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October 2008 Cover Story

The Energy Policy Debate

For no election in recent memory–perhaps ever–has energy been such a pivotal issue in shaping voters’ attitudes toward the candidates. Indeed, in a September poll conducted by Peter Hart Research Associates on behalf of Consumers United for Energy Solutions, registered voters who were asked what were the most important issues that they would consider in voting, put energy at the top. According to CUES, 43 percent of voters indicated energy would be a key determinant in selecting the candidate of their choice, followed by healthcare at 33 percent, the Iraq war at 25 percent, foreign policy at 23 percent and job creation at 22 percent.

Even more telling, CUES reports more than half of voters surveyed say they will be “much more inclined” to vote for a candidate who supports urgent, bipartisan action on energy, and 42 percent indicate they want a national energy policy that will lead to more energy efficiency, conservation, renewable energy, and oil and gas drilling!

This increased public awareness of the need to produce more U.S. crude oil and natural gas is borne out in other polls. Gallup says 57 percent of Americans support drilling in U.S. coastal and wilderness areas that have been off limits, while Fox News puts the percentage at 76. The Pew Research Center released a poll in early summer that said 60 percent of Americans chose developing new energy sources over environmental protection.

Much has been published regarding the candidates’ views regarding energy efficiency, renewables and alternative forms of energy as well as their positions on popular environmental causes such as limiting greenhouse gas emissions. But what about the role U.S.-produced crude oil and natural gas will play in meeting the nation’s future energy needs, or issues that get to the heart of independents’ ability to continue to produce American oil and gas, such as Bureau of Land Management permitting and environmental review processes, increasing federal regulation of E&P activities, or funding research so important to increasing recovery from the nation’s known reserves?

These are the questions The American Oil & Gas Reporter posed to presidential candidates: Democratic Senator Barack Obama of Illinois and Republican Senator John McCain from Arizona. And just as it has every election year since 1988, The Reporter presents the candidates’ responses as received in a Q&A format in order to provide the independent oil and gas producers that drill 90 percent of the nation’s wells and produce 85 percent of its natural gas and 67 percent of its crude oil some insight into the beliefs and principles that will guide U.S. energy policy for the next four years.

Public dissatisfaction with rising gasoline prices has elevated energy to the top of Congress’ agenda, even though two major energy bills were passed in the past three years. What are the elements of the national energy policy you would present to Congress and the American public?

McCain: My energy plan–the Lexington Project– calls for an all-of-the-above approach to increasing America’s energy supply and lowering the price of energy for American families. First, Congress must lift the ban on offshore drilling, empowering states to determine whether to tap the oil and natural gas reserves off their coasts. In the near term, it is vitally important that we maximize our domestic energy supplies in order to break our dependence on foreign oil. The technology exists to drill off our shores in an environmentally responsible manner, and we ought to do so.

We also must expand the use of carbon-free nuclear energy. Nuclear energy now produces 20 percent of our electricity, but the United States has not started construction on a new nuclear power plant in more than 30 years. China, India and Russia have goals of building a combined total of more than 100 new plants, and we should be able to do the same.

I will put my administration on track to construct 45 new nuclear power plants by 2030, with the ultimate goal of constructing 100 new plants. It also is critical that U.S. industry be able to build the components for these plants and reactors within our country to create jobs and reduce our dependence on foreign suppliers with long wait times to move forward with our nuclear renaissance.

In addition to opening domestic reserves and promoting nuclear power, we must encourage the development of alternative energy sources such as wind, hydro and solar power. To do that, we must rationalize the patchwork of temporary tax credits. I believe in an even-handed system of tax credits that will remain in place until the market transforms sufficiently to the point that renewable energy no longer needs the taxpayers’ dollars.

I also will commit $2 billion annually to advancing clean-coal technologies.

Of course, conservation also must be at the center of our national energy policy. We must give tax credits to consumers that purchase zero-emission vehicles, promote the use of flexible-fuel and alternatively fueled vehicles, and provide financial incentives for developing next-generation car batteries while better enforcing fuel-mileage standards.

We also must upgrade our national electricity grid to meet the demands of the 21st century, which will include a capacity to charge the electric cars that one day will fill the roads and highways of America. And to save both money and electrical power for our people and businesses, we also will need to deploy smart-meter technologies. These new meters give customers a more precise picture of their overall energy consumption, and over time will encourage a more cost-efficient use of power.

