Midterm elections have favorable implications for oil and gas

The U.S. midterm elections were held on Nov. 4, with all 435 seats in the House of Representatives, and 36 of the 100 seats in the Senate, contested, along with 38 state and territorial governorships and 46 state legislatures. This was the most expensive midterm election in history, as spending totaled $3.7 billion. The elections saw sweeping gains by the Republicans in the Senate, House, and numerous gubernatorial, state and local races. Republicans gained control of the Senate for the first time since January 2007, increasing their majority in the House, while gaining a net two seats in governors’ races.

Fig. 1. The overall Republican majority in Congress is the largest it has been since 1928.

Overall, the elections resulted in the largest Republican majority at the Capitol (Fig. 1) in nearly a century, with 54 seats (54%) in the Senate, 247 seats (57%) in the House, 31 governorships (62%), and 68 houses in the state legislatures. Republicans achieved their largest majority in the House since 1928, the largest majority in Congress, overall, since 1928, and the largest majority of state legislatures since 1928.

Elections have consequences. The oil and gas industry was a clear winner, and energy issues played a key role—especially in those states that gave Republicans control of the Senate. An election night telephone survey of voters found 90% agreed that increased U.S. oil and gas production creates jobs, and 86% stated that it stimulated the general economy. For 2016, 66% of the respondents said they were more likely to back a candidate who supported more domestic oil and gas development. It is a message that newly elected senators, all of whom stressed their support for expanding energy development, will not forget. 

The sweeping Republican victory will bring legislative priorities of the oil and gas industry to the House and Senate, such as approving the Keystone XL pipeline; revising air quality regulations for oil refineries; expanding drilling in federal lands and waters; and revising EPA regulations. However, Republicans still lack enough votes to overcome a Senate filibuster on a party-line basis and the two-thirds majority to override a Presidential veto, limiting the scope of possible energy policy changes.

OBAMA DOUBLES DOWN

In a rational world, one would expect President Obama to heed the will of the electorate, and revise his energy and environmental policies. However, the administration is doing just the opposite, and in the coming months plans to impose a series of additional costly regulations on the oil and gas industry—a response aimed at enhancing Obama’s “environmental legacy.” The impending rules include the first-ever federal standards regulating methane emissions, stricter controls on hydraulic fracturing; tighter controls on Arctic drilling; new rules governing oil shipped by trains; and tougher standards for offshore drilling.

Fig. 2. A large number of the regulations under discussion at the White House may lead to higher costs and lower incentives for the drilling industry.

Thus, “The large number of imminent regulations may be a sign that the White House (Fig. 2) is greening up its oil-and-gas policy.” If unchallenged, the repercussions for the industry will be increased uncertainty, constrained options, higher costs and fewer incentives to drill on public lands. In its first six years, the administration issued relatively few regulations directly affecting the oil and gas industry, and instead issued numerous rules targeting the coal and electric utility sectors. 

One of the most anticipated actions for the industry is EPA regulation of methane emissions from gas drilling. The administration’s goal is to reduce methane emissions from oil and gas production by up to 45% by 2025, from 2012 levels. EPA will issue the proposed regulations this summer, and issue final regulations by 2016. The major potential regulations of concern to the industry include:

• Hydraulic fracturing, EPA—The agency may expand its 2012 rule to reduce traditional pollutants from fraced natural gas wells.
• Hydraulic fracturing, Interior—The department plans to require chemical disclosures and tougher standards for fracing on public lands.
• Methane emissions, EPA—The agency will issue the first national standard for methane emissions as an air pollutant.
• Methane emissions, BLM—The bureau is drafting a rule to reduce the methane vented or flared from wells.
• Arctic drilling—Interior is drafting regulations for offshore Arctic drilling.
• Royalties—Interior may change the royalty process for onshore oil and gas leases to “better ensure a fair return to the public.”
• Blowouts—Interior is promulgating tougher standards for blowout preventers.
• Rail transport—The Department of Transportation is strengthening its safety regulations for trains carrying oil and ethanol.
• Renewable Fuel Standard (RFS)—EPA is requiring increased amounts of ethanol to be blended into gasoline each year.

