Washington And Energy Policy

After announcing most of his cabinet-level nominations, at press time President-elect Barack Obama unveiled his energy and environmental team—Dr. Steven Chu, a Nobel laureate, biofuels ingenue, and head of Lawrence Berkeley National Laboratory, will lead the Energy Department. Former EPA Administrator Carol Browner will chair the new White House National Energy Council. Nancy Sutley, a veteran of multiple California state environmental posts, will chair the Council on Environmental Quality. Lisa Jackson, former head of the New Jersey Department of Environmental Policy, will lead the EPA.

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“We see an unmistakable trend: environmental stewardship will drive energy policy,” says analyst Kevin Book with Friedman, Billings, Ramsey & Co. Inc.

Clearly, the global economic meltdown, the fate of the U.S. automobile industry, and the restoration of nearly 2 million lost American jobs have to take top priority in January when Obama enters the Oval Office.

Some clues to the energy future may be found in looking at the Obama energy transition team, which is mostly made up of politicians and attorneys who served on Capitol Hill during the Clinton administration, or who come from left-leaning think tanks, says Lee Fuller, vice president of government relations for the Independent Petroleum Association of America. There is no one directly associated with the upstream industry, notes Fuller.

Although upstream operators are leery of what the new administration will bring this year and next, they may take some small comfort in knowing that Obama has been willing to alter his plans in response to conditions on the ground. During the end stages of the campaign, he reversed himself and stopped opposing all bans of offshore drilling after polls showed a majority of the American public had shifted on this issue.

Now that oil prices have plunged from $147 a barrel to under $50, he has shelved the idea of imposing a windfall-profits tax on the majors.

During a December appearance on NBC’s “Meet the Press,” he said he would not impose a higher federal tax on gasoline at the pump to reduce consumption, given the dire economic situation for many consumers. Such a tax was thought to be one of the ways he would seek to fund research into alternative fuels.

And, in a CBS “60 Minutes” interview shortly after the election in November, Obama said that, for the next few years, he will not be as concerned with federal deficit spending since so many urgent national problems need to be solved first.

“But he also said he will not allow the country to make the same energy-policy mistakes of the past just because oil prices have recently dropped,” says Michael J. McAdams, executive director, government affairs for Hart Energy Consulting in McLean, Virginia. “He believes, now more than ever, energy policy needs to be integrated into the overall effort to restore economic stability for the nation.”

Pavel Molchanov, an analyst with Raymond James & Associates, told Houston Energy Finance Group members last fall, “The U.S. needs a thoughtful energy policy because the current one of ad-hoc, hodge-podge decision-making is not a viable long-term strategy.”

What will that strategy look like? There are some things we do know. Obama and many members of the Democratic Congress still oppose opening the Arctic National Wildlife Refuge (ANWR) to drilling. He has pledged to create so-called green jobs in alternative-energy industries to bolster the economy and to reduce oil imports.

Likely winners under his administration include wind and solar power, and incentives to promote more development of early-stage, clean, energy sources, such as hybrid vehicles. Offshore players would likely lose ground.

IPAA’s Fuller has his eye on what Congress might do with regard to increased regulation of water used in association with hydraulic fracturing. This could torpedo the economics or cycle time for fracturing all the nation’s gas wells. In Texas and Pennsylvania alone, there were nearly 35,000 frac jobs performed last year, according to Spears & Associates.

“Recent claims that hydraulic fracturing is a source of groundwater contamination are unfounded…Recent studies by the EPA have clearly demonstrated the effectiveness of (existing state) regulations,” the American Petroleum Institute finds in a 2008 study of fracturing.

House changes

Regardless of what Obama proposes, it will be the legislative branch that bears watching first. In Congress, the House of Representatives returns with a Democratic advantage of 256 seats to Republicans’ 175.

“Since 218 votes are required for a House majority, combined with the proportional appointment to key committees, the Democrats should be able to pass just about any legislative program they and the new president desire,” McAdams said during a recent OilandGasInvestor.com webcast.

Of particular concern is that the new chairman of the powerful House Committee on Energy and Commerce is Henry Waxman, a Democrat from California who has long criticized big business, Big Oil and the auto industry. Waxman’s views are generally to the left of that of the former chairman, John Dingell of Michigan, and they align with that of other industry critics and fellow Californians Senator Barbara Boxer and House Speaker Nancy Pelosi.

Meanwhile, nearly all energy legislation goes first through the House Subcommittee on Energy and Air Quality. It has spent the better part of the past two years preparing a 400-page draft of a climate-change bill that would regulate CO2 emissions, according to chairman Rick Boucher (D-Virginia), speaking at the Sanford Bernstein Energy & Utilities Conference in early December.

“Do not be misled into thinking that a weak economy is going to delay the adoption of a regulatory program,” he said. “A weak economy will influence the shape of the program and the structure of it.”

Boucher also said that funding for carbon-sequestration research is a top priority.

Cap and trade

Obama also supports some kind of cap-and-trade system to reduce carbon use. Instead of a carbon tax, a cap-and-trade system is inevitable—but not before 2010, says analyst Molchanov. That’s because, in December 2009, a “Kyoto II” conference on climate change is scheduled in Copenhagen, Denmark. It would open the door to mandatory caps on carbon emissions for each country that signs the treaty.

A cap-and-trade system would adversely affect the oil-refining and coal-fired power industries, but would likely promote more use of natural gas, he says. The cap-and-trade concept incentivizes, but does not force, people to conserve energy. It would affect utilities and heavy industry more than the oil and gas industry itself, Molchanov says.