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Energy Approaches Obama, New Congress Guardedly

With a sea change about to take place in Washington politics, the oil and natural gas industry and public utilities -- hoping for the best but bracing for the worst -- last week pledged to work with the new administration and Democratic leaders on Capitol Hill.

Nicolette Nye, a spokeswoman for the National Ocean Industries Association (NOIA), said the group was prepared for Congress to reinstate restrictions on offshore oil and gas drilling regardless of the outcome of the elections. "We were expecting there would be attempts [by Congress] to bring restrictions back no matter which way the elections went," she said. Nye expects the upcoming Congress to introduce legislation that will reimpose restrictions on the federal Outer Continental Shelf (OCS) "in some form."

Democrats, who typically object to policies supporting oil and gas, increased their control of the Senate to 57, with three races still undecided. Senate Democrats were within grasp of attaining the veto- and filibuster-proof 60 majority. House Democrats gained at least 18 seats, giving them the largest caucus since 1994 when they held 259 seats before losing control to the GOP.

The American Petroleum Institute (API), which represents major producers, is keeping its fingers crossed that neither President-elect Barack Obama nor the new Congress will resurrect the bans on OCS development.

"We're hopeful that the groundswell of public support [for offshore drilling] will translate into meaningful energy policy," said Rayola Dougher, API's senior economic adviser. "The public wants to see development offshore...We don't want to see any backsliding or restrictions."

She believes that Americans "are just tired of partisan bickering" over energy within Congress and between the administration and Capitol Hill. "We hope it [production] will proceed full steam ahead" under the Democrats.

If Obama and the Democratic-controlled Congress want to reflect the views of voters, they won't impose any of the offshore bans. According to exit polls conducted last Tuesday on behalf of major news organizations, nearly 50% of the people polled who voted for Obama favored "drilling for oil offshore in U.S. waters where it is currently not allowed," while 45% of them opposed it, the Washington Post reported Friday.

Despite the margin in favor of offshore drilling, the exit poll indicated that voters did not support the Republican party's mantra of "drill, baby, drill."

Obama in August signaled that he would be open to allowing drilling off certain coastal states as part of a larger compromise on energy policy, a shift in his previous position opposing development of the OCS (see NGI, Aug. 11).

"That was total lip service," Kevin Book, an analyst at Friedman Billings Ramsey & Co in Arlington, VA, told Bloomberg News. But energy analysts Christine Tezak and K. Whitney Stanco of Stanford Group Co. don't agree. "We're not expecting substantive change to existing offshore drilling (that window may have passed), but onshore policies may be up for reconsideration," they said.

In July President Bush lifted the presidential ban that placed the East and West Coasts and parts of the eastern Gulf of Mexico off limits to leasing and drilling activity (see NGI, July 21). And the congressional moratorium on leasing in those areas expired on Sept. 30, leaving the OCS free of restrictions for the first time in decades (see NGI, Oct. 6). Producers are waiting on the sidelines to see if Obama and the new Congress will reinstate the bans, partially or fully.

API's Dougher said she also hopes that Obama doesn't resurrect the windfall profits tax on producers. "We want affordable fuel...If you tax the industry more than it is now, it will mean less investment, less supply."

The Natural Gas Council (NGC), which represents four natural gas groups, warned that such a tax would be passed along to American consumers and would negatively impact investors.

The slide in crude oil and natural gas prices should make the windfall tax a less attractive option for the new president, Dougher said. She noted that the tax was last imposed in 1980, and resulted in less domestic production and more imports.

But in their "Washington Energy/Environment Bulletin," Tezak and Stanco wrote that they believe a windfall profits tax may happen. "With tax receipts down in a recession and significant profits still likely, we think that windfall profits and other tax issues for conventional energy companies remain real possibilities."

On a more optimistic note, the NGC said natural gas could turn out to be one of the biggest winners of last Tuesday's elections. "President-elect Obama has announced his support for increasing American natural gas production as part of his energy agenda. We will work with his administration to ensure new supplies of...natural gas," said Barry Russell, president of the Independent Petroleum Association of America, one of the members of the council.

On the electric side, the outcome of the elections "hasn't changed our basic equation and challenges" of getting more electricity generated and delivered, said Ed Legge, a spokesman for Edison Electric Institute (EEI), which represents investor-owned power utilities.

"We think some kind of climate change regulation is coming" that will have economic repercussions for utilities and consumers, he said, adding that EEI believed this before the election. The group supports a renewable portfolio standard (RPS) at the state level, but EEI's not sure where Obama stands on the issue. Tezak and Stanco believe that a national RPS should be "relatively easy to pass in a heavily Democratic Congress."

As for transmission, "we need more of it and we need a better working system," Legge said.

He said the EEI favors a broad mix of energy resources for generating electricity, including nuclear and renewable fuels. "We believe you can't take anything off the table right now" to keep affordable power flowing.

"We believe that we are in step or maybe a step ahead of where they're [the Democrats] headed. Clearly on climate we have been working that issue very aggressively and supporting climate legislation. We believe the probability of climate legislation in the next session of Congress is very high. The only question is whether it will be in '09 or '10," said Duke Energy CEO James Rogers last Wednesday.

"We anticipate that 'cap and trade' will be the basis of federal climate change legislation. There will likely be a strong push for legislation," but it "won't necessarily be quick -- the debate will center on how many allowances will be allocated and how many will be auctioned, and whether some parts of the country bear heavier burdens than others," said Tezak and Stanco.

"With respect to renewables, that's going to be a key part of any kind of legislation that comes out of Washington, and there as you know we've [Duke] invested in wind, with 5,000 MW under development. We think that they will be pushing more and more for wind. We think that given the credit crunch we're well positioned to take advantage of that market and we think the margins will actually go up because so many of the players will not be able to access capital," Rogers said.

Moreover, "we think there will be a push on solar, and...we have several innovative proposals pending here in North Carolina. Energy efficiency will be a centerpiece in any legislation...There will be greater emphasis on the smart grid and on projects like coal gasification as well. We believe there will be a stronger emphasis on nuclear because that's the only option that you can generate electricity with zero greenhouse gases," Rogers said.

He expects energy and climate to be among the top national issues that Obama will address in the next 18 months.

The rumor mills have been relatively quiet about who Obama will select to be chair of the Federal Energy Regulatory Commission. Suedeen Kelly, a Democrat who has the most experience at FERC, and Commissioner Jon Wellinghoff, who was backed by Senate Majority Leader Harry Reid (D-NV), are two possible candidates. There's always the chance that Obama could bring in his own pick.

FERC Chairman Joseph Kelliher, a pick of President Bush, has served as head of FERC since July 2005. He has not disclosed his future plans.

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