Issue Date: February 26, 2007
Industry Adapts To New Congress
WITH DEMOCRATS back in complete control of Congress after 12 years of near-domination by the Republican Party, business groups and their lobbyists are facing a less than hospitable political climate on Capitol Hill.
That became apparent almost instantly after the November midterm elections when incoming House Speaker Nancy Pelosi (D-Calif.) promised to roll back billions of dollars in oil industry tax breaks as part of the Democratic majority's legislative agenda for the first 100 hours of the 110th Congress.
But after initially taking aim at a long list of tax breaks and other subsidies worth $32 billion over five years, the House passed a more tempered measure on Jan. 19, trimming about $6 billion primarily by making oil and gas companies ineligible for a domestic manufacturing tax credit and changing current rules for depreciating costs incurred in energy exploration. The legislation was scaled back after a number of moderate Democrats, including Texas Reps. Gene Green and Chet Edwards, intervened on behalf of the energy sector.
"There are plenty of Democrats who know and understand us," says Charles T. Drevna, executive vice president of the National Petrochemical & Refiners Association (NPRA), who was still "extremely disappointed" by the passage of the House bill. "The repeal of these fiscally sound tax provisions only serves to discourage much-needed energy infrastructure investment, which allows us to increase refining capacity and domestic production," he remarks.
Although big oil remains a top target for the new Congress, Drevna insists that refiners will not shift from pursuing goals such as expanding access to offshore energy to merely fighting off damaging legislative proposals. "As with any shift in power on the Hill, we must adapt while maintaining our long-standing policy positions," Drevna says. "I think we all understand that energy and the petrochemicals that are derived from that energy are the lifeblood of the American economy."
Business lobbyists emphasize that although their tactics and, in some respects, their expectations may have changed, their goals have not. "Our agenda doesn't change just because of the election," maintains R. Bruce Josten, executive vice president for government affairs at the U.S. Chamber of Commerce, the nation's largest business organization. "Our policy positions for the refining and petrochemical industries are not based upon who holds the gavel on Capitol Hill," adds Drevna. "Our message remains constant no matter which way the prevailing political winds are blowing."
Industry groups may have been more likely to achieve legislative victories under Republican majorities, but business lobbyists nevertheless see opportunities for action on at least parts of their agendas. Pelosi is leading a fractious House, with Democrats holding a 233-202 majority. Democrats also maintain a tenuous 51-49 hold on the Senate, with Sen. Tim Johnson (D-S.D.) slowly recovering in a Washington, D.C., hospital after suffering a brain hemorrhage. The fragile Senate margin ensures little Democratic-sponsored legislation can pass without support from at least some Republicans.
"The American people have made it clear they are tired of bickering and want action," says National Association of Manufacturers (NAM) President John Engler. "The only way to get things done in this environment is to put partisanship aside in favor of consensus solutions to our nation's problems." Drevna says Democratic leaders need to move beyond campaign-style tactics and rhetoric. "The election is over and the political sound bite should be put away," he says. "We need to govern by sound policy."
Thomas J. Gibson, senior vice president of advocacy at the American Chemistry Council (ACC), emphasizes that the Democrats' slim one-vote majority in the Senate, coupled with parliamentary procedures that require 60 votes to move major legislation, necessitates a spirit of bipartisanship and cooperation.
"No matter who is running the Senate, whether it's Democrats or Republicans, they have to decide whether or not they are going to reach across the aisle and put together a coalition of 60 votes to do anything substantial," Gibson says. He notes that offshore-drilling legislation approved by Congress in December would not have passed without significant support from Democrats.
That measure, the Gulf of Mexico Energy Security Act (S. 3711), will open up about 8 million acres in the energy-rich eastern Gulf to oil and gas drilling, and U.S. industrial consumers of natural gas hope it will boost supplies and keep prices in check.
But industry groups view the legislation as only a modest first step in their bid to lift a 25-year-old moratorium that bars oil and natural gas production in 85% of the U.S.'s territorial waters. Chemical manufacturers have been hit especially hard by the run-up in natural gas prices over the past six years because they use gas both to fuel their plants and as a key feedstock in production processes.
"It is abundantly clear we need a comprehensive national policy on energy," Engler says. "Sky-high energy costs are a major impediment to our ability to compete in the global marketplace. We need to increase access to domestic energy sources, especially natural gas, even as we accelerate research and development of alternative fuels and nuclear power."
