Here’s a tough question for the US oil and gas industry: How much of the nightmare forming in Washington, DC, must come true before companies begin to decamp? It’s a global industry. Oil and gas companies based in the US don’t have to stay where they are.
With Barack Obama in the White House and fellow Democrats firmly in control of both houses of Congress, the US government acts like it tolerates the oil and gas business only as a source of funding for economic and social reform. Even courts are getting into the act. From leasing to taxation, political hazards are accumulating for the industry responsible for 60% of US energy supply.
Reasons to sneer
When perpetrators of these follies claim to be pursuing “energy independence,” new limits on industry access to federal land are reasons, by themselves, to sneer. In February, Interior Sec. Ken Salazar nixed 77 high bids worth $6 million from a December sale of leases in Utah. Then he delayed a 5-year program for leasing of the Outer Continental Shelf. Then he canceled preliminary work for an oil shale pilot program in Colorado and Utah.
Last month, the US Appeals Court for the District of Columbia vacated the current OCS leasing program, saying environmental impact statements prepared by the National Oceanic and Atmospheric Administration didn’t sufficiently assess deepwater areas off Alaska. And that’s just a sample of things to come. In March, Congress passed and Obama signed a lands bill that removed 2 million acres of land from federal leasing immediately and gave statutory authority to National Landscape Conservation System. For the 26 million affected acres, using lawsuits to block drilling on federal land will be easier than ever.
The federal budget proposed by Obama, meanwhile, would soak the oil and gas industry for $50 billion over 10 years. Some of the money would come from repeal of tax preferences that independent producers need for capital formation. Industry groups say the moves would cut drilling and production investment by 30-50%.
Larger oil and gas companies would take 10-year hits estimated by the administration at $17.2 billion from reinstated Superfund taxation, $13.3 billion from denial of the manufacturers’ tax deduction available to other industries, $5.3 billion from repeal of deepwater royalty relief, and $1.2 billion from fees on “nonproducing” OCS leases in the Gulf of Mexico. That last fee is supposed to prod operators into drilling or relinquishing leases on the assumption that they otherwise would pay millions of dollars in bonuses and rentals for privilege of doing nothing. Since publication of the final budget proposal, the administration has revealed that it can’t define “nonproducing lease” in any way that accommodates routine permitting and other administrative delays.
The budget also proposes to raise $650 billion from sales of allowances under a cap-and-trade program targeting emissions of greenhouse gases. The administration’s plan would hit refiners harder than other manufacturers by excluding ultimate consumers of oil products from emission caps. It also relies in its revenue estimates on an auction of all emission allowances. In response to political pressure, the House Energy and Commerce Committee has softened that part of its cap-and-trade bill. Some energy-intensive industries would receive cost-free allowances. The refining industry isn’t among them.
More to come?
Other venomous issues slither in the political grass. The most costly of them could be federal controls on drilling and frac fluids. The measures, under discussion at the Environmental Protection Agency and supported by key lawmakers, are environmentally unnecessary and threatening not only to drilling in general but to development of unconventional gas resources in particular. A wrong move in this area would stunt a crucial source of future energy supply.
This barrage of political setbacks and economic threats has developed in just 4 months. Hostility toward oil and gas, no doubt reflecting political payback to antipetroleum supporters of Obama and Democratic congressional leaders, is unmistakable. Oil and gas companies must wonder how bad things might become over 4 years in such a frosty political climate—and whether the atmosphere might be warmer somewhere else.
