Beyond Macondo: Industry faces range of issues in 2011

Jan. 3, 2011
The Macondo well accident clearly was the biggest event shaping US energy politics in 2010.

Nick Snow
Washington Editor

The Macondo well accident clearly was the biggest event shaping US energy politics in 2010. It sent shock waves through Congress and the Obama administration, which continued to reverberate as the year wound down. But it was not the only game in town. Other policy and regulatory initiatives loom large in 2011, industry association leaders told OGJ in early to mid-December.

"Voters sent a message in the November elections that jobs are the number-one issue," American Petroleum Institute Pres. Jack N. Gerard observed. "The US oil and gas industry already employs 9.2 million people and has the potential to create hundreds of thousands more with the right policies."

Independent Petroleum Association of America Pres. Barry Russell said, "Whenever you have an emergency, there's always a potential to overreact. We've had our hands full the past 6 months." He nevertheless suggested that the US could be poised for a major economic and energy renaissance. "There have been some real supply game-changers which have caused many people to reassess policies and strategies," Russell said.

Whether the Obama administration recognizes this and adjusts its energy strategy or doggedly continues to emphasize encouraging alternative fuels with subsidies and discouraging fossil fuel development and consumption with punitive taxes and moratoriums could be 2011's primary question, several of the industry association officials said.

"Energy should not be a partisan issue; unfortunately, over time, that's how it has been perceived," said Gerard. "It could be a good economic starting point for the new Congress. The challenge will be to bridge political philosophies and come together to create a comprehensive energy policy."

Two major concerns

Industry association officials expressed concern over the Environmental Protection Agency's plan to regulate greenhouse gas (GHG) emissions under the Clean Air Act early next year. Several also suggested that US Interior Sec. Ken Salazar may have gone further than necessary following the Macondo well accident and spill with withdrawals and new regulations which unduly delay exploration and development on federal land onshore as well as offshore.

US President Barack Obama and Environmental Protection Agency Administrator Lisa Jackson will be key figures in the energy politics of 2011. They're shown here receiving a briefing last May from US Coast Guard Commandant Adm. Thad Allen following the Macondo blowout in the Gulf of Mexico, which reshaped the political climate. Allen was national incident commander. Official White House photo by Pete Souza.

"Our frustration has been that instead of learning lessons, the secretary has taken an overly cautious approach," said Daniel T. Naatz, IPAA's vice-president of federal resources and political affairs. "We've moved backward as a result of what happened, and that will hurt our economy domestically and our competitive position globally."

The industry is "trying to adjust to a 'new normal' in offshore oil and gas production," said National Ocean Industries Association Pres. Randall B. Luthi. "One of the biggest challenges is simply getting back to work. The secretary's deepwater moratorium covered 33 rigs, and as far as we know none are back on track to resume operations. Shallow-water operations also have been delayed, and seismic work was even delayed for a period of time."

American Exploration & Production Council (AXPC) Pres. V. Bruce Thompson said his association's members report that processing of federal onshore drilling permits "has slowed to a snail's pace." He said many independent producers suspect the administration is trying to accomplish by regulation what it couldn't by legislation with EPA's GHG effort.

Voters rejected congressional attempts to regulate energy markets with a carbon cap-and-trade program, according to National Petrochemical & Refiners Association Pres. Charles T. Drevna. "Now, EPA needs to realize what happened and recognize that the Clean Air Act is not the right mechanism," he said. "It looks as if we're going to have to live with what it comes up with until cooler heads prevail or the courts decide. We're not saying that environmental rules and regulations aren't necessary, but they need to be balanced."

Investment chill

Gerard similarly suggested that the EPA's push to regulate GHGs conflicts with the message voters sent in November. "They made it very clear they want Congress focused on job creation and economic recovery," he told OGJ. "EPA's burdensome regulatory approach creates uncertainty which will chill any investment recovery. Further, it expects elected officials in Congress to determine a policy of such consequence-and not unelected bureaucrats."

Oil and gas associations' first task following the election was to begin educating new members of Congress and their staffs about energy issues in general and oil and gas in particular, the officials said. "We and other trade associations work together," said Luthi. "We're preparing energy information sheets for each state to provide new members of Congress."

Thompson said the oil and gas industry's ability to send a consistent message to federal lawmakers despite its diversity is probably its biggest single improvement in Washington in the last 30 years. "We try to get everyone on the same page where possible and support one another. There's plenty to do and no shortage of opportunities," he said. "The more times we can go to the Hill with the same message, the better off we are."

He said he expects concerns over the growing federal budget deficit to drive the 2011 congressional agenda but was not certain what the impact might be on oil and gas. Other officials said they expect the White House to use this in its annual effort to remove tax incentives ranging from the intangible drilling cost exemption to denying oil and gas companies use of the manufacturer's tax deduction available to other industries.

Russell said the recent emphasis on reducing the deficit could intensify attacks on tax incentives because new programs require funding. "On the other hand, more economic activity is needed to help state and local governments," he said. "We have a good case there because we show positive impacts independent producers provide."

Punitive agenda

Gerard said some members of Congress and the Obama administration will probably continue to push a punitive agenda, including taxes, at the industry. "Recent studies concluded that increased oil and gas taxes over time will cost the Treasury revenue," he told OGJ. "In contrast, opportunities to develop domestic oil and gas will generate billions of dollars to assist in deficit reduction. It is clear the best approach is to encourage development of America's vast oil and gas resources."

He added that the Obama administration moved in the wrong direction when it dramatically changed course on its offshore oil and gas policy following the Macondo accident and spill. "Studies show access to areas currently off-limits has the potential to create hundreds of thousands of jobs and generate billions of dollars in federal revenue," the API president said. "We believe the administration should review its announcement and focus on producing American oil and gas as a significant spark to job creation and economic recovery."

That won't be easy, warned NOIA's Luthi, a former US Minerals Management Service director. Lease sales are the trigger for generating more offshore oil and gas revenue; so many of them have been canceled that the next one won't occur until late in 2011 at the earliest, he pointed out. "Take a look at what other countries are doing in the meantime," he said. "They aren't curtailing their efforts. In fact, they're increasing them."

AXPC's Thompson said he's encouraged by "an awakening on the part of Congress to our industry's economic contributions, and how punitive legislation has implications beyond hurting our members."

Drevna of NPRA, calling himself "cautiously optimistic," said, "2011 and the 112th Congress give us an opportunity to have the debate on where policies come from, what they're going to do, and how they're going to be corrected. I'm still naive enough to think that common sense will prevail. The American public is smarter than many politicians think. It's growing tired of this anticarbon fallacy."

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