Midterm elections in US have profound implications for the oil and gas industry

At stake are greenhouse gas regulation, billions of dollars worth of tax incentives, and the development or abandonment of offshore resources.

Roger H. Bezdek, Contributing Editor, Washington

In the 2010 US midterm elections to be held on Tuesday, Nov. 2, Republicans are poised to make very significant gains in both the House of Representatives and the Senate. They may become the majority in the House, where all 435 seats are up for grabs, and thus gain control of powerful House committees. Changes in the composition of Congress and possible Republican control of House committees will have important impacts on the oil and energy industries.

Democrats have been in trouble since at least the beginning of the year, and unless something significant changes over the next two months, they are headed toward losses of the magnitude experienced in the midterm elections of 1958, 1966, 1974, 1994 and 2006. History suggests that the Democratic majority in the House is in grave danger—the Republicans only need to pick up at least 39 seats to gain control—and Senate Democrats could easily see their ranks shrink from 59 (including two independents who usually caucus with the Democrats) to 52 or 53 seats. Elections will be held for 36 of the 100 Senate seats.

EARLY INDICATORS

Recent polls, conducted by both Democratic and Republican pollsters, indicate the salient trends. For example, among registered voters, Republicans lead by about two points on the generic congressional ballot test, 45% to 43%. This may not sound like much, but when this same poll was taken in June 2008, Democrats led by 19 points, 52% to 33%.

Pollsters tried to ascertain who really is most likely to vote. Although 2010 is a “downshifting” election (i.e., from a high-turnout presidential year to a lower-turnout midterm year), only one group is currently more interested than it was in 2008: those who had voted for Republican John McCain
for president. Furthermore, the groups that showed the largest decline in interest were those who voted for Barack Obama—liberals, African-Americans, self-described Democrats, moderates, those living in either the Northeast or the West Coast, and younger voters (18–34 years of age). These are “game changing” indicators with ominous implications for the Democrats.

Surveys of likely voters in 70 competitive House districts indicate that the Democrats could lose the vast majority of them. In competitive House races, the Democrats currently have about 65 seats at risk, whereas the Republicans have less than 10.

As evidenced by these and other polls, there may be an electoral tsunami building that could deluge the Democrats in November. Of course, things could change over the next two months, and the Republicans’ failure in the May 18 special election in Pennsylvania’s 12th District underscores that the party cannot be complacent. Nevertheless, the prospects are that the Democrats will lose control of the House, and will lose most of their majority in the Senate.

IN THE HOUSE

What would Republican control of the House imply for the US oil and gas industry? Among the most important results, the GOP would control the House committees and the ranking Republican members on all House committees would become the committee chairmen. This would be especially significant for the powerful House Energy and Commerce Committee—which has jurisdiction over more than half of the legislation that moves through Congress—where current Chair Henry Waxman (D-Calif.) would be replaced by ranking Republican Joe Barton (R-Texas). Waxman, a liberal Democrat from Los Angeles, has been a harsh critic and a thorn in the side of the oil industry for decades. He is also the co-author of the Waxman-Markey cap-and-trade bill that was passed by the House last year, as I discussed in this article in August 2009. Waxman’s seat in Congress is safe, and if the Democrats retain control of the House, he will return as committee chair. If the Democrats retain control and for some reason Waxman does not remain as chair, his successor could be Rep. Edward Markey (D-Mass.), whose seat is also safe. This would not be good news for the oil industry; if anything, Markey is a more implacable foe than Waxman.

If Joe Barton (whose seat is also safe) becomes committee chair, a sea change with respect to the committee’s energy policies is likely. Barton is a former oil and gas consultant with Atlantic Richfield (Arco), which is now part of BP, and since his election in 1984 has received $1.4 million in campaign contributions from the oil and gas industry—more than any other House member.  Thus far this year, he has received more than $100,000 from the oil and gas industry.

