Energy Policy:

Independent Petroleum Assoc.'s Linn expects uphill battle on OCS

With the major oil companies reporting record profits recently, Congress has begun to take a hard look at oil industry incentives. But how will independent oil companies be affected by potential changes? And what are the legislative goals of the independent oil producers now that Democrats are in power? During today's OnPoint, Mike Linn, Chairman of the Independent Petroleum Association of America and Chairman, President and CEO of Linn Energy, discusses IPAA's push for expanding offshore drilling. Linn explains why he believes ethanol is not an effective component of the U.S.'s energy policy and discusses the negative effects of a cap on emissions.

Transcript

Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Mike Linn, chairman of the Independent Petroleum Association of America and chairman, president, and CEO of Linn Energy. Thanks for coming on the show.

Mike Linn: Thank you.

Monica Trauzzi: Your organization has strongly supported the expansion of offshore drilling in the U.S. In terms of energy policy what are the IPAA's main energy policy goals for the 110th Congress?

Mike Linn: The first goal is access, access to the inner mountain west, more access to the Rocky Mountains under federal lands, access to the East Coast of the U.S., the West Coast of the U.S., and also the eastern Gulf of Mexico. The potential is enormous, especially the eastern seaboard, the Atlantic seaboard. There's potential of enough oil to back out Middle Eastern oil for at least 57 years. There's enough potential natural gas to heat 60 million homes for over 30 years. So there's a vast potential, and it doesn't stop at -- Canadians have been drilling the area of the Maritimes and then we don't exploit our own asset. Now Cuba is going to have the Chinese national government drill off of their coast, which is within 60 miles I believe of Florida, where they're going to be drilling. But we can't drill within 300 miles in the Gulf of Mexico off Florida.

Monica Trauzzi: So you support offshore drilling beyond what was done last year and Senate Energy and Natural Resources Committee Chair Jeff Bingaman said he'd like to focus on alternatives to OCS. So how likely do you think any movement on OCS is with the Democrats in power?

Mike Linn: I think it's going to be an uphill battle. It was an uphill battle during a Republican-controlled Congress. It will be a bigger uphill battle I think in this Congress. This Congress is focused on alternative energy, which we're in favor of alternative energy. We need all forms of energy in this country. We need more nuclear. We need clean burning coal. We need more wind, solar, and ethanol. We also need other forms of energy we haven't even discovered yet. But in the meantime we could use our resources to back out other oil, also to find natural gas offshore and in the inner mountain west that helps power new generators with natural gas which is cleaner burning than building a coal plant. And in addition, it's faster to put those facilities in place while you're building the coal plant. You can also discover more natural gas so you can co-fire with coal to clean the emissions from a coal plant.

Monica Trauzzi: What kind of -- go ahead.

Mike Linn: So it's going to be an uphill battle though, in this Congress, as evidenced by H.R. 6. For the first hundred hours energy was targeted. So our goal at IPAA is to continue education, continue talking to people and fighting the uphill battle. It might not be this Congress, it might not be the next Congress, but hopefully we can do something in the third Congress maybe.

Monica Trauzzi: What kind of working relationship exists there with the Democrats? Are they willing to listen to what your organization has to say?

Mike Linn: Yes, what we've done is reached out to the other side. We have to, as organization, and other people have to reach out to both sides of the aisle. This is a bipartisan issue. Energy is a bipartisan issue, as is health, as is education. So you've got to be able to work with the other side, the Democrats as well as the Republicans. And we're getting some good response from Senator Bingaman for example, Senator Mary Landrieu. People who have oil and gas production in their states understand this.

Monica Trauzzi: Our nation's rising oil needs are a major issue that lawmakers are facing this year. And recently the Fuel Economy Reform Act of 2007 was introduced by a bipartisan group of senators. Are you at all concerned that legislation like this and a push for ethanol will diminish the need for the resources that your member companies provide?