Obama: The Obama-Biden comprehensive “New Energy for America” plan will promote ongoing responsible domestic production of natural gas and oil. Our plan will help create 5 million new jobs by strategically investing $150 billion over the next 10 years to catalyze private efforts to build a clean energy future. Within 10 years our plan will save more oil than we currently import from the Middle East and Venezuela combined.

We will increase fuel economy standards for vehicles and put 1 million plug-in hybrid cars–cars that can get up to 150 miles per gallon and are built right here in America–on the road by 2015. The Obama-Biden energy plan will ensure that 10 percent of our electricity comes from renewable sources by 2012 and 25 percent by 2025. We will implement an economywide cap-and-trade program to reduce greenhouse gas emissions 80 percent by 2050.

Even after factoring in the strong conservation and efficiency provisions of the Energy Independence and Security Act of 2007 (HR 6) and its incentives for alternative energy sources, in its revised Annual Energy Outlook for 2008, the U.S. Energy Information Administration projects petroleum and natural gas will provide 57.1 percent of total U.S. energy consumption in 2030, compared with 62.7 percent in 2006. In the same time frame, total petroleum usage is projected to increase by 9.8 percent while natural gas consumption is projected to rise 5.9 percent. What role do you believe U.S.-produced crude oil and natural gas should play in meeting America’s energy needs?

McCain: I believe that U.S.-produced crude oil and natural gas will play a major role in meeting America’s energy needs in the near future.

As president, I will commit our country to expanding domestic oil exploration. The federal moratoria on drilling in parts of the Outer Continental Shelf stand in the way of energy exploration and production. I believe it is time for the federal government to lift these restrictions and to put our own reserves to use. There is no easier or more direct way to prove to the world that we no longer will be subject to the whims of others than to expand our production capabilities.

We have trillions of dollars worth of oil and gas reserves in the United States at a time when we are sending hundreds of billions of dollars a year overseas to buy energy. This is the largest transfer of wealth in the history of mankind. We should keep more of our dollars in the United States, lessen our foreign dependency, increase our domestic supplies, and reduce our trade deficit–41 percent of which is the result of oil imports. My administration will cooperate with the states and the Department of Defense in the decisions to develop these resources.

I also support promoting and expanding the use of America’s domestic supplies of natural gas. We have tremendous reserves of natural gas within our country. The areas of the Outer Continental Shelf subject to the moratoria alone contain an estimated 77 trillion cubic feet of recoverable natural gas. It is time we capitalize on these significant resources and build the infrastructure needed to transport this important component of electricity generation and transportation fuel around the country.

Obama: Recognizing that the United States contains only 3 percent of the world’s oil reserves, we agree with T. Boone Pickens when he says, “This is one emergency we can’t drill our way out of.”

But U.S. oil and natural gas production plays an important role in our domestic economy and remains critical to preventing global energy prices from climbing even higher. Increased domestic oil exploration has its place as we make our economy more fuel efficient and as we transition to other, renewable, American-made sources of energy. Breaking our oil addiction is one of the greatest challenges this country faces.

We recognize that there are several key opportunities to support increased U.S. production of oil and gas that do not require opening protected areas. Increasing production of natural gas from shale formations such as the Barnett, Fayetteville and Bakken shales offers great promise for increasing domestic production. The National Petroleum Reserve-Alaska, which comprises 23.5 million acres of federal land, contains a vast amount of oil and represents another key opportunity for increasing domestic oil production.

An Obama administration also will encourage greater use of enhanced oil recovery utilizing carbon dioxide to produce technically recoverable oil that remains stranded in existing fields. To speed that process, we will map all stationary CO2 sources and develop a database to help industry calculate the most economic oil field destinations for each source’s CO2.

The Obama-Biden plan will prioritize constructing an Alaska natural gas pipeline, and will work with stakeholders to accelerate this process. While this pipeline was proposed in 1976, there has been little progress in building this critical energy infrastructure under the Bush administration. The planned pipeline will have a daily capacity of 4 billion cubic feet of natural gas, or almost 7 percent of our current U.S. consumption. Not only is this pipeline critical to our energy security, it will create thousands of jobs.

Given the nation’s heavy reliance on petroleum and natural gas that the EIA is projecting for the next quarter century, what policies will you advocate as president to ensure an adequate supply of crude oil and natural gas?

