CLIMATE:

Hints at more drilling fall short of wooing oil company support for cap and trade

The suggestion from two key senators that climate change and energy legislation could allow expanded oil and gas drilling has failed to charm the fossil fuel industry that opposed the House bill.

The biggest oil and gas companies and their trade group said they will have to hear a lot more than what Sens. John Kerry (D-Mass.) and Lindsey Graham (R-S.C.) wrote in an Oct. 10 New York Times op-ed, which referenced additional drilling as part of a bipartisan approach.

Oil and gas companies fear Senate climate legislation will look much like the House bill that set up a program forcing businesses to buy allowances for carbon emissions. The early years of the cap-and-trade program would give away 85 percent of the carbon permits, but petroleum refiners would receive the smallest share. More drilling won't suffice, an industry spokesman said.

"In short, it's nowhere near a trade off," said Lou Hayden, policy analyst at American Petroleum Institute, trade group for 400 oil and gas companies, refiners, pipeline companies and fuel transporters.

Costs that would be imposed by the House bill are "so great it would restrict a lot of U.S. refining capacity," Hayden added. "Access to domestic oil and natural gas should not be held hostage to a very costly and very unbalanced climate change bill."

Kerry and Graham wrote that "we are committed to seeking compromise on additional onshore and offshore oil and gas exploration -- work that was started by a bipartisan group in the Senate last Congress. Any exploration must be conducted in an environmentally sensitive manner and protect the rights and interests of our coastal states."

The "Gang of 10" last year called for production greater than 50 miles off the coasts of the Carolinas, Georgia and Virginia, if those states agree, and they would get a revenue cut. It also would reduce the no-drilling buffer off Florida's Gulf of Mexico shores to 50 miles.

Neither office currently will go beyond what is in the op-ed. Kerry spokeswoman Whitney Smith said that the senator's office was "not ready to talk specifics yet, it's just too soon." Graham's office did not respond to voice and e-mail messages.

Kerry and Graham gave a kind of "rough architecture" of what a bipartisan bill could look like, said Mark Muro, director of policy for the Metropolitan Policy Program at the Brookings Institute. The op-ed probably should not be viewed as laying out specific provisions, he said.

"Clearly, it's essentially a political ploy in the effort to try and find a sweet spot for a potential bipartisan bill," Muro said. "There are a lot of differences of opinion about how important increased drilling will be ... and whether it stands for something more."

If a provision on drilling ultimately ends up in Senate legislation, it might not matter whether the legislation has the support of industry, another analyst said. In fact, putting the proposal in print might have less to do with winning the hearts of the oil industry than winning the votes of senators.

Adding language on drilling might bring in senators from states along the Gulf of Mexico like Sen. Mary Landrieu (D-La.), or those from Indiana and Ohio where manufacturing businesses use natural gas and other fossil fuels and residents warm homes with heating oil. Diesel and other fuel prices also affect agricultural states, said Samuel Thernstrom, resident fellow at the American Enterprise Institute and communications director at the Council on Environmental Quality from 2001-2003.

"The industry position on these things is important, but by no means the end of the story," Thernstrom said. "A lot of what proponents of the climate bill are trying to do is give people an excuse to find a way to vote for it. They're trying to persuade people that are really having a hard time making up their mind."

Drilling stalled

The Gang of 10 proposal never moved forward as a bill after President Bush last summer lifted a moratorium on offshore drilling and a congressional ban was allowed to lapse as well. (A large portion of the eastern Gulf of Mexico remains off-limits until 2022 under a separate 2006 bill that expanded gulf leasing.)

Oil companies say the lifting of some limits on drilling has not made much difference in terms of their access. The Interior Department still needs to issue exploration leases and so far has not started doing so, Hayden said.

In fact, "the estimated total number of oil wells, natural gas wells and dry holes" completed in the third quarter of this year was down 46 percent from the same period a year earlier, a level not seen since 2003-2004, API said in a statement last week.

"It's important for America to be investing in energy security," said Rob Young, spokesman for Exxon Mobil Corp. "The best way to do that is to have access to the U.S. resources that have been off limits. We would be encouraging any policy provision to go down that path."

But Exxon Mobil and other oil companies said they would need to see a specific drilling provision in legislation and what else is in a Senate climate bill before making a decision on support or opposition.

"All we can do is respond to what's out there," Hayden said.

Industry lays out wants

For now, that means oil and gas companies must wait and lobby for what they want and don't want in a Senate bill. So far, they do not like that the bill from Kerry and Sen. Barbara Boxer (D-Calif.) is similar to the House measure from Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.)

"We are still assessing Kerry-Boxer but acknowledge that it contains many elements similar to Waxman-Markey," said Chevron Corp. media adviser Justin Higgs. "We do not support Waxman-Markey because it places transportation fuels under the cap-and-trade program, it is not equitable, it lacks provisions to control costs and it lacks transparency for consumers."

The companies say that the provision on free emissions allowances in Waxman-Markey is not equitable. Electric utilities in that bill get 35 percent of those free permits in 2012 and 2013, with the sector's free permit portion shrinking every few years after that. Oil refiners, in contrast, receive 2 percent of those free emission allowances for two years. That will drive up fuel costs and potentially the price of anything that is shipped or trucked, the oil companies have said.

"We're just saying you can't treat emitters so disproportionately," Hayden said.

Chevron said it wants climate change legislation that meets seven principles. In a statement it outlined those as: "shared reduction of greenhouse gases by top emitting countries"; a recognition of oil, gas and coal "as critical energy sources expected to dominate energy supply for the long-term"; continuation and enhancement of programs to promote energy efficiency and conservation; a "measured and flexible approach"; ensuring that no sector or company is disproportionately burdened; accelerating research and development of carbon mitigating technologies; and transparency of "costs, risks, trade-offs and uncertainties."

Royal Dutch Shell PLC spokesman Bill Tanner said legislation should create "an environment that will allow continued investments in energy supplies and the efficient deployment of low-carbon technologies to address greenhouse emissions.

"With energy demand expected to grow, we should focus on legislative efforts that keeps open all supply options while respecting the need for proper policy frameworks and incentives, Tanner added. "We believe that a federal cap-and-trade program that sets mandatory caps on emissions -- along with a price on carbon -- is the most effective way to slow, stop and reverse greenhouse gas emissions."

Exxon Mobil said it rejects cap and trade as the best option and instead favors a carbon tax as the cleanest, most market-based option.

Although a carbon tax has not had much traction on Capitol Hill, Chairman and CEO Rex Tillerson earlier this month rejected the idea such a plan is politically impossible. "It is not too late for Congress to consider a carbon tax as the better policy approach for addressing the risks of climate change," Tillerson said. "Indeed, there has never been a more opportune time for Congress to pursue this course of action."

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