Mike Linn: No, the interesting thing about ethanol, in terms of overall energy policy, ethanol, the emissions from the ethanol powered cars, the E85 cars is the same if not worse than oil. It takes natural gas and oil and energy to create the ethanol because you've got to plant the field, drive the tractors, haul the corn to the plant, process it, etc. So you're using energy to make energy. The ethanol that we're using essentially is just to get us off of more foreign oil as it's imported. It's really not the answer to our future in terms of overall energy policy.

Monica Trauzzi: So are we going in the wrong direction by pursuing things like cellulosic ethanol? You know, a lot of research and development is going into that, should we not be doing that?

Mike Linn: Now, because we need all forms, that we need. We need not just corn ethanol, we need biomass. We need other types of fuel too. That will not replace oil though because oil currently represents over 85 percent of our motor transportation needs. So it's a large, large amount of oil you've got to back out with the ethanol and other biomass and other forms. But what you're going to do is we keep buying more cars. Our country keeps getting larger and larger. You're going to need that ethanol along with oil and other alternatives such as fuel cells, etc.

Monica Trauzzi: How do you find that balance between securing our energy future and also ensuring that we don't continue to damage the environment through the use of fossil fuels?

Mike Linn: As I said, what you need to do is clean burning natural gas will help us on our electric generation needs. It will also help us to build clean coal plants because you can use it to co-fire the emissions coming out of the stack, which would meet part one and two of the Clean Air Act. On the oil side we need more fuel-efficient cars. We need higher CAFE standards. That's not going to be replaced though overnight. Eventually, hopefully, you would have alternative energy that would help reduce emissions on automobiles and back out and become more fuel-efficient.

Monica Trauzzi: So you would be in support of CAFE, increased CAFE standards?

Mike Linn: Yes, because we need to extend those mileage requirements.

Monica Trauzzi: There's a lot of talk among Democrats about a cap on emission. Is that something that IPAA supports?

Mike Linn: The problem with the cap on emissions, it could hurt some of our manufacturing sectors in the country. And until we can come up with alternatives that are efficient or we have tax incentives or credits you don't want to hurt the manufacturing processes and lose jobs and factories to overseas.

Monica Trauzzi: Explain exactly how that would impact it negatively.

Mike Linn: For example, if you had an emission requirement on a coal plant that they can't meet for the next 10 years or they have to put a facility in that would cost a lot of money, they would have to be able to pass those costs through to the consumer in his electric bill. If you can't pass the costs through to the consumer the plant will close. The plant closes, then you have a gap in terms of that electric generation. You've got to find something else to replace that electric generation model. If there are manufacturing plants in Ohio, for example, that have emissions coming out of a canned food business, a can processing business, if they can't meet the Clean Air Act or don't have tax incentives to meet the emissions right at this time or it's not cost-effective they will close the plant and go overseas.

Monica Trauzzi: The House took on the issue of oil tax and royalty relief right out of the gates. How would legislation like this effect IPAA member companies?

Mike Linn: Well, I'll take it in a couple parts. Some of the provisions only affect the major integrated oil companies. IPAA represents the upstream, independent companies. Companies that range from Ma and Pa companies to large independents, but our members typically do not have refineries or gas stations. We're essentially producing the oil and producing the natural gas and we take what they pay us. We're at this end of the stream. Some of the provisions do affect the large integrated oil companies for some of the tax provisions. The provisions that do affect us though -- and I think that hurts our nation's energy policy overall. If you increase taxes on energy when you're trying to create more energy it doesn't seem right. The tax that does affect our members is the manufacturer's deduction. Manufactures get a tax deduction of a certain percentage for American products. In 2004 it was passed. It included oil and gas. That takes money out of our pockets because independents reinvest 150 percent of the profit and also borrow money back in the ground to find more oil and gas. If you take taxes out you're taking that off the table that can go back in the ground to find more natural gas and more oil.

Monica Trauzzi: Still would legislation like this stymie the production of domestic oil?

Mike Linn: It hurts it. It will hurt it. It will hurt some investment. And some of the large counties that can go overseas will go overseas. If they have an alternative to drill in the US versus overseas and the tax structure is more favorable overseas they'll drill it overseas.

Monica Trauzzi: OK. We're going to end it there. Thanks for coming on the show.

Mike Linn: Thank you.

Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.

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