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Wall Street Upheaval Diverts Political Spotlight from Offshore Drilling

As the Bush administration and Congress worked to restore confidence to Wall Street last week, the issue of offshore oil and natural gas drilling -- a political hot potato for weeks -- got pushed to the back-burner on Capitol Hill.

"It doesn't seem to have the same level of intensity as it did," said Bill Wicker, spokesman for Sen. Jeff Bingaman (D-NM), chairman of the Senate Energy and Natural Resources Committee. The banking and financial crisis "has sucked out all of the oxygen" on offshore. "The sense of urgency is kind of gone," and the Senate is in a "holding pattern" on the matter, he said.

The market liquidity and credit problems "have taken precedence" over offshore drilling, said a Capitol Hill observer. Facing lawmakers before they can adjourn to campaign will be legislation addressing the Wall Street meltdown, possibly a second stimulus bill, a continuing resolution to keep the federal government operating past Sept. 30 (which may or may not include a drilling moratorium), and a $17 billion package to extend tax credits for renewable fuels and efficiency. It's unclear whether offshore drilling will be squeezed in.

Even the bipartisan group of 10 Republican and 10 Democratic senators, now known as the "Gang of 20," has decided to wait until after the November elections to introduce their legislation, which close sources says would allow drilling 25 miles offshore and provide revenue-sharing for coastal states that "opt-in" to drilling, Politico.com reported. The bipartisan group believes the political climate is too charged to introduce its bill now. The Senate is scheduled to adjourn Friday (Sept. 26) to campaign, but this could be delayed due to the upheaval in the financial markets. Both houses could return for a lame duck session in November.

"The million dollar question" is what, if any, offshore legislation will the Senate take up before it leaves. It's "very possible" the Senate could vote on the offshore legislation that the House passed last week, Wicker said.

The House last Tuesday passed a broad energy bill that would clear the way for drilling as close as 50 miles off the Atlantic and Pacific coasts if coastal state legislatures approve, as well as raise taxes on oil and gas producers by nearly $18 billion, accelerate leasing in Alaska, establish the first national renewable electricity standard and encourage the development of renewable energy and other alternative fuels.

The Democrat-sponsored measure (HR 6899), which triggered fierce opposition from Republicans, cleared the House by 236 to 189, with most Republicans voting against it because the bill does not allow drilling closer to the two coasts and in the natural gas-rich eastern Gulf of Mexico. The bill could face problems in the Senate and a potential veto by President Bush, who supports allowing drilling three miles from shore, where the federal waters of the Outer Continental Shelf (OCS) begin.

The House bill is "unlikely to make it through the Senate, and the White House issued a veto threat. In our view that bill is dead," said energy analysts Christine Tezak and K. Whitney Stanco of Stanford Group Co. However, they were more optimistic about a compromise bill on energy taxes that appears imminent in the Senate. "If Senate Republican leadership signs off on that bill, the White House and Republicans may play along -- as the tax changes on the oil and natural gas industries are less onerous than before."

If Congress does not pass an energy bill expanding offshore drilling by Sept. 30, the 26-year-old congressional moratorium on oil and natural gas drilling in the OCS, which has been a staple in appropriations bills since 1982, may lapse and allow drilling as close as three miles from beaches -- a prospect that even the states that support offshore drilling don't want.

"Oct. 1 could be one of the great days in the history of this country," CQ Today reported House Minority Whip Roy Blunt (R-MO) as saying. Other lawmakers, however, pointed out that the lifting of the moratorium would likely be short-lived if Sen. Barack Obama (D-IL) is elected president in November.

The House leadership's energy measure was the culmination of several weeks of negotiations in response to increased pressure from Republicans and a shift in public support for drilling on the OCS. House Speaker Nancy Pelosi (D-CA) agreed to increased OCS access as Republicans, with support from moderate Democrats from producing states, threatened to block a continuing resolution to fund the federal government past Sept. 30 if the drilling issue is not settled to their satisfaction.

Pelosi touted the bill as a "reasonable compromise" that makes "Big Oil pay for its fair share of our transition to a clear, renewable energy future." Rep. Nick Rahall (D-WV), chairman of the House Natural Resources Committee, called the measure a "compromise between the 'drill nowhere crowd' and the 'drill everywhere crowd.'"

But Republicans saw the bill as being anything but a compromise. "You can put lipstick on a bad bill, but it's still a bad bill," said Rep. Jo Bonner (R-AL). "This is a pretend bill," Rep. Joe Barton of Texas, ranking Republican on the House Energy and Commerce Committee, agreed, adding that it would not result in one additional barrel of crude oil or 1 Mcf of natural gas.

