The Senate passed comprehensive energy legislation (HR 6) late Thursday that is considerably more attractive to oil and natural gas producers and electric utilities than it was a few hours earlier that day.

By 65-27, senators voted out the broad energy bill after two weeks of debate, but not before Republicans blocked efforts to include a $32 billion tax package in the measure that would have raised taxes on oil and gas companies; at the same time Democrats failed to force a vote on a controversial amendment that would have required electric utilities to produce 15% of their power from renewable fuels.

But the fight over what energy tax measures finally emerge from the Congress this year is a long way from finished. The Senate Democratic leadership is expected to try to attach the tax package to another legislative vehicle prior to the start of a House-Senate conference on the energy bills. Given that the two houses' energy bills have striking differences, "we'll have an energy conference of some sort this summer," said energy analyst Christine Tezak of Stanford Group Co.

But "we...think it likely that the legislative debate on energy could drag well into the fall before everything is sorted out, a successful conference concludes and a bill makes its way to the president," she said.

The Senate-passed energy legislation calls for greater production of renewable fuels and ethanol, would protect consumers from price gouging, would increase the energy efficiency of products, buildings and vehicles, and seeks to improve the energy performance of federal buildings. President Bush has vowed to veto any legislation that contains price gouging measures or language that seeks to subject OPEC nations to U.S. antitrust laws, as the Senate energy bill does.

By 57-36, Senate Republicans last Thursday held back an attempt to bring to the floor for a vote the tax package that provided incentives for renewable fuels and clean energy initiatives, but stripped oil and natural gas producers of benefits and assessed new taxes.

The defeat of the Senate tax package was a major victory for oil and gas companies, which would have paid for the bulk of the $32 million in tax incentives for alternative fuels. The measure sought to impose a 13% excise tax on oil and gas produced in the Gulf of Mexico. But since it would allow producers to credit against the excise tax an amount equal to their royalties paid, it would mostly have been a tax on future production from the flawed 1998-1999 deepwater leases that omitted the critical price thresholds. The tax package also would have revoked a manufacturing credit for major integrated companies for income attributable to domestic oil and gas production.

The two proposals alone would have required oil and gas producers to pay more than $20 billion in additional taxes over the next 10 years, according to the Joint Committee on Taxation.

Although Democrats insisted they had 60 votes to adopt the revised draft of Sen. Jeff Bingaman's (D-NM) 15% renewable electricity mandate, Senate Majority Leader Harry Reid (D-NV) never filed the cloture petition needed to override Republican objections -- a decision he later said he regretted, CQ Today reported.

Bingaman, chairman of the Senate Energy and Natural Resources Committee, will continue to try to get the renewable fuel mandate passed in other legislation, said Bingaman spokesman Bill Wicker. "It is not gone for good."

The House Ways and Means Committee last week approved a tax package that totaled $16 billion, or half the size of the Senate's. But it took the same approach as the Senate tax committee's bill, stripping the oil and natural gas industry of many benefits to pay for the bulk of the green incentives.

The House committee's measure repeals the Section 199 deduction for income attributable to oil and natural gas. This is expected to result in $11.4 billion in lost tax benefits to the oil and gas industry over the next 10 years, according to the Joint Committee on Taxation.

The measure also makes a clarification to foreign oil and natural gas extraction income, a move that is estimated to raise taxes on the industry by $3.56 billion over the next decade. And it extends the amortization period for geological and geophysical expenditures from five years to seven years for large integrated energy companies, which is expected to raise $103 million to fund renewable fuels.

Rep. Jim McCrery of Louisiana, the ranking Republican on the House committee, opposed the tax package. "This bill will not increase the energy supply of the United States by one drop of gasoline or one watt of electricity," he said.

McCrery noted that the tax bill does three things -- it raises taxes on the domestic energy industry; it extends some alternative energy tax provisions that had already been enacted by Republicans; and it creates $6 billion worth of "green" pork funds to be doled out to states and cities with little oversight and no coordination.

The bill, which passed out of committee 24-16, is scheduled to come to the House floor after the July 4th recess and be included in a broader energy package requested by Speaker Nancy Pelosi (D-CA).