Promising as that sentiment might sound to energy companies, the industry also must confront views contrary to their interests. For example, the industry lost a major ally in the fight to expand access to offshore energy reserves when former House Resources Committee Chairman Richard W. Pombo (R-Calif.) lost his seat in November to Democrat Jerry McNerney, an opponent of offshore drilling. Meanwhile, Sen. Jeff Bingaman (D-N.M.), the new chairman of the Senate Energy & Natural Resources Committee, says Congress is unlikely to ease or repeal existing oil and gas drilling bans. "Our time and efforts are better spent focusing on areas that are available in the Gulf of Mexico and focusing on alternatives to outer continental shelf production," Bingaman observed at a Jan. 25 committee hearing.
Nevertheless, industry lobbyists say they will continue to urge Congress to allow more domestic natural gas production. "It's a challenge, no doubt about it," Gibson says. "The Democratic chairs of the committees have indicated that looking again at the supply issue is not at the top of their agenda." But he adds that "the Gulf of Mexico Energy Security Act did establish some important precedents on revenue sharing." And that could provide the industry with some political leverage, Gibson and friends of industry say.
A provision attached to the legislation by Sen. Mary L. Landrieu (D-La.) diverts 37.5% of federal royalties from future drilling to four states bordering the Gulf of Mexico: Louisiana, Texas, Alabama, and Mississippi. The royalties ultimately could be worth $650 million a year for Louisiana, the biggest beneficiary.
But opponents of the legislation fear the royalty payments will entice coastal states that have long opposed offshore drilling, such as California, Virginia, Florida, and North and South Carolina, into supporting exploration and production off their shorelines in return for new revenue. That's exactly what industry officials hope happens. "Certainly, legislators at the state level are going to take note in some places, and that will create some interest for revenue streams similar to what the Gulf states are getting," Gibson says.
AS LAWMAKERS search for ways to bolster U.S. energy security, "the Democrats initial focus undoubtedly will be on the demand side, on energy conservation," notes the ACC official. "But if you really start taking a comprehensive look, it's going to have to include the supply side as well." Gibson says enormous amounts of natural gas will be needed—well beyond the constrained supply available today—to generate lower-carbon electricity, grow renewable energy crops, act as a feedstock for energy-efficient materials, and move the nation toward energy independence. But, he says, domestic natural gas supplies remain "woefully inadequate" to meet the growing demand. "You have to deal with the supply issues if you want to keep a competitive chemical industry and other industries in the U.S.," Gibson remarks.
ACC and other industry groups plan to strongly push legislation being drafted by Landrieu and Rep. John E. Peterson (R-Pa.) that would open more offshore areas to energy development. "It's a sad state of affairs when so much of our domestic natural gas and other valuable resources are locked up because of ill-advised and politically motivated moratoriums," Drevna says. Environmentally conscious nations such as the U.K., Canada, and Norway do not restrict offshore energy development, he notes.
Business lobbyists also are concerned that Democrats have vowed to use their majority power to pass legislation that would limit emissions of carbon dioxide and other greenhouse gases by all industry sectors. "There is scientific evidence that we are emitting more greenhouse gases and things are getting warmer," says U.S. Chamber of Commerce President Thomas J. Donohue. "We believe in management of this issue, and we are not going to spend time in a scientific debate." But he says any bill to curb U.S. emissions of carbon dioxide would have to impose controls "without losing jobs or driving companies away."
The Chamber of Commerce is evaluating market-based approaches to lowering greenhouse gas emissions, such as expanding the use of nuclear power and emerging clean-coal technologies, Josten says. But he asserts that a mandatory cap-and-trade regime, by itself, would "kill the economy" because there are not enough cost-competitive alternative energy solutions currently available. Under the cap-and-trade approach embodied in a half-dozen legislative proposals, companies unable to meet their emission targets could avoid penalties by purchasing "allowances" from companies that exceed their goals.
Congress should proceed with "extreme caution" as global climate change is debated, Drevna says. "We need to have a reality check as to the art of the possible," he warns. "Putting aside whether you buy into the science of global climate change, studies must be done to determine what impact a cap-and-trade system would have on this nation's economy. If you look out to the conclusion, if some of the policies offered are implemented, a ripple effect will be felt around the world, with a recession not far behind."
Climate change is ultimately an energy policy issue, Gibson explains, because mandatory carbon restraints would cause the electric power industry to switch from coal to natural gas. "The utilities have a legal requirement to provide service, so they essentially could outbid us for natural gas, which would drive up prices further and cause a severe problem." He says a diverse fuel mix will be needed so utilities are not forced to rely solely on natural gas to meet emissions targets that are established.
"No Democrat or Republican has a goal of exporting American jobs overseas," Gibson says. "But you have to look at the likely effects as you create a cap system to make sure you still have a competitive manufacturing sector in the U.S. And to have a competitive chemical sector, you're going to have to make sure you have a rational policy on natural gas."
