Energy bill effects begin as refiner exits MTBE business

Aug. 3, 2005
Valero Energy Corp. announced plans to quit producing methyl tertiary butyl ether (MTBE) to reduce its product liability lawsuit exposure. The action, which will cut gasoline production at its refineries by about 60,000 b/d, came after the House-Senate conference removed MTBE defective-product liability protection from the energy bill.

Nick Snow
Washington Correspondent

WASHINGTON, DC, Aug. 3 -- The most ambitious federal energy legislation in decades began to have an impact less than a week after its passage by Congress and before President George W. Bush's scheduled Aug. 8 signing of the bill into law (OGJ, Aug. 1, 2005, p. 25). But the effect probably wasn't what lawmakers and administration officials had in mind.

Valero Energy Corp. announced plans to quit producing methyl tertiary butyl ether (MTBE) to reduce its product liability lawsuit exposure. The action, which will cut gasoline production at its refineries by about 60,000 b/d, came after the House-Senate conference removed MTBE defective-product liability protection from the energy bill.

Refiners were disappointed that the provision, which was part of the original House bill, did not survive.

"This means that industry resources—better employed to produce fuel—will have to be used instead to contest legal actions that seek to penalize our members for obeying the requirements of the Clean Air Act," the National Petrochemical and Refiners Association said in a statement.

NPRA noted that the bill also has a mandate to blend 7.5 billion gal/year of ethanol made from US grain or cellulose into US gasoline by 2012. The association has never supported such a mandate.

Refiners did not come away from the energy bill debate empty-handed, however. The bill aims to encourage refinery construction by allowing the Environmental Protection Agency administrator to enter into cooperative permitting with a state upon the governor's request to streamline environmental impact reviews. It also lets EPA financially assist states in hiring employees to examine refinery construction permit applications.

Refiners and petrochemical producers also were pleased with the bill's provisions involving LNG. So was Donald F. Santa Jr., president of the Interstate Natural Gas Association of America, who applauded the bill's "clearly defined process for the approval and permitting of interstate pipelines and liquefied natural gas terminals" in a July 28 letter to House Energy and Commerce Committee Chairman Joe Barton (R-Tex.) and Senate Energy and Natural Resources Committee Chairman Pete V. Domenici (R-NM).

Santa said Sect. 313 of the bill (1) designates FERC the lead agency under the National Environmental Policy Act, (2) grants FERC authority to establish an administrative schedule for completing permitting reviews, (3) requires creation of a consolidated FERC record during this review to be used in all subsequent appeals of siting and permitting decisions, and (4) provides for judicial review of these permitting activities by the US Court of Appeals.

"This comprehensive approach to the approval and permitting of natural gas infrastructure will greatly enhance the ability of our industry to meet the demand for natural gas over the next 20 years," INGAA's president said.

The bill also directs Energy Sec. Samuel W. Bodman to convene at least three forums in areas where LNG terminals are being considered to discuss LNG's role in meeting near-term gas demand growth, the federal siting and permitting process, safety and environmental requirements, and prevention, mitigation and response strategies for LNG hazards.

Upstream provisions
A provision of the bill significant to producers keeps hydraulic fracturing and storm-water construction outside the federal Safe Drinking Water Act.

The Independent Petroleum Association of America cited Department of Energy estimates that EPA storm-water regulation during construction of oil and gas facilities had the potential of reducing production over the next 20 years by 1.3-3.9 billion bbl of oil and 15-45 tcf of gas.

IPAA said in a statement that the energy bill makes clear that storm-water permitting for oil and gas activities will be based on the discharge of contaminated water and not the mere act of construction.

IPAA also expressed approval of provisions in the bill that improve coordination of federal agencies, set deadlines for action on completed permits, prohibit permit fees on top of lease costs and royalties paid by producers, and reduce excessive reviews of minor federal actions under the National Environmental Policy Act.

The Independent Petroleum Association of Mountain States supported the bill's provision that it said prevents the Bureau of Land Management from charging producers processing fees without improving service.

As the bill was in conference, BLM proposed charging producers first-year fees of $1,600 for applications for permits to drill (APDs) and geothermal permits to drill (GPDs) and $500 for geophysical exploration permits. Rates would have increased by $500/year until reaching the full fee of $4,000 for an APD, $3,500 for a GPD, and $2,500 for a geophysical exploration permit if the cost recovery proposal had been adopted (OGJ, Aug. 1, 2005, p. 27).

IPAMS noted that Sens. Craig Thomas (R-Wyo.) and Orrin Hatch (R-Utah) cosponsored the amendment requiring process improvements before fees could be collected. The amendment became part of the provision to improve federal onshore oil and gas permit processing by establishing pilot programs in the BLM's busiest offices in Wyoming, Utah, and Colorado.

"We basically have tapped out the capacity of those BLM offices to process drilling applications," IPAMS Pres. Logan Magruder said during a Washington visit as the bill was coming out of conference.

IPAMS members viewed BLM's cost-recovery proposal as "simply another tax that hurts the small independent," he continued. "It was not tied to performance. It simply generated revenue for the general treasury."

IPAA also applauded the bill's provisions requiring the Interior Department to conduct a resource inventory of the Outer Continental Shelf, using royalty incentives to encourage development of deepwater oil and deep gas in shallow offshore areas, and that make the federal royalty-in-kind program permanent.

"By addressing the issues that allow for domestic oil and gas exploration and production to move forward efficiently and under sound regulation, the bill creates the opportunity for independent producers to enhance our national energy supply," IPAA Pres. Barry Russell said.

Long-term efforts
One way the bill aims to increase domestic oil and gas production is through carbon dioxide injection. It authorizes suspension of royalties on up to 5 million bbl of oil equivalent/lease where CO2 injection is used for enhanced recovery. Royalty suspension could be limited based on market price.

The provision, which also is designed to promote carbon sequestration, mandates that the energy secretary establish a CO2 injection demonstration program for up to $3 million. The program would involve up to 10 projects in the Williston basin and one project in Alaska's Cook Inlet.

The legislation also aims to establish federal leasing for production from oil shale, tar sands, and other unconventional resources. It requires the Interior secretary to offer leases for research and development within 3 months of the bill's becoming law on federal land in Colorado, Utah, and Wyoming.

Within 18 months of the bill's enactment, the Interior Department, which the legislation designates as the lead agency in the process, would have to produce an environmental impact statement examining effects of commercial oil shale and tar sands development and production on public land in those three states.

Leasing would begin 6 months after the EIS was complete. The provision also requires consultation with governors, local officials, Indian tribes, and other interested parties to determine that there is sufficient support in that state for tar sand and oil shale resource development.

The bill also establishes combined hydrocarbon leasing on federal land containing tar sands as well as oil and gas. The provision authorizes the Interior secretary to issue a separate tar sands lease using the existing oil and gas process, except that the minimum acceptable bid will be $2/acre and the due diligence requirement may be waived or altered.

The legislation also contains a gas hydrate production incentive, authorizing the secretary to grant royalty relief on the OCS and federal lands in Alaska on leases issued before Jan. 1, 2016, and where gas is produced from hydrate resources by Jan. 1, 2018, for up to 30 bcf/lease of production.