In other action, the Senate last Tuesday defeated 56-37 a floor amendment to HR 6 that would have given states veto power over liquefied natural gas (LNG) terminals sited within their borders or within 15 miles of their borders.

Maryland senators who offered the amendment said it would simply order the Army Corps of Engineers to work with the states before issuing permits for tanker access to LNG sites. "This will not change the authority of the Federal Energy Regulatory Commission," which approves LNG sites, said Sen. Benjamin Cardin (D-MD), the bill's sponsor.

The measure was opposed by both the Republican and Democratic leaders of the Senate energy panel. Bingaman pointed out that it would allow the affected states to block the permitting for LNG ships to dock. "There's no point in building a terminal if ships are not permitted to get near it," he said. The Army Corps of Engineers would have to get the approval of state governors in order to issue a permit.

Cardin and Sen. Barbara Milkulski (D-MD) were supporting the measure as part of a campaign to block the siting of an LNG terminal that is proposed to be located at the former Bethlehem Steel Sparrows Point manufacturing facility in Baltimore.

Elsewhere on Capitol Hill last week, the Senate Appropriations Committee Thursday struck a provision in a fiscal year 2008 spending bill that would have barred producers from bidding on future offshore leases unless they agreed to renegotiate the flawed 1998 and 1999 leases that they currently hold.

By 15-14, Senate appropriators adopted an amendment offered by Sen. Pete Domenici (R-NM) that removed the language from the spending bill for the Interior Department and Related Agencies.

The provision that would have forced producers to renegotiate their 1998-1999 leases was sponsored by Sen. Dianne Feinstein (D-CA), and was approved by an appropriations subcommittee earlier last week. Domenici objected to Feinstein's measure, saying that the issue should be dealt with in the Senate Energy Committee, where he is the ranking Republican.

"The effect of my amendment is to bring this challenging issue back to where it belongs -- in an authorizing committee. The language inserted by Sen. Feinstein into the Interior appropriations bill would have invalidated proper, legal contracts that were negotiated by the United States government," Domenici said.

"While I certainly share the frustration over the substantial loss of revenue as a result of the way these contracts were written, I do not believe that we should be in the business of invalidating legally binding contracts," he noted. "I look forward to find a better, legally permissible approach to this question that will bring companies back to the table" to renegotiate these contracts.

It's estimated that the 1998-1999 leases, which omitted price thresholds, have cost the federal government approximately $1 billion in lost royalties so far, and unless corrected, could cost up to $10 billion over the life of the leases.

In the House, Reps. John Peterson (R-PA) and Neil Abercrombie (D-HI) provided producers a ray of optimism. The two lawmakers introduced legislation last Wednesday that would remove the congressional ban on natural gas exploration and production in much of the Outer Continental Shelf (OCS).

The National Environment and Energy Development Act (HR 2784) seeks to lift the congressional and presidential moratoria on offshore natural gas production, giving the states the right to drill off their coastlines. Under the measure, gas activity would be barred within the first 100 miles off of a state's shoreline, while drilling would be permitted beyond that mark upon the bill's enactment.

The bill would direct revenues to producing states, various environmental restoration projects across the county, the Low-Income Heating Energy Assistance Program, weatherization programs and research and development for alternative and renewable energy, according to Peterson spokesman Travis Windle.

"What makes this bill so different than other 'energy' bills is that it actually produces energy, while encouraging the protection and continued safeguard" of the environment, Peterson noted. The Independent Petroleum Association of America, which represents independent oil and gas producers, endorsed the House measure.

This is the second time that Peterson will try to push through Congress legislation favorable to offshore energy drilling. Last year the House approved a bill to open historically closed portions of the federal OCS to oil and gas drilling, but it never made it through the Senate (see NGI, July 3, 2006). Congress instead wound up passing, and President Bush signed into law, narrower legislation to open more of the Gulf of Mexico to leasing (see NGI, Dec. 25, 2006).

Peterson and Abercrombie will face a tough time selling their legislation in a Democratic Congress, which has placed oil and gas issues on the back burner this year.

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