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New fracking regs: Another disconnect between the administration's words and actions

With the release last week of hydraulic fracturing rules for federal and tribal lands, the Obama administration has shown once again how White House rhetoric trumps reality when it comes to domestic energy policy.

On Friday, the Interior Department unveiled the new regulations, which will become effective in 90 days. They include language that imposes stricter rules on wastewater management and cement well casings, and a requirement that chemicals used in the process be posted on FracFocus.org.

The rules are so wrong, on so many levels, that it boggles the mind.

To begin with, states are already doing a good job at drilling oversight. There hasn’t been a single proven instance where fracking has tainted water. That sends a strong message that there’s no justification for the feds to step in and usurp what should be a state responsibility. What’s more, in states like North Dakota that already have disclosure rules, it could add a costly, time-consuming, unnecessary layer of regulation.

Speaking of government overreach, the rules are tougher than those that exist in most states. For example, they require that wastewater now has to be secured in covered tanks prior to permanent disposal rather than in pits. Ten states have similar requirements. So the federal government is now basically superseding rules in the other 40 that to date have been working pretty well.

Beyond that, compliance costs are expected to run about $11,400 per well. To the majors, that may not seem like much. But it will have an impact on smaller, independent companies that are already struggling in the current price environment. That’s ironic given that the White House has repeatedly voiced its support for small businesses. Apparently, that support doesn’t extend to small businesses in the energy industry.

The paperwork demands of the rules will probably increase the length of time required to process drilling applications, too. Right now, with the Saudi price war on U.S. shale companies slowing activity, that’s probably not a huge concern. But when prices do come back, and the declines in output are reversed, it could be.

Which brings me to the subject of timing. Issuing rules that add costs when oil prices have dropped 50 percent and natural gas prices are low makes absolutely no sense.

When you add all of this to the fact that the White House has shown no real inclination to lift the ban on crude exports; that it has shown no interest in allowing a waiver of the Jones Act to facilitate shipment to light, sweet crude to U.S. refineries equipped to handle it; and that it continues to target oil and gas companies by pushing punitive tax policies, one thing is clear:

For all its talk about the benefits of the U.S. energy revolution, this administration is more interested in crippling the boom than in sustaining it.

Let’s s face it, these rules are less about fracking than they are about fear. Because fracking, done responsibly, is safe. A number of former White House officials – including ex-EPA administrator Lisa Jackson, ex-Energy secretary Kenneth Chu, and ex-Interior secretary Ken Salazar – have all said as much. But the environmental community has successfully pushed the White House into advancing policies based on a doomsday “what if” scenario rather than on a real-world, fact- and science-based “what is” scenario.

The administration can say what it will, as often as it chooses, about how it has fostered America’s surge in production, and the advantages that delivers to the country. But actions speak louder than words. Unfortunately, what this White House says about energy, and what it does, are light years apart.


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State legislators call for end to crude ban, but will Congress listen?

I want to take a moment this week to recognize state lawmakers from North Dakota and Texas for doing something that’s rare in politics these days: Showing common sense.

Last week, the North Dakota Senate passed a resolution urging Congress to lift the ban on crude oil exports. Nearly identical to a measure passed earlier by the state House, it points out that the prohibition is a policy whose time has long since passed and that allowing exports would provide continuing opportunities for the kind of economic growth and stability that has been a hallmark of the domestic energy boom.

There’s a similar resolution pending in the Texas House. In addition to making the widely known economic arguments for lifting the ban, which it calls “a relic from an era of scarcity and flawed price control policies,” it also says that the move would reduce potential of oil being used as a “strategic weapon”; that it would strengthen the U.S. “geopolitical influence”; and that it would promote a global marketplace that is “more free from artificial barriers.”

My guess is that the Texas resolution will get a positive hearing as well.

But here’s the big question: While the states are raising their voices in support of lifting the prohibition, will Washington listen – and if so, when will we see some action?

I think some in Congress actually are listening. U.S. Rep. Joe Barton has introduced a bill to end the ban, and has said he believes momentum is building on the measure’s behalf. But unfortunately, it doesn’t look like anything is going to happen anytime soon.

Rep. Fred Upton, chairman of the House Energy and Commerce Committee, said, “Congress needs to be aware of all of the impacts before considering any modifications to energy policy. We again are undertaking a thorough review and will consider all perspectives – including producers, refiners, and consumers.”

That sounds like a political speed bump to me.

