or-nothing extremes of the past.”
When retail gasoline prices broke the $4/gal barrier, it did more than simply get the public’s attention, he suggested. “The American people reacted quickly to the failed energy policies of the past. When they heard that the United States was sitting on vast amounts of oil and gas that Congress had placed off-limits, they overwhelmingly called for reform. The public understands that we have the ability to better control our energy destiny. By two to one, people expect us to develop American resources to benefit all Americans,” he said.
Supply diversity
Voters were emphatic in the weeks leading up to the Nov. 4 election about energy, NPRA’s Drevna said. More than 60% said that OCS areas, which had been closed by moratoriums, should be opened for leasing, he told OGJ. “We as a nation can’t continue to say we want to limit our dependence on foreign crude and [at the same time] restrict our domestic development…. The bottom line is that as a nation, it’s our responsibility to make our energy supplies as diverse as possible. The best way to do this is to develop more of our own resources,” he maintained.
IADC’s Petty raised another point: “The Interior Department, as it administers offshore and onshore oil and gas leasing, has to take a longer view. It is the second largest source of federal revenue after the Internal Revenue Service. I think the Obama team could take a long look at expanding offshore access as a result.”
NOIA’s Fry was not so certain. “It’s all about the economy,” he said. “It’s also about supply and demand from an oil and gas perspective, and I can’t predict how that’s going to look in the short term. Obviously, when prices fall, some of the harder-to-get resources won’t be developed, because it’s not economic to do so. Some companies already are talking about cutting back capital expenditures, which probably means we won’t be producing as much oil and gas in 2-3 months onshore and 7-8 years offshore,” Fry told OGJ.
“I think people want to look at the energy security question,” said Naatz. “President-elect Obama and Congress are going to have to deal with this. We hope there won’t be any steps backward on access onshore as well as offshore, because the public is looking at this in a whole new light.”
The most recent election brought more new members to Congress from politically conservative districts that are friendly to business, Naatz continued. IPAA plans to reach out to them, as well as to members from districts with agriculture and other industries that consume large amounts of energy, he said.
“Over the last two elections, most of the Democrats who were elected replaced centrist Republicans,” said Fuller. “But we also saw in the last Congress that there’s a big difference between where they view an issue and how they’re able to develop legislation.”
Decision-making areas
Fuller explained that most House energy bills introduced during the 110th Congress were written outside of the committees and were presented as a final package. “So the challenge is not only finding more centrist Democrats who are willing to consider oil and gas’s role, but also [those] who are willing to move the discussions into areas where decisions are made,” he said. “The Blue Dog Democrats, who mostly concentrate on fiscal issues, put out a package of energy principles this last Congress, which we thought was very good. The next step will be to get this debate into the Democratic caucus,” Fuller said.
“No matter how much you try to accelerate the transition to a new energy economy, gas will play a major role for a significant period. But it will need a bigger infrastructure.”
—Donald F. Santa, INGAA president
That could be difficult, Petty observed, because more California Democrats chair key energy committees. “Anywhere you have a Californian chairing a committee, they’re going to be very aggressive on the air quality issues, whether it’s Barbara Boxer in the Senate or, now, Henry Waxman in the House,” he said.
Waxman took aim at hydraulic fracturing this past session when he chaired the Oversight and Government Reform Committee before he successfully challenged John D. Dingell to lead the Energy and Natural Resources Committee in the 111th Congress, the IADC official noted. “The centrists may be too few and too junior to make much difference,” he warned.
Setting up a competitive, fair market is complicated. Congress will try to do it right, “which could delay action until 2010. The only thing that could change this would be pressure to move on the environment.”—R. Skip Horvath, NGSA president
Oil and gas association officials were divided as they assessed prospects for federal clean air legislation in 2009, particularly when it came to cap-and-trade proposals.
“I expect it to be talked about,” said NGSA’s Horvath. “We’ll certainly see some bills. I personally believe that setting up a market that’s competitive and fair is more complicated than setting up a lemonade stand. There are so many difficult economic questions. I think that once Congress takes a close look and realizes what this means, it’s going to step back and try to do it right, which could delay action until 2010. The only thing that could change this would be pressure to move on the environment.”
Petty said he doesn’t consider a cap-and-trade bill inevitable. “With the financial meltdown and auto imbroglio, other issues loom larger. I hope the economic team in the Obama administration seriously considers the economic consequences of cap-and-trade on energy development. They’re going to have to throw themselves into the breach against the potentates on Capitol Hill who would have it otherwise,” he maintained.
Carbon capture question
Fuller said pressure could mount for legislative action on global climate as an alternative to trying to reduce greenhouse gases through the Clean Air Act, which he believes would be disastrous.
“The principal factor in cap-and-trade is the availability of carbon capture and sequestration at some point. That may not be available immediately, so there probably will be some research and development,” he said.
Drevna questioned predictions that a cap-and-trade bill is immediately inevitable. “Given the fact that there are very divergent forces coming in and stating the economic dangers of a cap-and-trade system to the country, from John Dingell to Jim Hansen and even Ralph Nader and a number of environmental groups, I’m not yet ready to say that anything is inevitable,” he said.
“Clearly, the current state not only of the US but the global economy is much more than the 800-pound gorilla in the room. It’s the whole primate portion of the zoo. It has to be considered,” the NPRA president said. “The last thing this country needs is something that creates winners and losers by putting a further drag on a very tenuous economy. Does this mean that policymakers will consider this? I would absolutely hope so,” Drevna said.
“Ultimately, the economy could temper some proposals,” said Fuller. “It will depend on the dynamics going forward. Certainly, we’ll see a stimulus bill fairly early. That will start some movement with public works projects that can result in jobs in the construction and engineering trades. If the banks can bring up credit and the auto industry issue can be settled, that will be helpful. But I think we’re in for a recession that will temper what Congress may want to do in global climate and other issues. It will have to look more closely at consequences,” he added.
“Our view is that the public pushed and voted for change” said Gerard. “It’s clearly significant in Washington. But those who voted for change have made it clear they want to move away from the extreme partisan politics of the past and toward an attitude of getting the people’s work done. I believe many newly elected House and Senate members clearly understand that.” So did the president-elect, when he said he planned to govern from the political center, API’s president continued.
“We’re all anxious to work with him and his administration and the new leadership in the Senate and the House to see if we can find balanced outcomes to some tough issues that have confronted our country for many years.”