Barton is a noted skeptic of human-caused global warming and opposes greenhouse gas (GHG) control policies. He served as chair of the committee until 2007, and was the primary House author of the Energy Policy Act of 2005. Barton feels that government policy should be geared to increasing energy production of all kinds, favors subsidies and incentives for the oil and gas industry to expand production, and supports opening the Arctic National Wildlife Refuge (ANWR) to drilling. If he becomes chair again in 2011, the powerful committee will likely shift 180° from restricting and penalizing the oil and gas industry to facilitating, encouraging and incentivizing it in both onshore and offshore activities.

However, in June, Barton jeopardized Republicans’ electoral chances and his position on the committee during a hearing with BP’s CEO Tony Hayward, by apologizing to Hayward on America’s behalf for a White House “$20 billion shakedown” to create a fund to clean up the oil spill created by the blowout at the company’s Macondo well in the deepwater Gulf of Mexico. In reality, BP had agreed to establish the fund a month earlier. Democrats—especially the White House—pounced, and House Republican leaders quickly recognized the political peril of Barton’s charge that Congress owed BP an apology for White House pressure to establish an escrow fund to help victims of the spill. They gave Barton an ultimatum: Apologize for the apology—and quickly—or lose his position as top Republican on the House Energy and Commerce Committee. He did as he was told, but it was too late. The damage was done and Barton became, in an instant, the poster boy for why not to give Republicans the majority in the House in the midterm elections.

Lost in the firestorm was a more disturbing fact: Shortly before Barton made his infamous apology to BP, a nearly identical statement was issued by the House Republican Study Committee, which includes 115 GOP House members (about two-thirds of the Republicans in the House). Putting aside the debate over the appropriateness of a BP escrow account, how could such a large group of lawmakers sign off on such an incendiary, politically tone-deaf statement several months before a critical midterm election?

IN THE SENATE

The odds that Republicans will gain control of the Senate are much less promising than in the House. They currently have 42 seats that are not up for election or are rated safe for them, but they need 51 seats for a majority. However, only eight Democratic seats are currently rated as “toss-ups” in November’s election. One of those eight belongs to Senate Majority Leader Harry Reid (D-Nev.) and, due to the ineptitude and verbal gaffs of his Republican “Tea Party” opponent, his reelection prospects are improving by the week. Thus, to control the Senate, the Republicans may have to win two additional seats that currently lean Democratic: Those held by Sens. Barbara Boxer (D-Calif.) and Russell Feingold (D-Wis.). The oil industry would like to see both of these incumbents defeated: They are both liberal, strongly support GHG control measures and green energy mandates, oppose drilling offshore and in ANWR, and support increased taxes and restrictions on the oil industry.

US Rep. Joe Barton’s politically tone-deaf apology to BP chief Tony Hayward (right) during the latter’s testimony before a House subcommittee investigating the GOM oil spill drew harsh criticism from Democratic leaders and made his fellow Republicans nearvous enough to force him to retract. Nevertheless, the GOP is still widely expected to take control of the House after the Nov. 2 midterm elections.

If, by some miracle, Republicans are able to gain control of the Senate in November, the ranking Republican, Sen. Lisa Murkowski (R-Alaska) would become chairman of the all-important Senate Energy and Natural Resources Committee. She is considered sympathetic to the oil industry, having sponsored legislation to open ANWR to both conventional and subsurface development, called for a new inventory of offshore energy and a one-stop permitting office to speed development of the Outer Continental Shelf (OCS), and proposed OCS revenue sharing to states, expanding federal loan guarantees to speed construction of an Alaska gas pipeline, and reforming oil spill liability limits.

Nevertheless, the Republicans are not likely to control the Senate in 2011, so Jeff Bingaman (D-N.M.) will likely continue as chairman of the Energy and Natural Resources Committee. While Sens. Boxer, John Kerry and Joe Lieberman have received most of the attention with respect to energy issues, Bingaman is the one to watch. He is not up for reelection this year, but if he was, it probably wouldn’t matter: He is extremely popular in New Mexico and has faced substantive opposition only once since being elected in 1982.

