As 2009 began, the US oil and gas industry wondered how the change Barack Obama promised in his successful 2008 presidential campaign would affect its business. It was clear as the year ended that changes could be substantial, and not necessarily good for all. But 2009 wasn't entirely bad as policymakers increasingly embraced natural gas as the primary fuel in the nation's energy future.
This year consequently began with a mixture of strong optimism about gas and equally strong concern for potentially onerous restrictions and regulations.
"I do not recall a year where so much has been going on. There's so much we don't know," said Tom Fry, a former US Bureau of Land Management and US Minerals Management Service director who will retire in early 2010 after 10 years as National Ocean Industries Association president.
"We expect we'll always have challenges, but with every challenge comes opportunity. We see those opportunities today in discussions over climate." — Jack N. Gerard, president, American Petroleum Institute
"There certainly will be opportunities, but there are also many moving parts in many areas which could affect the oil and gas industry from cap-and-trade to taxes," he said during a late-December interview. "There will be a lot going on. Whether a lot gets done may be a different matter."
"We expect we'll always have challenges, but with every challenge comes opportunity," American Petroleum Institute Pres. Jack N. Gerard said. "We see those opportunities today in discussions over climate. We've had a great opportunity to talk about the oil and gas industry as a major job creator in the US economy. People are starting to pay attention."
'Opportunity to educate'
Gerard told OGJ, "Democrats and Republicans alike are saying they probably should look to oil and gas to help bring the US economy back to health. So each challenge is an opportunity to educate and help public officials understand the oil and gas sector's very important role."
For independent producers, 2009 was positive as it became increasingly apparent that shale gas supplies in the Lower 48 potentially offer a huge resource base improving the US balance of payments while providing a wide range of economic benefits in several parts of the country, Independent Petroleum Association of America Pres. Barry Russell observed. Offsetting this were proposed new taxes, hedging rules, and permit processing and other fees, he continued. "It's frustrating because we believe we have so many ways to address what we believe is a nonpartisan issue: improving the US economy," he said.
The industry's downstream segment may have been hit hardest during 2009, first by a deepening recession, which reduced demand for its products, and then by "foolhardy policies posed by Congress and the Obama administration," according to National Petrochemical & Refiners Association Pres. Charles T. Drevna.
"We were shocked when the president published his budget proposal because the refining industry was a target to pay for all of his programs," Drevna said. "Right from the start, he laid down a gauntlet. We took that message to heart, and came up with what we believe were solid economic and technical reasons why these programs would be failures if enacted."
For 2010, said Drevna, "We would hope to see some temperance when it comes to proposals coming out of the administration and Congress. We're hopeful, but reality dictates that some of these folks are zealous when it comes to ruining the US economy. If they attempt to vilify the oil and refining industry in an attempt to use them to pay for some of these moronic policies, the American public is in for a lot of sleepless nights."
'All-encompassing issue'
"Climate change is the elephant in the room, an all-encompassing issue that affects everyone," said Interstate Natural Gas Association of American Pres. Donald F. Santa. Efforts to address climate change could affect what interstate gas pipelines transport as well as their own emissions, he told OGJ. Problems could arise if incentives to protect other forms of energy diminish gas's potential, he said.
"We hope gas does well. We think it will. Not every alternative will hit a homerun, so gas still looks promising," Santa said, adding, "The combination of reports about gas' abundance and new industry groups, such as the American Natural Gas Alliance, has improved its outlook. But there still are big hurdles to clear before gas is in a position to compete fairly, based on its attributes."
Congress took its first major steps in trying to address climate change in 2009 with two bills that would regulate greenhouse gases by establishing a domestic carbon cap-and-trade program. The House passed HR 2454 by three votes on June 26. The bill was cosponsored by Reps. Henry A. Waxman (D-Calif.) and Edward J. Markey (D-Mass.). The Senate Environment and Public Works Committee approved S 1773, cosponsored by Barbara Boxer (D-Calif.) and John F. Kerry (D-Mass.), on Nov. 5 despite a boycott by its Republican members.
Both measures posed significant problems for the oil and gas industry, both upstream and downstream. "Refiners would be required to take into account, in reductions targets, not only carbon dioxide emissions from the plants themselves, around 4% of the total, but also from our customers, which would be another 38%. We're in the crosshairs," said Drevna.
"When you look at the Waxman-Markey bill, the process was political and not designed to look at target reductions," said Lee O. Fuller, IPAA's vice-president of government relations. "They needed 30 votes to get it out of [the Energy and Commerce Committee] and 247 to get it passed on the floor. Many oil state Democrats were more focused downstream. The way the process worked, whatever allocations tried to protect other fuels took away from natural gas."
'Economic suicide'
"I'd like to see that vote in the House again on Waxman-Markey," Drevna said. "More members recognize the reality of the economy now and what we would be sacrificing as a nation if we tried to go it alone. The initial timeframes and targets, particularly for the refining industry, are more than problematic. They're economic suicide. Meanwhile, other nations like China and Russia met in Copenhagen [at the United Nations climate-change conference in December] without us. That's a telling fact."