McCain: We must lift the federal moratoria on offshore drilling. Although in the long run we must move to other sources of energy, such as nuclear, wind, solar and hydro, in the near term we must have adequate supplies of oil and natural gas. As president, I will make it a top priority to work with Congress to lift the moratoria. I will then work to ensure that new offshore drilling is done in an environmentally responsible manner.

We also must maintain access to the supply of oil and natural gas from friendly countries such as Canada and Mexico. My opponent often has mentioned that he would unilaterally open negotiations and press for changes to the North American Free Trade Agreement. Canada already has made it clear that any renegotiation of NAFTA would include changes to the preferential access the United States now enjoys under the trade agreement, which was negotiated at a time when oil prices were much lower. Forcing our allies to the table to renegotiate NAFTA would put at risk the provisions that provide America with a steady flow of oil from a friendly source.

Obama: An Obama administration will promote responsible production of domestic supplies of natural gas and oil. We will establish a process for early identification of any infrastructure obstacles or possible federal permitting process delays to drilling.

We also will prioritize constructing an Alaska natural gas pipeline. While this pipeline was proposed in 1976 and Congress authorized up to $18 billion in loan guarantees for the project in 2004, there has been no progress in building this critical energy infrastructure under the Bush administration. The planned pipeline will have a daily capacity of 4 billion cubic feet of natural gas, or almost 7 percent of current U.S. consumption. Not only is this pipeline critical to our energy security, it will create thousands of new jobs.

An Obama administration will work to get more oil from our existing oil fields. Experts believe that nationally, billions of barrels of technically recoverable oil remain stranded in existing fields. Enhanced oil recovery utilizing carbon dioxide offers an immediate to medium-term opportunity to produce more oil from existing fields. And in the EOR process, large quantities of CO2 can be sequestered underground, reducing pollution that would contribute to global warming.

To speed that process, we will map all stationary CO2 sources and develop a database to help industry calculate the most cost-effective oil field destinations for each source’s CO2.

U.S. energy policy cannot be discussed today without factoring in climate change. Given your own statements on the importance of limiting greenhouse gas emissions, and recognizing the importance of affordable energy supplies for the nation’s economy, what safeguards will you propose as part of your climate policy to prevent the loss of U.S. oil and gas production, and oil and gas refining and processing capabilities?

McCain: I have proposed a comprehensive cap-and-trade system to combat climate change, which will reduce greenhouse gas emissions 60 percent by 2050 by using market forces to develop the most efficient ways to cut emissions. This system would set a limit on greenhouse gas emissions and allow entities to buy and sell rights to emit, similar to the successful acid rain trading program of the early 1990s. The key feature of this mechanism is that it allows the market to decide and encourage the lowest-cost compliance options.

The cap-and-trade system would encompass electric power, transportation fuels, commercial business, and industrial business–sectors responsible for nearly 90 percent of all emissions. Small businesses would be exempt.

Initially, in order to mitigate the economic impacts of transforming to a new green energy economy, participants would be allowed to either make their own greenhouse gas reductions or purchase offsets–financial instruments representing a reduction, avoidance, or sequestration of greenhouse gases practiced by other activities, such as agriculture–to cover 100 percent of their required reductions. Offsets would be available only through a program dedicated to ensuring that all offset greenhouse gas emission reductions were real, measured, and verifiable. The fraction of greenhouse gas emission reductions permitted through offsets would decline over time.

Also, my plan would permit banking and borrowing permits to allow for excess savings from one year to be used in the next. In addition, my climate proposal would incorporate a combination of allocation and auctions, enabling covered entities to transform to the new cap-and-trade system without passing upfront costs on to consumers.

My plan represents the best way to fight climate change while ensuring affordable energy. Only a plan that harnesses the power of the market to fight climate change by bringing together businesses, venture capitalists, environmentalists, and others can usher America into a green economy at the lowest cost.

Obama: We support implementing an economywide cap-and-trade system to reduce carbon emissions by the amount scientists say is necessary: 80 percent below 1990 levels by 2050. This market mechanism has worked before and will give all American consumers and businesses incentives to use their ingenuity to develop economically effective solutions to climate change.

The Obama-Biden cap-and-trade policy will require that all greenhouse gas emission credits are auctioned. A 100 percent auction ensures that all industries pay for every ton of emissions they release, rather than giving these valuable rights away to companies on the basis of their past emissions.