And Rep. John Shimkus, a Republican from Illinois, said that some members of Congress could face voter backlash if they supported lifting the ban and gas prices spiked. “It’s very hard for politicians without a five-second sound bite to examine the macro and micro economic issues” related to lifting the ban, Shimkus said.

That sounds like a political excuse, given that about a half-dozen studies have shown that ending the prohibition won’t boost prices at the pump.

Meanwhile, we’re running out of storage space for crude, in no small part because U.S. producers are prevented from competing in the global marketplace, and energy companies are cutting payrolls and investments.

That doesn’t make any sense, at least to the North Dakota and Texas legislatures. We can only hope that at some point in the not-too-distant future, it won’t make any sense to Congress, either.
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How a little-known law has a big impact on the energy industry

When it comes to energy policy, congressional action (or lack thereof, as in leaving the ban on crude exports in place) sometimes doesn’t make a lot of sense. And perhaps nowhere is that lack of logic more evident than in a little-known law called the Jones Act.

Like the export ban, the Jones Act is a relic of another time. Passed in 1920, it requires that any commodity being shipped on American waters between American ports must be transported by vessels that are American-made, -owned, and -operated.

At first glance, that may not seem like a major concern. But it has a huge impact on the energy industry.

According to a Congressional Research Service report, it costs between $3 and $4 more per barrel to transport oil from the Gulf Coast to the Northeast on Jones Act tankers than it does on foreign-flagged tankers. CitiGroup analysts put the per-barrel differential even higher – at $6 to $8. By some estimates, the price to ship Texas crude from the Gulf region to Asia is $2 per barrel; because of the Jones Act, it costs $7 to ship that same oil to Philadelphia.

An obvious question here is why does this matter if exports are banned. Here’s one answer, from Mark Perry, an economics professor at the University of Michigan and scholar at the American Enterprise Institute:

“Gulf Coast ports currently have more oil in storage than they can transport to East Coast refineries. As a result, the U.S. is paying billions of dollars a year for Venezuelan oil because the Jones Act makes it uneconomic to ship our own domestically-produced crude oil to refineries in Philadelphia and other East Coast cities.”

Perry’s reference to East Coast refineries is significant.

As I have written before, Gulf Coast refineries are generally equipped to handle heavy crude rather than the light, sweet crude coming from the Eagle Ford. On the other hand, those in the Northeast can process that oil. But since there are no pipelines from the coast to the Northeast, those refineries are dependent upon imported oil, which is more expensive.

Costs and geography aside, there is a safety issue. Crude that cannot be shipped by tanker is often shipped by rail, which as recent incidents have demonstrated can pose a danger to communities if the cars derail.

So in effect, the Jones Act is driving up prices, encouraging imports of foreign oil, and promoting a risky transportation option. Show me the logic in that.

And when I say the law is a relic of another time, it’s not just an argument. It’s backed up by hard facts.

The Jones Act’s original purpose was to maintain a strong, reliable maritime fleet for national security and to respond to emergencies. That is a worthy intention. But the number of Jones Act-eligible ships has plummeted over time, falling from 1,072 in 1955 to 193 in 2000, to 90 in 2014. Currently, only 13 ships can haul crude between U.S. ports.

In other words, what we have is a measure whose sole purpose appears to be protecting a shrinking number of vessels in the maritime industry.

An outright repeal of the law is probably a long shot. Arizona Sen. John McCain has been trying for years without success, though he believes the Jones Act will eventually die. However, at a time when domestic storage capacity is strained, Washington can temporarily waive the measure’s requirements. It would give East Coast refiners access to get less-expensive shale oil, potentially lowering the cost of gasoline for American consumers.

There’s precedent for that. In 2012, when Hurricane Sandy hit the Northeast, the Department of Homeland Security allowed foreign ships to transport fuel from the Gulf Coast to ease gasoline shortages.

I’m not sure whether this White House, which has targeted oil and gas companies on a number of fronts, would actually do anything to support an industry that almost single-handedly kept the economy afloat until Saudi Arabia declared a price war against U.S. shale drillers. But waiving the Jones Act requirement would be the right thing to do, at the right time, for the right reasons.

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In Colorado, the system worked. So, naturally, the fractivists aren't happy.

When Colorado Gov. John Hickenlooper created an oil and gas task force to resolve simmering issues between the industry and local communities, it demonstrated the sometimes-necessary give-and-take that can be critical to policy-making. But now that the panel has made its recommendations, it looks like the activists and their allies are in no mood to give – and keep wanting to take.

