PRESIDENT CLINTON FAR FROM DYNAMIC ON U.S. ENERGY POLICY ACTION

After Bill Clinton's election as president nearly 2 years ago, the U.S. oil industry had few positive and many negative expectations about his administration.

Although Clinton was expected to promote use of natural gas, he was unconcerned about the declining state of the oil industry and was recklessly pro-environment.

The passage of time has borne out most of those expectations.

The administration has helped the gas industry somewhat but has disappointed producers by not helping them through a trough of low prices. Its environmental policies have troubled the industry but could have been worse.

The administration's major conflict with the oil industry was fought last year when Clinton proposed a 60cts/BTU tax on oil to help raise $72 billion for a deficit reduction bill. After a brutal congressional battle, Clinton had to settle for a 4.3cts/gal tax on transportation fuels.

Industry was pleased with two other Clinton actions in 1993.

The president spent much political capital to leverage passage of the North American Free Trade Agreement.

And he began a voluntary climate action plan for American industry that did not contain a carbon tax on carbon dioxide emissions or higher fuel economy standards as had been feared (OGJ, Oct. 25, 1993, p. 36).

Since last fall, the administration has not proposed a major energy bill and largely has remained on the sidelines as Congress mulled the routine energy measures its members have filed.

This year, most of the action has been in the regulatory agencies as industry sought to moderate pending offshore oil spill liability insurance regulations and reformulated gasoline rules promulgated under laws passed earlier.

There is little chance of substantive action on energy bills in the remaining days of the 103rd Congress. Legislators plan to adjourn in mid October and are pressing to pass key, major bills.

Because elections loom and time is short, lawmakers are shelving any bills that are controversial or could take too much time.

ENERGY INITIATIVE

Although the Clinton administration has drafted an energy policy blueprint, it has not yet amounted to much.

Last December it unveiled a "domestic gas and oil initiative" designed to promote U.S. production, reduce regulations, increase natural gas production and marketing, review oil and gas tax policies, and improve industry's access to advanced technologies (OGJ, Dec. 20, 1993, p. 21).

The plan listed 49 actions DOE and other federal agencies could take to help producers. Included were studies of a half dozen controversial energy issues, but so far the Department of Energy has released only one of the studies.

A key study is due completion in December on the economic, environmental, and security implications of rising U.S. dependence on oil imports. But it is unlikely to recommend an oil import fee or tariff.

DOE backed up its gas proposals in the initiative by doubling spending on its gas programs.

Apart from the initiative, DOE has begun holding hearings as groundwork for an energy policy report it is required to make to Congress.

Along similar lines, Energy Sec. Hazel O'Leary plans to ask her oil industry advisory committee, the National Petroleum Council, to prepare a major report on the state of the U.S. oil industry, recommending changes necessary to keep the industry viable.

CONGRESSIONAL PUSH

Frustrated by low oil prices, early this year the Independent Petroleum Association of America asked the Commerce Department for relief from low priced oil imports under Section 232 of the Trade Expansion Act.

IPAA said it is not pressing for an oil import fee, recognizing the political difficulty of getting Congress to pass an oil tariff that would raise domestic prices.

Commerce decided it needed to prepare a new study on whether oil imports threaten national security. It could be issued this winter.

Frustrated by the Clinton administration's inaction on substantive industry relief, 117 oil state congressmen drafted their own package of proposals and presented it to Clinton last June.

Their action was unusual. Not in recent memory have so many oil state congressmen been able to agree on a single bill to help the industry.

For existing marginal wells, they urged tax credits of $3/bbl on the first 3 b/d of oil and 50cts/Mcf on the first 18 Mcfd of gas production. The "marginal" definition would be expanded to include "high water cut" leases.

For marginal wells drilled after June 1, 1994, there would be a $3/bbl tax credit for the first 15 b/d of oil and a 50cts/Mcf tax credit for the first 300 Mcfd of gas.

The production tax credits would phase out as oil prices increase between $14 and $20 and as gas prices climb between $2.49 and $3.55. The credits would apply against regular taxes and the alternative minimum tax.

The congressional plan proposed current expensing of geological and geophysical costs, elimination of the net income limitations on percentage depletion, lifting the legal ban against exporting Alaskan North Slope (ANS) crude, and a per barrel tax credit to encourage deepwater (400 m or deeper) and frontier production.