He and other oil and gas association officials noted that Kerry and two other senators, Joseph I. Lieberman (I-Conn.) and Lindsay O. Graham (R-SC), proposed a climate-change compromise framework on Dec. 10. "There are parts of it which speak to onshore and offshore oil and gas, but we really don't know the details," said Fuller.
"It was interesting in their framework that, for the very first time, members of the Senate were saying for the first time that this country needs a healthy and vibrant refining industry. That was monumental to us," Drevna told OGJ. "I sent them a letter thanking them for noticing us, but warned them that if they were going to try to pursue targets, it wasn't going to help much."
The domestic climate-change regulatory situation was complicated further when the US Environmental Protection Agency, in response to a 2007 US Supreme Court decision that GHGs fit the federal Clean Air Act's definition of pollutants, issued an endangerment finding on Dec. 7 that set the stage for it to move ahead on attempting to regulate GHG emissions under the law. "EPA may be trying to force Congress to move legislatively to avoid a bigger problem since the [CAA] was designed for local applications," Fuller said.
Drevna suggested, "Let's get back to what the situation looks like today and understand what happened in Copenhagen, then reassess everything. Whatever they have on their chalkboards should be erased so everyone can start with blank slates and participate in an interindustry fashion and determine what's possible and what makes sense instead of picking winners and losers. Heretofore, we haven't seen much which makes sense for the refining industry and the US economy."
Mixed signals
Many producers, meanwhile, entered 2010 trying to reconcile what they perceived as mixed signals from the Obama administration in 2009. Russell noted that US Department of the Interior officials "say the right things, but when you look at what they actually do, it's frustrating. They move more slowly on oil and gas but quickly on renewables, which they seem more interested in."
"We're seeing more [DOI] actions taken through the prism of climate change," added Daniel T. Naatz, IPAA's vice-president of federal resources and political affairs. He said that Rocky Mountain upstream independents were troubled when US Interior Secretary Ken Salazar directed BLM on Feb. 4 not to accept $6 million in successful bids on 77 tracts offered in BLM's Dec. 18, 2008, oil and gas lease sale in Utah.
Disputing Salazar's assessment that offering the tracts was an 11th hour maneuver by the Bush administration, Naatz told OGJ that the secretary's action raised questions about proximity to national parks and proposed wilderness areas. "Producers didn't get everything they wanted at that sale. The people in BLM are professionals," he said. "There are inherent costs to operating on federal lands in the West already. Independent producers with small operations don't have a large number of plays. "BLM's multiple use ethos has assumed that different activities coexist. When land turns to a single use, oil and gas revenues can be lost." The onshore situation of rising costs and permitting delays extends to federal offshore areas, he indicated.
NOIA's Fry said, "We are rid of the moratoriums and withdrawals, where 85% [of the US Outer Continental Shelf] was off-limits. Yet there's only 15% available under the current 5-year plan. It will take a new 5-year plan, with administration support to move forward." The arrival of S. Elizabeth Birnbaum as MMS's new director on July 15 probably has helped, he continued, but NOIA and its members plan to make certain DOI officials have all the information and are aware of proposed policies' possible unintended consequences.
Shorter offshore leasing periods, which Salazar announced on Nov. 13, are one example, Fry said. "The change itself is not that great if the government considers matters which are beyond lessees' control, such as rigs not being available or other government agencies not completing their reports," he said, adding, "MMS needs to have flexibility to grant extensions in cases where operators have been diligent but haven't, through any fault of their own, met development deadlines."
'Under the gun'
Fry said he hopes Salazar does not delay completion of a new 5-year OCS plan much longer, and warned that MMS is "under the gun" to keep a planned 2011 lease sale off Virginia on schedule in the current plan as the state's Gov.-elect, Robert F. McDonnell, requested in a Dec. 23 letter to Salazar. Fry said that officials in North Carolina, South Carolina, Georgia, and Florida have indicated that they're interested in seeing their states possibly be included in the next 5-year OCS plan.
But Fry doesn't expect much progress unless these coastal states receive federal revenue shares similar to those of Alabama, Mississippi, Louisiana, and Texas, which would require congressional action. "These states recognize that just having offshore resource development, whether from alternatives or from oil and gas, would create jobs and improve their economies," he said, citing one estimate that Virginia could get $165 million/year with a revenue share similar to that of some Gulf Coast states.
Other association officials said it also became apparent during 2009 that Congress and the Obama administration planned to regulate more aggressively. Interstate gas pipelines received a dramatic signal on Nov. 19 when the US Federal Energy Regulatory Commission launched new investigations into four pipelines' rates under Section 5 of the Natural Gas Act not in response to customer complaints, but following analysis of data which the pipelines submitted earlier in the year. "We're asking whether this is limited or a precursor of things to come. It certainly raised some eyebrows in the financial community," Santa said.
