This month's column continues the theme we started in the October issue in which we discussed political and regulatory risk in the petroleum industry. In the United States, this type of risk often can be minimized or increased, depending on which party is in control of the government.
Generally speaking, the Republican Party is seen as pro-business and against excessive government regulation, so regulatory risk likely would be reduced in an environment in which the GOP is in power, particularly in the executive branch.
In general, the Democratic Party is viewed as pro-environment and in favor of greater regulation to protect the environment. A president with this mindset is widely seen as someone who would increase regulatory risk, particularly for an industry like coal or oil that exploits our natural resources.
At this writing, the US has not yet held its general election. It's too late for me to try to persuade anybody how to cast their vote, but I wouldn't anyway. I prefer to let people make their own informed decisions on political candidates and keep my nose out of their business. However, I do have some thoughts, which I'll discuss here.
On Nov. 6, the US elects a president for the next four years. In addition, voters will choose all 435 members of the House of Representatives and one-third of the US Senate. The officials in these two branches of government determine regulatory policy for the US energy industry. The Constitution mandates that the legislative branch makes the laws, and the executive branch implements and enforces them. At least that's how it's supposed to work. In practice, the executive branch has tremendous power over how the rules are set in place and enforced.
As an example, President Nixon signed a bill in 1970 creating the Environmental Protection Agency. The EPA was given the responsibility to protect human health and the environment by writing and enforcing regulations passed by Congress. Most of us would agree this seemed like a positive development at the time. Few people who were around in 1970, including Nixon, could have imagined what a colossus the EPA has become. Today, the EPA employs more than 17,000 people and hires many more on a contractual basis. Its annual budget has grown to nearly $8.7 billion.
For Republicans who want to pare down the size of government, the EPA is an example of a government agency that has gotten too big for its britches and overstepped its charter. For people in the oil and gas industry, the EPA puts up unnecessary roadblocks that prevent them from drilling for and producing the hydrocarbons that keep our country running. This is apparent in the current lack of drilling activity on federally-owned land in the Western US and in Alaska. Statistics show that even though drilling activity is up substantially in the US since that time, it has declined around 11% on federal lands.
Many feel that if the regulatory leash were removed, we could drill our way out of our dependency on foreign oil imports and begin the process of exporting liquefied natural gas, or LNG. The US has an abundance of natural gas reserves, and we recently passed Russia as the world's top producer of natural gas. But, unlike Russia, we are not yet a major exporter of natural gas. In order to become an LNG exporter, the industry needs to invest billions of dollars in infrastructure, and we need to do it yesterday. Timely government approval of the projects is critical, so we need a government that understands this and is prepared to act. There is no time for environmental studies that take years to complete. LNG export facilities must be put on the fast track.
Currently, Republicans hold a 50-vote majority in the House. In the Senate, Democrats have a 53 to 47 edge, and we have a Democratic president. If Democrats retain control of the White House and the Senate, and the GOP holds the House, it is likely a stalemate will continue with respect to legislation. In other words, we'll maintain the status quo.
In this situation, the president wields enormous power. Case in point: In the aftermath of the April 2010 Macondo well disaster in the Gulf of Mexico, the president chose to shut down all offshore drilling activity in the Gulf for many months while the causes of the blowout were investigated. Many in the industry cried foul, especially those who had a spotless safety record. In response, the administration imposed stricter regulations and more red tape before drilling permits were granted.
During the drilling moratorium, companies and employees suffered economic hardships at a time when the country was still immersed in a recession. More than a few companies were forced to file for bankruptcy. So were a few individuals. We have to ask ourselves: Would another administration have handled this differently?