CLINTON REACTS

After a 2 month delay, Clinton met with about 75 of the congressmen last June 16.

The president showed interest in allowing ANS exports and drafting tax measures to keep marginal wells on production and encourage development of deepwater fields.

He wrote congressmen afterwards that he wants to identify policies that can "extend the margin of economic production while ensuring revenue neutrality."

Clinton said ANS oil exports should be allowed if it can be done "without triggering other concerns, such as trade related problems or adverse consequences for the U.S. maritime industry."

And he ordered the Office of Management and Budget to ensure that all oil industry rulemakings examine costs and benefits of all available regulatory options and select approaches that maximize net benefits.

A DOE study upheld the economics of exporting ANS oil to Pacific Rim countries rather than shipping it to the U.S. West or Gulf coasts. DOE said exports would increase domestic oil production, state revenues, and jobs without increasing gasoline prices (OGJ, July 11, p. 28).

But problems still remain.

Five maritime unions agreed to lifting the ban if the crude moved in U.S. flagged ships requiring U.S. crews. Other unions objected, as did California independent refiners.

The administration said requiring the exports to be carried in U.S. ships might violate the General Agreement on Tariffs and Trade (GATT) and undermine its efforts to persuade other countries to end shipbuilding subsidies. DOE officials say they are working on those problems.

Another study, this one by NPC, upheld industry's argument that it needs tax credits to prevent early abandonment of marginal wells (OGJ, Aug. 1, p. 26).

A White House economic council was deliberating on a marginal well relief package the administration could support, but time is running short in Congress and there are few vehicles tax bills to which a marginal well bill could be added available.

The Senate has passed a bill by Sen. Bennett Johnston (D La.) granting royalty relief for marginal deepwater fields. But after a year of wrangling, the Clinton administration still has some concerns about it.

Due to the much higher costs of operating in deep water (beyond 400 m), the bill would give operators a royalty, holiday until they recoup their field development costs.

Johnston attached the measure to a mining law reform bill that has been stalled in a House Senate conference all summer. Last minute compromises are possible but unlikely.

Meanwhile, independent refiners are looking for their own relief bill. They have proposed an "environmental equalization fee" of 7cts/gal on imported gasoline, rising 1cts/year until it hits 13cts.

They argue the fee is necessary because U.S. refiners have much higher environmental expenses than foreign refiners and thus are subject to unfair competition. That proposal is likely to resurface next year.

Possibly the only concrete development resulting from the 117 congressmen's oil and gas proposals will be a permanent coalition.

Sen. David Boren (D Okla.) and others were working to establish a bicameral oil and gas caucus using the 117 as a nucleus.

PENDING BILLS

With midterm elections nearing, congressional leaders are in the midst of an end of session rush to pass bills.

House and Senate committees plan more hearings this month on a measure setting a national, mandatory, one call notification system for locating underground utilities.

The legislation, prompted by third party pipeline ruptures, has only a fair chance of passage. Although gas pipelines unanimously favor the bill, some producers have objected to the expense of mapping their gathering lines. A compromise was being sought to exempt gathering lines on leases.

Passage of a bill re-authorizing and reforming the Comprehensive Environmental Response, Compensation and Liability (Superfund) Act was thought to be a sure thing earlier this summer after the administration and industry compromised on a package. But no longer.

Backers said the compromise bill, approved by House and Senate committees, would speed chemical dump cleanups 10 20% while reducing costs 20%.

The problem is how to pay for the cleanups. The House was preparing to vote on the Superfund bill, but the Senate finance committee was examining possible revenue changes, and its action must precede a Senate floor vote.

Reauthorization of the Clean Water Act, also due this session, ran into too many problems. The current law will be extended, and a reauthorization bill may be attempted again next year.

House and Senate conferees were trying to complete a mock conference on a bill approving the international rewrite of GATT. Conferees want to resolve all issues before the bill is officially submitted to Congress under a fast track procedure that does not permit changes, only up or down votes. Some key legislators want the measure delayed until 1995.

Last week the Clinton administration removed one barrier, dropping its request that the bill contain a provision allowing it to negotiate future trade agreements under the fast track process.

Another major problem facing GATT is the $12 billion in lost tariffs and other expenses it would cost. Congressional budget rules require legislators to find offsetting revenues.