A portion of the receipts generated by auctioning allowances will be used to support developing clean energy, invest in energy efficiency improvements, and to help develop the next generation of biofuels and clean energy vehicles–measures that will help the economy and will help meet the emission reduction targets. It also will be used to provide new funding to state and federal land and wildlife managers for restoring habitats, creating wildlife migration corridors, and assisting fish and wildlife to adapt to the effects of a warming climate.

All remaining receipts will be used for rebates and other transition relief to ensure families and communities are not adversely impacted by the transition to a new-energy, low-carbon economy.

U.S. producers drilled a record 32,910 natural gas wells in 2007, nearly triple the level of a decade earlier. The 14,477 crude oil wells drilled was the most since the early 1980s, and the average for the past five years was up by more than half from the last half of the 1990s. Yet U.S. crude oil production declined from 5.7 million barrels a day in 2002 to only 5.1 MMbbl/d in 2007, while natural gas production increased a mere 2.1 percent over the past five years, according to EIA calculations. Many industry experts blame this lack of production response on companies drilling more and more wells into nearly depleted reservoirs while the most prospective areas are kept off limits. Under what circumstances would your administration support increasing the industry’s access to leases off the East and West coasts, in the Eastern Gulf of Mexico, and in the Arctic National Wildlife Refuge?

McCain: I have proposed lifting the federal moratoria on offshore drilling, giving coastal states the choice to take advantage of our domestic reserves. The technology exists to tap these sources in an environmentally responsible manner, and it is vital that we utilize domestic supplies to wean our country off foreign oil. We have trillions of dollars of oil and gas reserves that can boost our economy and cut energy costs for American families.

I do not support drilling in the Arctic National Wildlife Refuge at this time. Quite rightly, I believe, we confer a special status on some areas of our country that are best left undisturbed. When America set aside the ANWR, we called it a “refuge” for a reason. So long as we have alternatives to meet our energy needs, we must protect the environment of this unique reserve and preserve it as a petroleum reserve for our children and grandchildren.

Obama: Oil companies have access to 68 million acres of land–more than 40 million offshore–that they are not drilling on. Drilling in open areas could significantly increase domestic oil and gas production.

An Obama administration will require oil companies to diligently develop these leases or turn them over so that other companies can develop them.

Because America has only a fraction of the remaining global oil reserves, we still do not believe that opening new offshore areas to drilling is likely to be a particularly effective solution to our long-term problems of high product prices and rising dependence on imports. However, we will consider increased leasing in moratoria areas as part of a comprehensive, bipartisan approach to crafting an energy plan for our country. Any such plan will have to include significant investments in energy efficiency and renewable energy, including aggressive research and development efforts. Of course, any new offshore leasing would be subject to state approval and applicable environmental review.

We remain opposed to opening the Arctic National Wildlife Refuge to oil and natural gas drilling.

The U.S. Department of Interior estimates 92 percent of oil and gas resources located on federal onshore lands is subject to some drilling and/or production restrictions, while 62 percent are not accessible at all. Even when development is permitted, opponents routinely challenge technicalities, delaying projects for months and years, and sometimes making them economically impracticable. What reforms would you support to stem harassing lawsuits, speed the Bureau of Land Management’s permitting and environmental review processes, and ease restrictions on multiple-use public lands?

McCain: I am strongly committed to expanding our domestic energy production in an environmentally sensitive manner. We must cut unnecessary red tape where we can in order to accelerate the process of opening these domestic resources while maintaining a commitment to sensitive ecosystems. And, as in many sectors of our economy, we must stem the ever-rising tide of frivolous lawsuits. As president, I will be committed to ensuring that all frivolous legal impediments to energy production are removed.

Obama: An Obama administration will set up a process for early identification of any infrastructure obstacles or possible federal permitting process delays to drilling in:

  • The Bakken Shale in Montana and North Dakota, which could have as much as 4 billion barrels of recoverable oil, according to the U.S. Geological Survey;
  • Unconventional natural gas supplies in the Barnett Shale formation in Texas and the Fayetteville Shale in Arkansas; and
  • The National Petroleum Reserve-Alaska, which comprises 23.5 million acres of federal land set aside by President Harding to secure the nation’s petroleum reserves for national security purposes.