The House bill opens the door to drilling 100 miles from shore without a coastal state's consent and would allow a state to "opt in" to drilling 50-100 miles from shore with the approval of its legislature. It calls for Interior to conduct lease sales in these offshore areas "as soon as practicable...but not later than three years after the date of enactment" of the legislation.

But House Republicans and industry contend that the bill takes a lot of "promising areas" off the table by setting a 100-mile buffer for drilling off the Atlantic and Pacific coasts and barring further activity in the eastern Gulf of Mexico. Nor does the bill provide for sharing of royalties between the federal government and coastal states, so there's no incentive for states to permit leasing. They further said the 100-mile limit will make it quite expensive for producers to drill off certain states, such as Virginia, where there is no existing pipeline infrastructure to bring oil and gas to shore or processing facilities.

"The House energy bill is a dry hole for American consumers. The bill does little to increase U.S. oil and natural gas supplies and, in fact, may well result in less domestic production" due to $18 billion in additional taxes on producers, lack of revenue-sharing for states and the 100-mile buffer for offshore drilling, said the American Petroleum Institute, which represents major oil and gas producers.

"While HR 6899 moves in the right direction, we believe it should be enlarged and expanded to include revenue-sharing with the states, access to the eastern Gulf of Mexico, opportunities to access rich reserves closer to short, and a robust inventory of the nation's most promising offshore energy reserves," said Cal Dooley, president of the American Chemistry Council, which represents major companies engaged in the business of chemistry.

The National Association of Manufacturers (NAM) agreed. "While we support an increase in domestic energy supplies, we have serious concerns that without any state revenue-sharing mechanisms it is highly unlikely that states will 'opt in' to leases and the result will be no new access."

NAM and Republicans also opposed proposals that would deny Section 199 tax benefits for the Big Five producers, while freezing the current Section 199 benefits at 6% for oil and gas production income of other taxpayers; would require holders of the flawed deepwater leases issued in the late 1990s to renegotiate their lease contracts to include price thresholds, before they can bid on new offshore leases; and would require producers to "diligently develop" the federal lands that they already control.

The denial of the Section 199 tax benefits would raise $13.9 billion over 10 years for investment in renewable energy, carbon capture and sequestration demonstration projects, energy efficiency and conservation. A provision that seeks to prevent the understatement of foreign oil and gas extraction income in calculating foreign tax credits would raise $3.84 billion for 10 years to invest in renewables.

"This will directly add to the costs to energy production, discourage new domestic oil and natural gas production and make domestic energy investments less competitive economically with foreign opportunities," NAM said.

Also drawing the ire of Republicans and industry was a proposal to establish a federal renewable electricity standard. The bill would require 15% of a retail electric supplier's power base to be generated from renewable resources by 2020. "This provision will directly add to the cost of electricity for manufacturers and consumers by mandating a renewable standard in regions of the country that do not have adequate resources to comply. In effect, it would translate into a new tax on electricity, passed on to U.S. manufacturers and consumers," NAM said.

In response to the disclosure of drug usage and sexual misconduct at the Interior Department's Minerals Management Service last week, the Democrats included a provision in their bill that would subject agency employees to penalties, suspension from work without pay or termination if they accept gifts from the oil and gas industry; and proposes ethics training and random drug testing for agency employees (see NGI, Sept. 15).

It also calls on the Bush administration to accelerate oil and gas leasing in the National Petroleum Reserve in Alaska (NPRA), including at least one lease sale during each of the calendar years 2009 through 2013. Currently lease sales are held every other year in the NPRA. And it urges the administration to facilitate the construction of an oil pipeline into the reserve and the construction of an Alaska natural gas pipeline.

The NPRA, a 23 million-acre area on Alaska's North Slope, is estimated to hold technically recoverable resources of 1.3-5.6 billion bbl of crude oil and 39.1-83.2 Tcf of natural gas on federal lands, according to the U.S. Geological Survey. But the economic viability of the natural gas resources hinges on the ability to transport them to markets in the Lower 48 states.

In response to high crude oil and gasoline prices, Democrats proposed temporarily releasing nearly 10% of the oil stocks from the Strategic Petroleum Reserve, to be replaced later with heavier, cheaper oil.

Moreover, the House measure seeks to raise the use of natural gas vehicles in the United States over the next 10 years by providing incentives to consumers to purchase natural gas vehicles, automakers to manufacture natural gas vehicles, and service stations to install the infrastructure necessary to fuel gas vehicles.

It also seeks to extend and expand tax incentives for renewable energy at a cost of nearly $7 billion, and would create a $5 billion Strategic Renewable Energy Reserve to invest in renewable energy resources and alternative fuels, promote new energy technologies, develop greater efficiency and improve energy conservation. The reserve would be paid for by the royalties from the flawed 1990s leases, the Democratic leadership said.

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