Energy Policy Set

The first major overhaul of U.S. energy policy in 13 years is a much-needed first step toward enhancing the nation's energy security, but the legislation does not go nearly far enough to boost domestic supplies of natural gas, industry leaders say.

The massive 1,724-page bill, signed into law on Aug. 8 by President George W. Bush, includes an $11.5 billion tax package to encourage new oil and natural gas drilling in currently leased areas, spur the development of clean-coal technologies, and promote renewable energy sources.

"This marks a very important milestone on the journey toward an energy policy that will keep manufacturing jobs in this country and provide America's chemical makers a fighting chance to compete in global markets," American Chemistry Council (ACC) President Jack N. Gerard says. "It is forward-looking legislation that will change the way the country produces and consumes energy."

Putting a lid on rapidly rising energy costs has been a top legislative priority for the chemical industry, the nation's largest industrial consumer of natural gas. Since gas prices began to surge in late 2000, the industry's energy tab has jumped by $27 billion and more than 100,000 jobs have disappeared.

Gerard says the broad legislation is especially strong in the areas of energy efficiency, fuel diversity, and infrastructure upgrades. But he stresses that the measure falls short in one key area--increasing access to offshore domestic natural gas reserves. During Senate debate on the bill in June, Sens. John W. Warner (R-Va.) and Lamar Alexander (R-Tenn.) proposed giving coastal states the right to petition the federal government to permit drilling off their shores in areas of the outer continental shelf (OCS) that are now off-limits. However, the amendment was withdrawn under a threat of a filibuster by drilling opponents.

Fearing damage to the tourism-based economies of Florida and other coastal states, Congress in 1981 banned oil and gas development in almost all of the nation's waters outside the western Gulf of Mexico. But industry officials note that current policies restricting development of energy resources in 80% of the 1.67 billion-acre OCS were adopted at a time when the U.S. had the lowest natural gas prices in the industrialized world. Today, they are the highest.

"Without a significant increase in domestic natural gas production, including OCS, prices will remain the highest in the world, and the nation's gas-dependent industries will continue to move offshore in order to meet their customers' needs," Dow Chemical President Andrew N. Liveris warns.

States should be allowed to opt out of the federal moratorium blocking natural gas production off their shores, says Geoffrey Hurwitz, vice president of government relations for Rohm and Haas. "Tapping into new natural gas supplies from OCS, and enabling states to gain the ability to pursue offshore access and benefit from it, is one of the safest and most productive steps America can take toward reducing the growing gap between supply and demand," he remarks.

ALTHOUGH LAWMAKERS refused to open more of OCS to drilling, the bill directs the Interior Department to conduct a comprehensive inventory of all offshore oil and gas resources. Opponents view the assessment as a prelude to eventual production. "It's the proverbial camel's nose under the tent," Sen. Bill Nelson (D-Fla.) says. "It's the first step toward drilling off the coast of Florida."

Inventory proponents maintain it is in the national interest to have an accurate and up-to-date estimate of how much offshore oil and gas might be available in the future. "The American people have a right to know how rich they are and how much more energy independent they could be," Sen. Mary L. Landrieu (D-La.) asserts.

Gerard says "some progress" has been made, but much more needs to be done to improve the supply side of the energy equation. "We will urge Congress and the Administration to continue efforts to increase natural gas supply and do what's necessary to access our plentiful offshore domestic gas reserves," he remarks.

Industry officials say diversification of the nation's fuel supply is one way to help bring U.S. natural gas prices down to globally competitive levels. The bill's tax package provides $2.9 billion in credits for investments in clean-coal projects, including incentives for manufacturers to switch from natural-gas-fired operations to synthetic gas made from the nation's vast resources of coal, biomass, and waste material. According to an ACC analysis, synthetic gas produced by new gasification technologies has the potential to displace the natural gas equivalent of 1.5 trillion cu ft, or 7% of total natural gas demand, in the power, industrial, and agricultural sectors.

Chemical manufacturers will also benefit from provisions in the bill designed to lower gas prices by increasing supplies of liquefied natural gas (LNG). Supporters say the legislation breaks the bureaucratic logjam that has stymied work on about 40 LNG import terminals nationwide by giving the Federal Energy Regulatory Commission "exclusive authority" to permit onshore facilities. Concerned that the terminals could be attractive targets for terrorists, state and local governments have held up many proposed projects.

"Both the petrochemical and refining industries depend upon a secure supply of natural gas," notes Robert G. Slaughter, president of the National Petrochemical & Refiners Association. "We have consistently advocated an energy policy that would increase energy supplies and encourage improvements in America's energy infrastructure. The legislation makes some progress on these issues."

Slaughter says the industry is disappointed that the bill does not include a House-approved plan that would have shielded producers of the gasoline additive methyl tert-butyl ether (MTBE) from defective-product lawsuits. Facing strong opposition by the Senate, proponents agreed to drop the liability waiver and an alternative proposal for an $11.4 billion trust fund to help clean up contaminated sites. At least 19 states have banned MTBE, and the industry has paid out about $485 million to settle eight lawsuits since 1998. More than 150 suits are currently pending.

"This means that industry resources--better employed to produce fuel--will have to be used instead to contest legal actions that seek to penalize our members for obeying the requirements of the Clean Air Act," Slaughter asserts. Refiners argue that they should not be held liable for groundwater contamination caused by MTBE because Congress required use of the additive to oxygenate reformulated gasoline under the 1990 Clean Air Act amendments.

But Rep. Lois Capps (D-Calif.), who worked to defeat the MTBE "safe-harbor" protections, says the liability waiver would have pushed tens of billions of dollars in cleanup costs onto taxpayers. "Now it is time for the oil industry to sit down and work out cleanup plans with the towns, cities, and counties that have MTBE in their groundwater," she says. "This problem has dragged on long enough, and the oil companies should focus on cleaning up the mess they caused rather than fighting about it in courts and the Congress."