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API: Economic, Energy Challenges Revisit U.S.

The country is confronting economic and energy challenges that are similar to those faced three decades ago during the Iranian crisis, said the head of the American Petroleum Institute (API).

"We're at [the] same spot again. We're going to have a new president and new Congress. We're going to have a lot of new economic conditions that we're going to be facing," API President Red Cavaney told reporters during a Platts energy symposium in Washington, DC, last Tuesday.

"I think the lessons that we should learn are don't act precipitously. And make sure you understand what the drivers are in the economic recovery and...that those drivers are permitted and allowed to do what's necessary. That's particularly true of the entire energy industry with its capital intensity [and] its long lead times," said Cavaney, who next month will leave API after 30 years to join ConocoPhillips.

A dozen different programs and activities were tried during the 1970s and early 1980s to "give us 'energy independence,' to get the economy back on track. [But] I think it's fair to say that every single one of [those] 'silver bullets' that were developed at the time proved to be inadequate," he said.

"What did happen...is the oil [and gas] industry was brought...to its knees, resulting in significant increases of imported oil as hundreds of thousands of wells were shut in here domestically [and] upwards of a third of the U.S. oil and gas work force lost their jobs. We [were] living with that legacy for about two decades afterward."

The industry needs to "[make] sure that we get economic and energy policy prescriptions that are going to end up propelling us forward and not backward," Cavaney said.

As the stock market continued on its roller-coaster path last week, Cavaney said producers that "are heavy on cash...are in a very good position right now," and have more options than those that are short on cash and heavy on debt.

As for drilling on the Outer Continental Shelf (OCS), he noted that producers aren't about to increase their offshore spending until they are certain the next president and Congress will not restore an OCS drilling ban that recently expired. They want to be sure that the removal of the ban "was not just a temporary aberration," but rather a longer-term policy.

Producers will look for a "positive proactive signal from the new administration" before making new plans in the OCS, Cavaney said. He said he expects Congress to take up the OCS issue when it returns in January. Lawmakers are likely to address the issue of how far off coastlines producers will be able to drilling -- 50, 100 or more miles.

"The majority...of the undiscovered technically recoverable gas is located within 50 miles of shore. But many of the proposals that are being discussed are talking about 100 miles or 150 miles off the shore."

Cavaney said any new OCS legislation next year should require that royalties be shared with states that allow drilling off their shores, and it should not prohibit drilling within the first 50 miles from coast lines . "What we would ask is that people look at the prescriptions that they're going to put on what that access is," Cavaney said.

In the meantime, the energy industry is frozen in a "wait and see mode" as it anticipates a new president, Congress and Interior secretary, said a Capitol Hill aide.

Cavaney expressed his opposition to a windfall profits tax on the oil and gas industry, saying the tax in the past "had [the] reverse effect" of its stated objectives, such as reducing dependence on foreign oil, increasing production and creating more jobs. "The idea that we need to put more taxes on oil and gas...is a fallacy." He noted that 27 of the largest companies in the industry had a tax rate of 40.7% last year.

While producers support the development of alternative energy fuels, "we think there is an incubation period that's necessary" for alternative fuels to prove that they can have "staying power" without being subsidized by the federal government, he noted. Producers especially object to the fact that they are being stripped of funds to aid in renewable fuel development. "Let's not end up crippling" oil and gas, he said.

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