The Obama administration will not only be promulgating new regulations, it will also seek to implement ones that it has been drafting over the last six years. The administration was committed to the upcoming deadlines many months ago, after postponing a number of the actions until after the 2014 elections:

• Jan. 1 was the starting date for enforcing a key requirement in a new air pollution regulation for fraced oil and gas wells, the technology at the heart of the U.S. energy renaissance.
• Jan. 1 was also the starting date for one of EPA’s hardest-fought air regulations, a rule that limits some types of air pollution from power plants that cross state lines. The Supreme Court upheld that rule in April.
• In April, power plants must begin complying with EPA mercury and air toxic regulations that have already caused utilities to begin closing many of the nation’s coal plants, although most power plants will get one-year extensions to clean up.
• By summer, EPA will complete the cornerstone of the president’s climate change agenda: A final regulation limiting CO₂ from the nation’s existing coal- and gas-fired power plants. It is unclear when EPA will finish a companion climate rule for future power plants.
• This fall, states will face tighter health-based air quality standards for ozone, a regulation that industry has denounced as possibly the most expensive federal regulation ever—even EPA admits that the regulations would cost $100 billion/year.
• Proposed water regulations are so broadly written that they would cover nearly all “waters of the U.S.” The regulations would control land use activities on private property and are of obvious concern to the oil and gas industry.
• Several agencies are drafting new regulations governing Christmas lights, automobile and refrigerator coolants, and endangered species guidelines that would block drilling and pipeline projects.
• EPA is also promoting major “sustainable development,” “environmental justice,” and “clean power” initiatives with deliberately vague and malleable terms that would further expand its mission far beyond anything envisioned in EPA’s authorizing legislation.

White House counselor John Podesta stated that the administration’s plans are “part of a continuing effort to move to cleaner sources of power.” That is, sources of power other than oil and gas. The administration will thus spend 2015 taking on the oil and gas industry, and attempting to make the environment the bedrock of Obama’s legacy. In December, Obama’s negotiators will be in Paris to reach a global agreement on climate change. This has major implications for oil and gas. Interim talks in Lima, Peru, ended in December 2014 with major issues still unresolved, including developing nations’ demands for $100 billion/year in aid.

The bottom line is that 2015 will be one of the most contentious years in energy, environmental and climate policy in decades, with a President who is free to act without fear of more elections to face, no further concern over protecting the Senate’s moderate Democrats, and little desire to compromise with the Republican Congress. However, Republicans, with both houses of Congress under their control, will use their spending and investigative powers to oppose the administration’s initiatives. 

With so much in the pipeline, Republicans will have to choose their battles carefully if they want to make headway while proving that they can govern—and they do not want to have another government shutdown. Nevertheless, the battle between a strengthened Republican Congress and a President with just two years to cement his environmental legacy will be one of 2015’s biggest policy dramas, and the stakes for the oil and gas industry are immense.

Fig. 3. New Senate Majority Leader Mitch McConnell (left) faces a strong challenge in guiding industry-friendly legislation that can override the President’s veto powers.

Senate turnover. The most significant impact of the election for the industry will be the agenda set by new Senate Majority Leader Mitch McConnell (Rep.-Ky.), Sen. Lisa Murkowski (Rep.-Alaska.), chair of the Senate Energy and Natural Resources (ENR) Committee, and Sen. James Inhofe (Rep.-Okla.), chair of the Senate Environment and Public Works (EPW) Committee. McConnell (Fig. 3) will manage Senate budget proceedings in an attempt to revise numerous energy and environmental regulations issued by Obama over the past six years, and will shepherd votes friendly to fossil fuels, such as approval of Keystone XL and U.S. LNG exports. 

Senator Murkowski (Fig. 4) favors increasing U.S. energy production and exports, and she doubts humans’ responsibility for climate change. She has made no secret of her energy priorities, and is Congress’ leading voice advocating that the U.S. end its restrictions on crude oil exports. However, Murkowski, who has a long history of legislating on energy policy, is likely to take a measured approach, and has stated that she will not advance legislation if she lacks majority support of the committee.

Murkowski may attempt to move the Fixing America’s Inequities with Revenues Act (S. 630), which she introduced with the previous Committee Chair Sen. Mary Landrieu (Dem.-La.) in March 2014. The bill, which is not supported by the Obama Administration, would give coastal states as much as 37.5% of revenues for offshore energy projects. Murkowski’s ascension to chair of ENR may not initially mark a radical shift of the committee’s focus. It had been chaired by Sen. Landrieu, who was a strong supporter of the oil and gas industry. Landrieu was not re-elected.

While the change in the Senate ENR Committee may be relatively modest, the same cannot be said of changes to the Senate EPW Committee, where Sen. Inhofe replaced Sen. Barbara Boxer (Dem.-Calif.) as Committee Chair. EPW has authority over EPA and is one of Washington’s most influential environmental committees, and a sea change in committee focus will occur. Boxer is a strong liberal, and used her position as chair to advance tougher environmental and climate regulations, and for measures to limit CO₂ emissions and energy production.

Fig. 4. Senator Lisa Murkowski, the new chair of the Senate Energy and Natural Resources Committee, has a long history as an advocate of the oil and gas industry.