The measure would replace GATT with a new World Trade Organization and would reduce tariffs worldwide by an average of more than 30%.

Also possible this year is a bill re-authorizing the Energy Policy and Conservation Act. It would officially recognize the de facto suspension of oil purchases for the 540 million bbl Strategic Petroleum Reserve. The House passed a bill, but the Senate has not.

ENVIRONMENTAL RULES

Under the Clinton administration, the Environmental Protection Agency has proceeded doggedly rules the refining industry says are unreasonable, while showing surprising flexibility in others.

Two reformulated gasoline (RFG) rules have been particularly controversial.

Over industry objections, EPA proceeded to issue an RFG rule that required RFG to contain an average of 15% oxygenates from renewable fuels Jan. 1 and 30% in 1996 (OGJ, July 18, p. 29). Ethanol is the oxygenate that will benefit the most.

Borrowing a tactic from environmental groups, Louisiana's Johnston proposed a floor amendment denying EPA the funds to implement the ethanol mandate. It failed 51 50 after a vote by Vice President Albert Gore broke a tie (OGJ, Aug. 15, p. 38).

The American Petroleum Institute and the National Petroleum Refiners Association then sued to overturn the rule, claiming EPA exceeded its legal authority and did not give industry enough time to prepare to use the oxygenates.

The two groups say they don't oppose use of ethanol in RFG, but that should be a refiner's choice, not an EPA mandate.

Last week an appeals court issued an order blocking implementation of the rule until the court hears the case in early 1995.

Opponents successfully used the funding process to block a second controversial EPA rule involving RFG.

The basic rule requires refiners or importers to keep conventional gasolines as clean as the gasoline produced or imported in 1990 to prevent refineries from dumping "dirty" gasoline byproducts from the RFG refining process into their conventional gasolines.

In 1998 all refiners must leave the baseline and meet a complex model for RFG that limits levels of volatile organic chemicals, toxics, and nitrogen oxide emissions.

Because non U.S. refiners lack a baseline EPA could verify, the rule assigns importers a baseline that approximates the average quality of 1990 U.S. gasoline.

Venezuela objected, and EPA ruled it would allow Venezuela to ask for its own baseline if it provided supporting data and met a number of other conditions.

The country exports considerable volumes of gasoline to the U.S. Northeast and noted it is spending more than $1 billion, mostly with U.S. engineering and construction companies, to produce RFG that conforms to the new rule.

NPRA and API said the exemption would allow Venezuela to export gasoline with an average olefins content two to three times higher than the baseline, worsening U.S. air quality.

The Senate approved an amendment blocking funding for the Venezuelan exemption (OGJ, May 30, p. 30). Last week the House voted 222-148 to block the EPA rule.

The U.S. refining industry is one of six that EPA wants to participate in a program to revamp its system of regulations.

EPA's "common sense" initiative is designed to achieve greater environmental protection at less cost by creating pollution control and prevention strategies industry by industry, rather than the current pollutant by pollutant approach.

It was inspired by an EPA Amoco Corp. study of operations at the latter's Yorktown, Va., refinery, which found greater air pollution gains would result from giving industry more flexibility to achieve emissions reduction goals.

Industry was pleased last fall when the administration proposed a voluntary program to limit carbon dioxide emissions, complying with the international treaty on global warming.

Now it is concerned about hints the administration has decided its voluntary program will be inadequate. The plan relies on industry to voluntarily reduce emissions by 2000 to 1990 levels. The administration's next option would be to limit petroleum use.

INTERIOR ACTIONS

Producers are concerned about pending Minerals Management Service rules that would implement the Oil Pollution Act of 1990 (OPA90) and require offshore operators to carry $150 million in oil spill cleanup insurance.

The U.S. Coast Guard has issued companion interim final rules, to be effective Dec. 28, imposing liability for oil discharges from U.S. and non U.S. flagged tankers.

The MMS rule would apply to platforms, ports, terminals, and offshore pipelines and other facilities (OGJ, Aug. 1, p. 14).

An NPC report for the Clinton administration has complained MMS took an overly broad and harsh approach in its rules. It said MMS' interpretation of OPA90 terms such as "offshore facility," "onshore facility," and "responsible party" are to (OGJ, Aug. 8, p. 31).

