Democrats, energy don't mix
CALGARY -- The outcome of last week's U.S. midterm elections has the potential to have a significant impact on the energy world.
With their newfound control over Congress (the House and the Senate), it's possible the Democrats will reopen the $2.8-billion (U.S.) energy bill passed last year.
Of particular interest are the tax breaks and incentives to oil and gas companies for everything from exploration and development to refinery expansion.
Also up for review will be offshore leases granted in 1998 and 1999, when oil prices were at record lows -- they omitted the oil price trigger point where royalty payments would kick in.
There's also been misguided discussion about imposing some sort of windfall tax -- something that has no place in a free-market economy.
The knee-jerk reaction at a time when the oil companies are racking up billions of dollars in profits is righteous indignation along the lines of: Why should oil companies get a break at all?
But it's not so simple.
Companies -- both foreign and domestic -- rely on the fiscal terms of the jurisdictions in which they operate when they formulate business plans.
And this applies as much to the oil business as it does to any other enterprise.
The U.S. basin, just like Canada's, is mature and this makes it harder to find new deposits for oil and natural gas. An older basin also means that when those reserves are uncovered, they are increasingly found in tricky geological formations or in the deep waters offshore in the Gulf of Mexico. Either way, they are costly to extract.
Recall that the price tag for the Jack well in the deep waters of the Gulf earlier this year was about $100-million for drilling and another $100-million for testing.
And with the huge demands on service companies these days around the world, the price tag for oil and natural gas projects keeps going up. When costs are factored in, along with the types of plays being pursued, it's tough to accuse the oil industry (trusts excepted) of not reinvesting enough. This is another reason why certainty in the operating environment is critical. Given the opportunities presented in other parts of the world to find bigger resource pools, any change in the rules could cause companies to pack up and go where the prize is bigger.
If the U.S. legislation is altered and companies opt to invest elsewhere, the goal of attaining a greater measure of energy self-sufficiency slips further away.
U.S. Treasury Secretary Henry Paulson said as much in his inaugural speech in August.
The former Wall Street banker emphasized the long-term structural issues facing the U.S. when it comes to meeting its energy needs. He said the U.S. must address the fact that it consumes more energy than it produces, and a big percentage of what makes up the shortfall originates in politically unstable parts of the world.
The Democrats have things on their agenda they say they want to change, but those proposals don't make sense in today's context.
One of these is the notion of rolling back the subsidies on refinery expansions.
Americans are already struggling with the $3-a-gallon they pay for gasoline: While some of this has to do with the price of oil, much also depends on a lack of refining capacity. Gaining greater ability to refine the heavier grades of crude is vital because existing refineries have limited capacity for anything other than conventional light oil.
If they want to ensure a healthier economy -- which has a lot to do with a happy consumer -- the Democrats shouldn't be monkeying with a mechanism that would ease pressure on refineries and not see prices at the pump skyrocket with every hiccup. Leaving the refinery incentives alone is the only option.
The one positive thing is that the Democrats are prepared to pour money back into research and development of alternative fuels.
According to a recently released Rand Corp. study, renewable energy accounts for 6 per cent of U.S. energy needs, half of which comes from hydroelectric power. This means not much is going into the gas tank, and this is doing little to reduce U.S. dependency on foreign sources of oil.
Except for slapping on a big tax at the gasoline pump, the only way the U.S. is going to see a drop in transportation-related energy consumption is to focus on technological changes that would help achieve this end.
It's likely the Democrats -- in spite of their rhetoric -- will end up leaving the energy sector alone, save for a bit of tinkering around the edges of alternative fuel R&D.
The fact is, as one Washington insider put it, they are not going to waste political capital on the oil business in the next two years leading up to the 2008 presidential election, when shining the spotlight on the war in Iraq would go much further in terms of building political capital.