By contrast, Inhofe may be the environmentalists’ worst nightmare: He represents oil- and gas-rich Oklahoma, and chaired EPW 2003-2007. He used his previous chairmanship position to battle EPA, which he contends is harming energy producers in his home state. Inhofe is an established enemy of Obama’s EPA, and is extremely skeptical of human-caused climate change, having written a book three years ago titled The Greatest Hoax: How the Global Warming Conspiracy Threatens Your Future. He has compared EPA to the Gestapo and worked hard to roll back water and air pollution rules, ozone limits and funding for environmental cleanup. He already has stated that he will go after regulators on numerous issues, including greenhouse gases (GHGs), methane leaks, and new power plant rules.

Inhofe also supports legislation to repeal or reform biofuel mandates in the Renewable Fuels Standard. His chairmanship will ensure that federal environmental and climate policies face regular, intense, and high-profile scrutiny during a period when administration officials will be working with the UN on plans for a global warming agreement. In his first speech after re-election, Inhofe stated that he would end “Obama’s war on fossil fuels,” promising that with a “Republican majority in the Senate, we will change that.” 

Other changes in Senate committees of importance to the oil and gas industry include:

• Senator Mike Enzi (Rep.-Wyo.) is the new chair of the powerful Senate Budget Committee, and he will have the opportunity to rewrite the budget and reduce funding for agencies attempting to implement Obama’s energy and environmental agenda. He dismisses the threat of climate change, calling the debate over the issue a “waste of money.” He may threaten to shut down the government in an attempt to defund EPA over its energy, environmental and climate rules.
• Senator Ron Johnson (Rep.-Wis.) is the new chair of the Homeland Security and Governmental Reform Committee, which is the Senate’s major investigative and oversight body. Johnson has accused EPA of conducting an “environmental jihad” against the energy industries and disagrees with the anthropogenic global warming (AGW) hypothesis, contending that climate science is “far from settled.”
• Senator Ted Cruz (Rep.-Texas) is the new chair of the Subcommittee on Science and Space, which oversees the National Science Foundation, the White House Office of Science and Technology Policy, and issues relating to federally funded scientific research. Cruz is one of the most conservative senators, opposes virtually all of the administration’s energy, environmental and regulatory policies, and does not believe in the AGW theory. With respect to AGW, Cruz questions the science, and states that the “data are not supporting what the advocates are arguing.”

REPUBLICAN STRATEGIES

A Republican Congress will not guarantee the kind of change needed to reverse the Obama administration’s misguided energy and environmental policies. Presidential vetoes will pose problems, although strong leadership may be able to construct bipartisan veto-proof majorities. Nevertheless, Republicans interpret the midterm elections as a mandate to roll back regulations from EPA and other agencies, citing regulatory costs that hinder energy development and cripple the economy, and they are highly skeptical about climate change initiatives. 

Senate Majority Leader McConnell has identified as his top priority “to try to do whatever I can to get the EPA reined in.” He said he feels a “deep responsibility” to stop the EPA from regulating CO₂ emissions from coal-fired power plants—but those are far from the only rules Republicans will target. They are planning an all-out assault on Obama’s energy and environmental agenda, including rules on mercury and other air toxics from power plants, limits on ground-level ozone, mountaintop mining restrictions, and EPA’s attempt to redefine its jurisdiction over streams and ponds.

The Interior Department is also in the crosshairs, with impending regulations on fracing on public land and protecting streams from mining waste. Republicans contend that Obama has tried to revive cap-and-trade rules for carbon emissions, despite the 2009 failure of legislation.

The House already has passed a slate of bills to roll back many EPA regulations, and the oil and gas industry hopes for a bicameral push in Congress against onerous energy and environmental regulations. Republicans do not take any of Obama’s major environmental rules off the table, saying they all could get scrutiny, and Republican lawmakers have a series of tools available to them to fight Obama with different degrees of severity: “It’ll be a combined effort of using the appropriations process and the legislative process, and the oversight process, to put pressure on the administration prior to finalization,” said McConnell.

McConnell has endorsed appropriations riders as the best tool to stop regulations. But if legislation with those policy provisions fails to pass, it could lead to a government shutdown, violating McConnell’s promises to avoid shutdowns as majority leader.

Climate change regulations will be the first priority, and Republicans will oppose Obama’s GHG rules. They will try to roll back the 2009 “endangerment finding,” the ruling from the EPA that GHGs pose a threat to public health and welfare, and can thus be regulated. They are also targeting the “social cost of carbon,” a metric used in the administration’s cost-benefit analysis method for reducing CO₂ emissions.

One policy that could become law quickly is legislation expediting federal reviews of natural gas exports. Senator McConnell has included this in the list of bills that he intends to bring expeditiously to the floor, and, depending on the scope of the bill, Obama may find it difficult to veto. The administration is on record as stating that it will work within the confines of a bill that sets a deadline for the government’s review. The Republican Congress bodes well for developing an accelerated process for approving LNG exports.