Unlike his bigger-name colleagues, Bingaman rarely makes appearances on the Sunday talk shows, does not give impassioned speeches, seldom injects himself into hot-button debates, and is known as one of the most frustratingly unquotable members of Congress. However, what he does do is slowly, carefully and methodically hammer out pragmatic, detailed energy legislation with Republican partners in long, dull markups that do not draw attention but do produce solid pieces of legislation forged in the order of the committee process. And as Senate Majority Leader Harry Reid scrambles to get a comprehensive and contentious energy package to the floor in the heat of campaign season, with his caucus fracturing around him and oil spill politics further inflaming the debate, Bingaman’s committee-approved energy bills grind ahead.

At the end of the day, Bingaman may be the most influential energy senator. He is a yeoman soldier who labors long and hard, understands the minutiae, and does so without a lot of public recognition. Any energy bill passed this year will likely resemble Bingaman’s American Clean Energy Leadership Act (ACELA), SB 1462, which conspicuously includes no mention of a carbon cap or a price on carbon—but does repeal royalty relief for production from certain ultradeep gas wells in shallow water and oil and gas production sites in the GOM and liberalizes oil and gas leasing in specified areas of the GOM. ACELA-like provisions will likely be merged with a spill bill—i.e., a bill regulating offshore drilling.

While not giving them control of the Senate, Republican gains of five or six seats could nevertheless be significant for the energy industry. For example, in June, a proposal by Sen. Bernie Sanders (I-Vt.) to repeal $35 billion worth of tax breaks for oil and gas producers was defeated. Republican gains could ensure that such Senate proposals are also defeated in the future.

More important, also in June, Murkowski introduced a resolution to stop the Environmental Protection Agency from regulating carbon emissions under the Clean Air Act, as ordered by the US Supreme Court. The Senate voted 53–47 to reject the resolution, largely along party lines. However, if the Republicans pick up the expected five or six seats in November, a similar resolution next year would likely pass. President Obama would veto it, and 67 senators would have to vote to override the veto. This would be unlikely even in 2011, but Senate passage of a resolution would represent an important shot across the bow of the EPA as it pursues it ruinous regulation of CO2.

BP AND THE ELECTION

The BP oil spill is having various indirect ramifications for the oil industry—none of them good. For example, for decades, Florida’s senior senator, Democrat Bill Nelson, has been a dogged opponent of the oil companies and has fought against bringing offshore drilling closer to Florida. A federal law that Nelson helped author keeps rigs a minimum of 125 mi off the state’s Gulf Coast. Unable to make headway in Congress on moving oil rigs closer, the industry turned to the Florida Legislature, where it found a more understanding ear—until the April explosion of the Deepwater Horizon drilling rig. Oil companies thought that if they could get Florida to eliminate the ban on drilling in state waters, it would make it harder for Nelson to keep the federal line out in the deep water of the GOM.

Obviously, due to the Gulf oil spill, the state option is now a non-starter, and Republican Gov. Charles Crist—currently running for the US Senate as an Independent—has called for a state constitutional amendment banning offshore oil and gas drilling. Nelson is not up for reelection this year, and Crist’s election to the Senate would not bode well for the industry.

CALIFORNIA SLEEPER

Another issue of key interest to the oil and gas industry on Nov. 2 is the fate of the California ballot initiative Proposition 23, the California Jobs Initiative, which would roll back implementation of AB 32, the state’s Global Warming Solutions Act of 2006. That law mandates phased-in, increasingly severe GHG restrictions and statewide goals for renewable energy. The November ballot initiative would delay implementation of AB 32 until the state jobless rate, which is currently about 12%, declines to at least 5.5% for a year. Republican gubernatorial candidate Meg Whitman supports the initiative, whereas the Democratic candidate for governor, Attorney General and former Gov. Jerry Brown, opposes it.

This ballot initiative is significant to the oil industry for at least two reasons. First, it is strongly supported and funded by the oil industry; thus far, nearly 90% of the pro-initiative funding (over $2 million) has come from the industry. More importantly, for better or worse, what happens in the US often happens in California first. For decades, the state has been the trendsetter for US economic, social, energy and environmental policies. If the ballot initiative succeeds, it could initiate a domino effect across many states that would be highly favorable to the oil and gas industry and discourage further environmental restrictions. Thus, a relatively obscure state ballot initiative could on Nov. 2 have as great effect as—or greater than—the midterm national elections.