The ACC official points out that action by the U.S. to limit its greenhouse gas emissions will not be followed by similar action in developing countries such as China, which is expected to overtake the U.S. as the top emitter of greenhouse gases by 2009. "This is a global problem, and the rest of the world needs to be part of the solution," Gibson says. "The atmosphere doesn't care if the tons of greenhouse gases are emitted here or somewhere else."
Drevna says NPRA also intends to work aggressively "to stop this euphoric, ill-advised push for renewable fuel mandates." In his recent State of the Union address, President George W. Bush called for a new renewable fuels standard requiring the use of 35 billion gal of ethanol and other alternative fuels by 2017. The President's stated goal is to reduce gasoline usage across the U.S. by 20% in the next 10 years. Senate Agriculture Committee Chairman Tom Harkin (D-Iowa) has proposed legislation that would require refiners to blend 60 billion gal of ethanol and biodiesel into the U.S. vehicle fuel supply by 2030.
"Unfortunately, biofuels are not a 'silver bullet' for America's supply problems, nor can they deliver on the much-touted promise of energy independence," Drevna says. "Energy policy based on mandates is no recipe for success." Congress and the White House need to realize that oil and natural gas will continue to serve as foundation fuels for the U.S. economy for the foreseeable future, he says.
Alternative fuels will continue to be a growing part of the nation's energy supply as their economic viability improves and technological progress continues. "But this is a long-term factor," Drevna argues. "The near-term reality is that mandating a massive increase in ethanol usage far beyond the current capacity of 5.4 billion gal is likely to impact corn prices, leading to unacceptable food price increases."
Although energy issues remain a paramount concern for chemical manufacturers, plant security follows close behind. Industry officials expect some Democrats will renew their efforts to pass legislation that would require chemical plants to use less volatile substances or other "inherently safer technology" (IST). Lawmakers passed an interim plant site security measure in September, but the law expires in three years and applies only to "high risk" facilities that make and store dangerous chemicals. Sens. Frank Lautenberg (D-N.J.) and Barack Obama (D-Ill.) are working with Rep. Frank Pallone Jr. (D-N.J.) to craft new chemical security legislation that would mandate the use of IST to the maximum extent possible. In addition, the bill would ensure that federal regulations do not preempt state authority to enact more stringent requirements. Manufacturers adamantly oppose such changes.
"This is what I call the back-door approach to environmental regulation," says Drevna, noting that toxics-use reduction has been on environmental activists' wish list for decades. "It's just a way to get increased environmental rules passed on industry that are not achievable through regular order," he contends. "IST has nothing to do with protecting your plant and, more important, the people in the surrounding community from a terrorist attack. This is a way to tell industry what processes they should or should not use in making products."
With the Department of Homeland Security (DHS) scheduled to publish final rules by April to implement the new security measure, Gibson says Congress is unlikely to rush into another round of legislation. "We're glad to see the debate in Congress finally settled," he remarks. "Our focus in 2007 will be to work with DHS as they move forward to implement their new chemical facility standards. Although there is still work to be done by the entire industry, we're confident the new rule will build on the significant security enhancements already undertaken by our members to protect the chemical industry and the nation."
Although the Senate Homeland Security & Governmental Affairs Committee has primary jurisdiction over domestic security matters, Lautenberg heads a newly created panel on chemical security under the Environment & Public Works Committee, which will enable him to hold hearings and highlight the issue. "Lautenberg is a pretty effective senator at bringing attention to an issue when he has the gavel," Gibson says. "Even when he doesn't, he's a pretty effective guy. So I'd expect hearings this year" on plant site security.
Drevna says lawmakers should give the regulatory process a chance to play out before considering new requirements. "Business plans are developed for the long term. We don't have the luxury of making or changing a business plan every election cycle," he notes. "Some stability and some reasoning in these policies would be beneficial so we don't have to keep changing things every two years."
LEVELING the international playing field also remains a major goal for U.S. manufacturers. "The world economy is more interrelated than ever before," Engler says. "Our primary trade objectives are to eliminate barriers to U.S. exports and to persuade our trading partners to play by the rules. At the same time, we must guard against protectionist pressures here at home. Every new free-trade agreement brings us a boost in exports."
The chemical industry, which had $119 billion in export sales in 2005, is hoping for a successful conclusion to the five-year-old Doha Round of global trade talks being conducted by the World Trade Organization's 149 member countries. ACC and several of its global counterparts have called for an agreement to eliminate chemical tariffs among major chemical-producing nations as an outcome of the negotiations.
The talks stalled last year, largely because of differences over U.S. farm subsidies and high tariffs that the European Union and other countries use to keep foreign competitors out of their markets. "The U.S. chemical industry continues to believe that broad, comprehensive, multilateral trade liberalization provides the single best opportunity for global economic growth," Gibson says.
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