Some environmental groups and their supporters in Congress contend that “loopholes” in federal laws enable the oil and gas industry to escape much environmental regulation. Industry organizations and state regulatory agencies respond that the states are better equipped to regulate exploration and production activities. They contend that exceptions in federal statutes merely recognize the adequacy of existing state regulations and the impracticality of imposing rules designed for centralized manufacturing facilities on widely dispersed E&P operations. What is your view on the adequacy of regulatory controls on the oil and gas industry? Where to you believe the proper point of enforcement lies?

McCain: I am a strong believer in the principle of federalism–that where the states are adequately suited to address a problem, the federal government’s role should be limited. In the context of the exploration and production of energy resources, we must evaluate the federal/state balance in terms of which level of government is best suited to achieving the twin goals of energy security and environmental responsibility. My administration will adhere to that principle in evaluating our national energy policy.

Obama: This complex question raises a number of important issues. In general, however, states have developed extensive expertise in regulating oil and gas exploration and production operations on nonfederal lands. As long as their regulatory approaches produce results consistent with applicable federal standards, we do not see the need to alter the balance of enforcement authority between state and federal agencies.

Independent producers drill nearly 90 percent of the wells in the United States, produce 85 percent of the nation’s natural gas and 67 percent of its domestic crude oil. The Independent Petroleum Association of America estimates independents reinvest 150 percent of their cash flow in new oil and gas drilling. The federal tax code is a key factor in defining how much capital a company will retain and attract, yet in the past couple years many in Congress have advocated new “windfall profit” taxes on the industry, as well as limiting or eliminating such existing provisions as the Section 199 Manufacturers Tax Deduction, the deduction for intangible drilling costs, accelerated depreciation of geological and geophysical costs, and percentage depletion for marginal wells. What specific tax code provisions relating to oil and gas would your administration support or oppose?

McCain: I opposed the excessive tax breaks for oil companies in the Energy Policy Act of 2005, and I voted against it. One of the problems with our tax code is lobbyists who are able to game the system to obtain tax breaks for a particular industry.

I have called for broad reform of our tax code to make America a more business-friendly environment for all sectors: cutting the sky-high corporate tax rate from 35 percent to 25 percent, creating a permanent research and development tax credit, permitting first-year expensing of certain business investments, maintaining our commitment to existing trade pacts and seeking new ones, and solving our healthcare problems without creating a massive new government bureaucracy.

Obama: We believe that investing in the United States to increase domestic production of natural gas and oil should be encouraged. When oil prices spike, however, we have called for a windfall profits tax on big oil companies to help provide emergency energy rebates for American families.

We also will roll back tax breaks for big oil, but will work with independent producers to ensure the proper incentives are available to expand exploration and production activities.

Advances in technology are critical to the oil and gas industry’s ability to locate and develop ever-smaller hydrocarbon deposits in deeper and more challenging environments. Most independents, however, are small businesses that do not have the resources to support internal technology research and development, and rely on government-funded research and the educational programs of organizations such as the Petroleum Technology Transfer Council. Yet appropriations for the Department of Energy’s oil and gas programs have eroded to a mere $25 million in FY 2008, with no funding earmarked for PTTC. What do you believe should be the federal government’s role in funding oil and gas technology research, and getting the results into the hands of independent producers?

McCain: Research is vital for expanding our ability to take advantage of our domestic oil and natural gas reserves, and I believe the federal government has a role to play in that effort. In the first year of my administration, I will freeze most discretionary, nondefense spending and conduct a top-down review to find what should be cut and what should remain. It is in the context of that comprehensive review that I will determine what research programs are justified.

In addition to funding research, I believe the federal government should make it a priority to enable businesses–including small businesses–to conduct necessary research. That is why I have proposed cutting our business tax rate–the second-highest in the world–from 35 to 25 percent, creating a permanent R&D tax credit equal to 10 percent of the wages spent on R&D, and permitting first-year expensing of certain business investments. With these reforms, we can unleash market forces to develop the technologies that can move our energy sector forward and expand the domestic production of oil and natural gas.

Obama: The experience of natural gas and oil production in the United States has consistently demonstrated that developing new technology is critical to more efficiently recovering these valuable resources for our country. We believe we must have domestic natural gas and oil production as we transition our economy and energy infrastructure to a new generation of clean, domestic energy resources.

An Obama administration will work with all stakeholders to determine the appropriate level of federal commitment to foster deploying new technology and make advancements more readily available to independent producers.

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