Last year, in an 11th-hour bid to keep potentially harmful anti-drilling initiatives off the November  ballot, Hickenlooper forged a compromise: The measures, which would have effectively banned hydraulic fracturing, would be pulled and the task force would instead work toward finding common-ground, common-sense rules and forward them to the governor.

Thirty-six proposals were considered; nine made the cut. One of them provided that local governments be brought into the facility-siting process early and, in the event differences could not be bridged, that the community and the driller would go into mediation.

It was a pragmatic, realistic way to deal with concerns that too often have been defined by the extremes. So, of course, environmentalists hated it.

Their problem was that none of the recommendations sent to the governor gave municipalities the right to regulate oil and gas development. That’s what they wanted. They didn't get it. And they almost immediately started criticizing the task force’s efforts – even going so far as to say that the initiatives Hickenlooper so artfully managed to keep off the ballot might surface again.

One of the more telling (and predictable) responses came from U.S. Rep. Jared Polis, who was the money behind the anti-fracking measures: “Unfortunately, the oil and gas industry proved they weren’t interested in a compromise or solving the problem.”

Seriously?

Here you have an approach that everyone agreed to; a task force whose membership represented every side of the debate; a six-month process that invited citizens from across Colorado to have their voices heard in meetings throughout the state; and real-world rules that give localities a greater role in decisions related to oil and gas development.

In other words, the strategy accomplished exactly what it was designed to accomplish. But instead of giving Hickenlooper and the panel its due, environmentalists fell back on their “blame-the-industry” rhetoric and vows to ban fracking.

Maybe the task force’s efforts were doomed from the start, given the activists’ traditional refusal to bend and their habit of embracing a line-in-the-sand strategy. I don’t know. But I do know this:

Colorado found a pragmatic way to handle a problem that, if left unsolved, could have had significant implications for the state’s economy and its people. Just because the outcome didn't completely go their way on every issue does not give environmentalists the right to cry foul, to point fingers, or to assail something they agreed to and were part of.

This is truly a case where the system worked. The fractivists need to deal with it.

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In the wake of a new White House report, one question


Last week, the Obama administration released the White House “Economic Report of the President,” a 414-page document that details a “breakthrough year” in 2014. I want to point to some of its highlights, and then ask a single legitimate – if pointed – question.


From the report:

  • “Expanded production of oil, natural gas, and renewables has raised employment in these industries during a period of labor market slack. Technological innovation and greater production help reduce energy prices, to the benefit of energy-consuming businesses and households. These developments have contributed broadly to employment and GDP growth, and will continue to do so.”
  • “Lower net oil imports reduce the macroeconomic vulnerability of the United States to foreign oil supply disruptions.”
  • “The U.S. energy revolution has contributed to economic growth, both in terms of net economic output as measured by GDP and overall employment. It has also contributed to a declining trade deficit as the Nation has recovered from the Great Recession.”
  • “Growth in oil and gas production has directly and indirectly created jobs over the past several years…(T)otal employment in the oil and natural gas industries…increased by 133,000 jobs between 2010 and 2013, and continued to grow through 2014.”
  • “New oil and gas (producing) regions have seen employment growth in schools, retail, health care, and other sectors.”
  • “The increase in domestic oil production, combined with reduced demand for oil, has also led to a sharp drop in net petroleum imports and, as a result, a decline in the Nation’s trade deficit.”
  • “The energy revolution has benefited not only domestic energy sectors, but also the energy-consuming businesses and households that enjoy lower energy price.”
  • “Households pay lower gas bills and can either spend or save the difference. Commercial and industrial businesses…also benefit from lower gas prices, which raise business profits.”


Even though these conclusions speak for themselves, let me summarize.


The domestic energy revolution has created jobs, supported communities, cut oil imports, reduced the trade deficit, enhanced local government services, saved families and businesses money on their monthly power bills, and improved our energy security.


So here’s my question:


Given all of that, why is the White House targeting the industry with punitive tax proposals (killing the so-called tax breaks for oil and gas companies) and burdensome regulations (for example, methane reductions on a sector that is already cutting them voluntarily) whose practical effect is to drive up costs and slow, cripple, or even stop the U.S. boom?


It strikes me as a triumph of presidential politics over sound economic and energy policy. And it makes no sense at all. None.


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