Another top target of Republicans is a suite of EPA rules that would reduce carbon emissions from the nation’s power plants, a cornerstone of Mr. Obama’s climate agenda. Republicans may well have the 60 votes to delay or significantly hamstring EPA’s authority over climate change—and the GOP-controlled House would surely follow suit, but the President is likely to veto any such measure. However, Republicans are unlikely to move quickly on legislation that significantly changes the nation’s decades-old ban on oil exports, an issue the oil industry is lobbying hard for. It is politically contentious, given the perception that it could raise gasoline prices.

Oversight committees will also be a major weapon to counter impending Obama energy and environmental executive actions. The Senate EPW committee will certainly be much more active under Inhofe than it was for the past few years under liberal Sen. Boxer—who has announced that she is retiring in 2016 (applause).

The House Oversight and Government Reform Committee will also be active under new Chairman Jason Chaffetz (Rep.-Utah), who is creating a Subcommittee on Energy and Interior that will focus on the administration’s regulatory efforts. That committee will be chaired by Cynthia Lummis (Rep.-Wyo.), whose state is a major energy producer. Lummis has shown strong interest in mineral rights issues, and will focus on EPA and Interior.

The House Energy and Commerce Committee held 189 hearings in the 113th Congress, and is planning more of the same in the new Congress. Energy and Power Subcommittee Chairman Ed Whitfield (Rep.-Ky.) shares McConnell’s focus on fossil fuel issues. The House Science Committee under Chairman Lamar Smith (Rep.-Texas) has been aggressive on EPA oversight, focusing on the data underlying air pollution regulations and the people that review it, and we can expect to learn more about the scandal of “secret science” and incestuous peer review at EPA.

KEYSTONE DEJA VU

The debate over the Keystone XL pipeline has now lasted nearly as long as it took the U.S. to put a man on the moon, and it is not over yet. The 1,700-mi pipeline would transport up to 830,000 bpd of Canadian oil sands product to Gulf Coast refineries, and environmentalists have made opposition to it a cause célèbre. This is ludicrous, since there are already more than 300,000 mi of pipelines in the U.S. and, in any event, in one way or the other, this Canadian oil will reach the U.S. market.

President Obama is now under increased pressure to decide the fate of Keystone after a Nebraska court in early January dismissed a challenge to it, and the House passed a bill approving it by a 266-153 vote. All sides of the Keystone debate agree that the decision now lies with Obama, since the Nebraska court ruling is the end of the challenge brought by state landowners. For the past year, the Obama administration has cited the court case over the pipeline’s route through Nebraska as the reason to deny approval, and administration officials have also used an ongoing State Department review to explain Obama’s threat to veto a congressional pipeline bill.

In comments since the November election, Obama indicated that he does not think the pipeline is economically beneficial to Americans, leading to a growing consensus that he will ultimately reject it. At a Dec. 19 news conference, Obama stated that “It’s very good for Canadian oil companies, and it’s good for the Canadian oil industry, but it’s not going to be a huge benefit to U.S. consumers. It’s not even going to be a nominal benefit to U.S. consumers.”

On the other hand, Senate Majority Leader McConnell has pledged to make construction of Keystone a priority, and Senate Republicans have enough votes to override a filibuster and send a bill to the White House, where Obama would have to either veto or sign it. Shortly after the Nebraska court decision, McConnell stated that “President Obama is out of excuses for deciding whether or not to allow thousands of Americans to get back to work.”

Of course, Obama has shown in the past that he is not hesitant to reject congressional action on Keystone, so he could veto any bill that reaches his desk. It is unlikely that Republicans could obtain the additional votes to reach the 67 needed to override a veto, but Republicans will likely attach the measure to a must-pass piece of legislation that the President would not want to veto, such as a spending bill. 

In summary, it will be a momentous year for the oil and gas industry in the U.S. There is ample reason to be hopeful—but not complacent. 

About the Authors

Dr. Roger Bezdek

Contributing Editor

Dr. Roger Bezdek is an internationally recognized energy analyst and president of MISI, in Washington, D.C. He has over 30 years’ experience in the energy, utility and environmental areas, serving in industry, academia and government. He has served as senior adviser in the U.S. Treasury Department, U.S. energy delegate to the EU and NATO, and as consultant to the White House, the U.N., government agencies, and numerous corporations and organizations. He has written eight books, has published over 300 articles in professional journals, and his work has been featured in the Wall Street Journal, the Washington Post, New York Times, Time, Business Week, Science, Nature, World Oil, and other print and digital media.