Santa told OGJ that the last decade-and-a-half's lighter regulatory approach at FERC spurred investments for pipelines to increase capacity. "Owners of existing facilities also felt that with certainty they would not be dragged into regular rate cases, they could pursue efficiencies and innovations," he said, adding that most pipeline rate of return cases in the last 15 years were settled before they reached an administrative law judge.
Independent producers and other end users had to fight hard to make certain they could continue to use commodity hedges as federal lawmakers considered proposals to regulate over-the-counter markets for the first time. Fuller said, "Most of our members hedge for a long time and use their reserves, instead of cash, as collateral. They also don't do daily clearing over-the-counter. The part we don't have the ability to shape, but have a concern about, is what happens after our trades."
'Very new territory'
Counterparties now have the flexibility to balance buyers and sellers, Fuller explained. Being required to use regulated exchanges could affect smaller banks which often act as first counterparties. "It's very new territory," he said, adding, "We haven't sought to be involved, but it's such a big part of many independents' cash management that we had to be there and explain how it could affect our members."
NPRA's Drevna said refiners face threats not only from problems posed by fuel composition mandates but also from efforts to impose new plant security regulations as an indirect means of creating new environmental requirements.
"It's just emblematic of the proponents trying to debilitate the refining and petrochemical business in this country," Drevna said, adding, "We were at the forefront of chemical and refining plant security even before 9-11. That simply increased our diligence on these matters. To suggest a total reconfiguration of security procedures by having bureaucrats tell chemical engineers and plant operators how to run their facilities is foolish. It will simply just move more plants and jobs overseas."
As for cellulosic ethanol's potential, Drevna continued, it "reminds me of my favorite baseball team: the Pittsburgh Pirates." He explained, "We're 2 years away from being 3 years away." He noted that when the US Senate Energy and Natural Resources Committee held a hearing in 2008, cellulosic ethanol proponents said they were 6-7 months away from a breakthrough. "Fast forward 6-7 months to a House Energy and Natural Resources subcommittee hearing, and the same people say it's a year away," Drevna said.
Refiners would like the allowable ethanol limit in motor fuels to stay at 10% until full tests of potential impacts from higher levels cam be completed. "The corn ethanol folks say that we need to keep moving forward and meet the mandates so the cellulosic folks will have the incentive to keep researching and developing," said Drevna. "Plowing more corn ethanol into the system so cellulosic can come on? Come on—give us, and the nation, a break. This was a train wreck we saw coming. That blend wall will come a lot earlier than expected, which is one reason we're against mandates."
Election year factor
A final question is whether an upcoming election in November will stimulate or impede congressional climate change actions. "There's no question that Senate centrists' views differ from the two bills which are out there, while some House moderates have said it would be harder to vote for cap-and-trade this time around," Fry said. "I think the moderates are going to require some changes. It also will be interesting to see what happens with EPA's pressure to regulate [GHGs] under the [CAA}. The whole concept of EPA's regulating this, as some have suggested, is more like a blunt instrument instead of carefully crafted legislation."
"The free allowances in the current climate bills confer significant benefits. Max Baucus and his committee exercise more influence in getting bills through the Senate than the Environment and Public Works Committee." —Martin E. Edwards, INGAA vice-president, legislative affairs
The US Senate Finance Committee could play an important part, suggested Martin E. Edwards, INGAA's vice-president for legislative affairs. "The free allowances in the current bills confer significant benefits," he said. "Sen. Max Baucus (D-Mont.) and his committee exercise more influence in getting bills through the Senate than the Environment and Public Works Committee because its issues require members to work together. Its members also better reflect the overall Senate's makeup."
International climate negotiations are in their 15th year and a lot has changed since they began, particularly in China, India, and Brazil, Edwards said. The Obama administration also made health care a legislative priority in 2009 so there won't be much appetite among Republicans and moderate Democrats to go very far on issues beyond jobs and the economy heading into next fall's federal elections, Edwards told OGJ.
"Somebody has to pay for this," said Drevna. "When cap-and-trade has been debated four or five times, no matter what path is taken, it always came out the same. The program makes no sense when you consider what we need to do in this country versus the rest of the world. I don't like sounding so negative. But there's nothing out there to be positive about. It's all costs and negative benefits. I can make the case today, looking at studies we have seen, that this is an all-cost, economic suicide kind of legislation."
Oil and gas industry associations plan to be more active than ever in conveying their views to Congress and the administration during 2010. IPAA will be working with regional independent producers' groups to bring producers to Washington and have them speak out in their home districts, especially since it expects punitive tax proposals which the White House put in its fiscal 2010 budget request but which were not enacted to reappear in its proposed fiscal 2011 budget in a few more weeks.
Associations also plan to continue spreading the good news about abundant domestic gas supplies. "People are starting to see beneficial impacts from new shale gas production," Naatz said. "Most policymakers understand this, but a certain segment is dead set against fossil fuels. That's what makes education so vital, not just for IPAA but for the industry as a whole."
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