The uproar over OPA90 has led to a congressional-administration stalemate on who should take the lead to change the requirements. MMS has shared industry's protest letters with congressmen, hoping legislators will ease the insurance requirements. But congressmen say they are waiting for the administration to propose changes.

To resolve long standing conflicts with industry over gas royalties, MMS has launched a negotiated rulemaking process to negotiate royalty guidelines for gas produced from federal acreage.

MMS and the gas industry disagree on how take or pay settlements, buy-downs, and buyouts affect royalties. MMS concedes that "royalty payors are not able to comply with existing regulations, particularly in the current gas market."

The panel will seek ways to reform royalties under unitization and communitization agreements, set an evaluation system for non-arm's length contracts, and propose royalties for cases in which a lessee does not sell part of its allocated production.

MMS also is considering changing its royalty methods for Gulf of Mexico gas production. It has begun a pilot program under which it will take gas in kind and sell the gas to competitively chosen marketing firms.

Another MMS initiative, to reexamine its Gulf of Mexico leasing practices, appears to be on the back burner. The agency was concerned the government might not be getting fair market value for new leases and asked industry comment on whether smaller lease sales should be held more often.

Also in limbo is an MMS initiative to examine the safety of aging pipelines in the Gulf of Mexico.

The Interior Department is considering merging management of the Arctic National Wildlife Refuge (ANWR) in Alaska with two adjoining Canadian national parks. The action is seen as a way to permanently prevent drilling on the ANWR Coastal Plain (OGJ, Aug. 29, p. 35).

Congress apparently will continue funding moratoriums that deny MMS the money to plan for certain offshore lease sales. A bill passed by both houses continues existing moratoriums off all of California, Washington, Oregon, the North Atlantic, areas of the Mid and South Atlantic, the eastern Gulf of Mexico, and the North Aleutian basin off Alaska. Involved are a total of 266.5 million acres.

The administration said it wants moratoriums continued while it gathers more data for "an informed resolution" of the offshore leasing debate.

GAS RULES

The U.S. gas industry has given the Federal Energy Regulatory Commission, reborn last year with a new chairman and four new members, high marks for its natural gas regulatory actions.

The commission disposed of issues from Order 636, the recent natural gas rate restructuring rule, without fuss and issued a rule reforming ratemaking for oil pipelines (OGJ, Nov. 15, 1993, p. 32).

This year it set a policy that mostly deregulated gas pipelines' gathering operations. Interstate lines and their affiliates had urged FERC to decontrol gathering because most of the gathering sector is not under FERC jurisdiction anyway. Producers were wary and wanted controls continued so gatherers would not gain monopoly power over production and prices.

FERC ruled it did not have jurisdiction over interstate pipelines' gathering activities that are spun off to others or spun down to subsidiaries. But it pledged to assert jurisdiction if the gatherer operated in a manner that frustrated FERC's regulation of the interstate pipeline industry.

The commission has adopted a hands off policy on further Order 636 changes, although it plans to examine incremental vs. rolled in gas pipeline rates in a hearing.

Now the commission has largely turned its attention to electrical power and hydropower issues, although its lawyers are busy defending Order 636 in a pending federal court lawsuit. A number of cases challenging the order have been consolidated for hearing. Proceedings are at an early stage.

NEXT SESSION

As usual, any energy issues not resolved this session of Congress are apt to pop up again in the next.

But the next Congress may have a large percentage of new faces. That and the fact that the presidential election campaign will start in 1996 are likely to slow the flow of legislation.

The Democratic party is bracing for big losses in November's midterm elections.

For one thing, retirements have vacated 49 out of 435 House of Representatives seats and 9 out of 100 Senate seats.

And historically, the president's party loses ground in midterm elections. Clinton's sagging popularity is expected to magnify those losses.

Republicans are optimistic that in November they might seize control of the Senate and come within 30 seats of the Democratic majority in the House.

About 125 House seats are believed to be closely contested, two thirds of them currently held by Democrats. Of the 35 Senate seats up for reelection this year, Democrats hold 22, and about half could involve close races.

So far only two energy posts in Congress will be vacated. Oklahoma's Boren, chairman of the Senate energy taxation subcommittee, is retiring. And House energy and power subcommittee Chairman Phil Sharp (D Ind.) is retiring. Reps. Mike Synar (D Okla.) and Billy Tauzin (D La.) are believed to be chief contenders for his job.