The Refining Industry, Public Policy, and Politics

1
The Refining Industry, Public Policy, and Politics

• Andrew G. Wallace
• Legislative Director
• U.S. Rep. Gene Green (D-Houston)
• Member, Committee on Energy and Commerce
• Subcommittee on Energy and Air Quality

2
Introduction House Votes

• 2003 Energy bill
• House passage 247 175 40 Democrats in favor,
  17 Republicans opposed
• Conference Report passage 246 180 46 Ds in
  favor, 25 Rs opposed
• Senate Conf. Rep. Cloture Vote (MTBE) 57 40
  13 Ds in favor (LA, AR, farm states), 6 Rs
  opposed (NH, ME, RI, McCain)
• 2005 Energy bill high water mark 75 Democratic
  votes
• House passage 249 183 41 Ds in favor, 22 Rs
  opposed
• Conference Report House 275 156 75 Ds in
  favor, 31 Rs opposed
• Conference Report Senate 74 26 25 Ds in favor,
  4 Rs opposed
• 2005 MTBE vote
• Motion to Strike defeated 219 213 14 Ds in
  favor of industry position (9 Texans, LA, AL,
  OK) 25 Rs opposed (NH, CT, IL, N.VA/MD, NJ, PA)
• 1992 Energy Policy Act approved 363 60
• 1990 Clear Air Act Amendments approved 401 21

3
Political Parties Messages

• The Refinery Revitalization Act sacrifices the
  air we breathe for petroleum corporation profits
  and doesnt do anything to lower the price at the
  pump. Democratic Congressional Campaign
  Committee
• One year ago, President Bush signed the
  Republican energy bill, giving 8 billion in tax
  breaks to energy companies. Since then, the
  American people continue to struggle just to fill
  up their gas tanks, as gas prices are up 65
  percent. Democratic National Committee
• "Americans can thank environmental extremists and
  their allies in Congress for high gas
  prices.Republican Member of the Energy and
  Commerce Committee
• Gas Prices Continue to Fall During a Republican
  Majority. But Does Democrat Leader Pelosi Have a
  Secret Plan to Raise Gas Prices?
• Oct. 2006 Press Release from Speaker Hastert

4
Macro-Congressional Trends Affecting the Refining
Industry

• Partisan Regional Realignment (Red State/Blue
  State)
• Republicans won every southern state in the past
  two presidential elections and now have 18 of the
  regions 22 senators and two-thirds of its House
  seats. Tom Schaler, Winning Without the South
• The collapse of Republican hegemony in the
  Northeast and Pacific West has gone largely
  unnoticed, buried in the intense examination of
  the growth of the Republican Party in the
  American South. The 1994 election . . .
  constitutes a realigning election. Charles S.
  Bullock, Regional Variations in the Realignment
  of American Politics, 1944-2004.
• 2003 off-year Redistricting reduced Texas
  Democratic Congressional Delegation from 17 to
  11.
• Gasoline Refining and Oil and Gas Industries are
  concentrated in the South/West and less popular
  in NE, MW and Pacific W.

5
Bipartisan Connection of National Security to
Oil-based Fuel

• Energy is fundamental to U.S. prosperity and
  national security.  With the advent of
  globalization, the onset of global warming, and
  the war on terrorism, the complex ties between
  energy and U.S. national interests have drawn
  tighter over time. --Energy Future Coalition
• The rise of terrorism by militant Islam against
  the United States and the West coincided with the
  rise in oil prices of 1979-80 and the subsequent
  transfer of hundreds of billions of dollars from
  the West to Muslim countries. The Hudson
  Institute
• America is addicted to oil. Pres. George W.
  Bush 2006
• Result More Ethanol!

6
Recent Public Attention and Focus on the Refining
Industry

• Capacity, Consolidation and Profits
• Dennis Hastert, Republican Speaker of the House,
  has called on refining companies to build or
  expand refineries
• Republican House Committee on Energy and Commerce
  Chairman Joe Barton is conducting an
  investigation into how the largest integrated oil
  companies are utilizing their profits
• Democratic support for a Strategic Refinery
  Reserve Boucher-Dingell bill (H.R. 5365)
• 24 Lexis hits for articles in U.S. Newspapers and
  Wires mentioning refiner/refining capacity in
  2003, 56 in 2004, 159 in 2005, and 61 so far in
  2006.
• Several Congressional hearings in 2005/2006
• House Energy and Commerce Government Reform
  Committees

7
Public Attitudes on Gasoline

• ASSOCIATED PRESS/IPSOS PUBLIC AFFAIRS 49 of
  Americans say a fair price for gasoline is below
  2/gallon, 40 say from 2-3/gallon.
• CBS NEWS/MTV 57 of Americans think that
  Americans' use of gasoline contributes a lot to
  global warming and 33 think it contributes
  some.
• CBS NEWS/NEW YORK TIMES 85 of Americans oppose
  increasing the gas tax, but 55 support if it
  will reduce American dependence on foreign oil.
• CNN 70 of Americans think that the President
  can take steps now to reduce gas prices. 61 of
  Americans think unethical behavior by gasoline
  companies is behind the increase in price, and
  26 think it is supply and demand.
• CNN/GALLUP/USA TODAY 49 of Americans think oil
  companies deserve a great deal of blame for
  recent high prices, 38 think the President does,
  31 foreign countries, 25 American consumers,
  and 19 environmental regulations.

8
Industry Message

• The market has responded to the high prices we
  witnessed earlier this year with increased supply
  and reduced demand, proving yet again that
  markets do work. The global oil market is one
  of volatility. API 10/06
• Alternative energies also offer many countries a
  means of gaining greater security of energy
  supplies. . . . Over the next three years, we
  plan to increase the sales of solar products
  threefold, start construction of two of the
  worlds first industrial-scale hydrogen power
  plants, . . . and develop a significant wind
  power business. Integrated Oil Co. A
• Other technologies, such as hydrogen, are
  considered to hold promise, but face substantial
  challenges in terms of cost and large-scale
  implementation. Widespread global deployment of
  new technologies, however promising, will take
  decades before the cumulative effect of
  investments makes a substantive contribution to
  overall supply. Integrated Oil Company B

9
Energy Policy Act of 2005

• Ethanol Mandate7.5 B gallons per year by 2012.
• Failure to Secure MTBE Liability (6 votes in
  the House in 2005, 3 votes short in the Senate in
  2003)
• Refinery Expensing50 deduction for refinery
  projects that increase fuel production by 5 or
  more with construction beginning between June
  2005 and December 2007
• Small Refinery Incentive (increase eligibility
  from 50K bpd to 75K bpd)
• Refinery Provisionsfederal assistance to state
  permitting offices
• Pet Coke Gasification projects and tax provisions
• Extension of OSTF (2014) and LUSTF (2011)

10
Refinery Revitalization Legislation

• 2005 version 100 Democratic opposition
• federal permit coordinator for refinery projects
• focus on new refineries, closed military bases
  and controversial federal project insurance fund.
  
• New Source Review provisions dropped due to
  Northeast Republican opposition.
• 2006 version 95 Democratic opposition (17 Yes
  votes).
• scaled back, just federal coordinator powers
  for refinery projects
• Yuma, AZ refinery case studydiffering
  perspectives of Republicans (permits delayed
  refinery) versus Democrats (permits granted to
  refinery twice, not built for other economic
  and/or local opposition reasons).
• Do these bills and the Energy Policy Act
  significantly benefit the refining industry?
  Compared to the political and publicity costs?

11
Likely Actions Regardless of Control of the US
House

• Ethanol-heavy farm bill
• Current law from EPACT 2005 is 7.5 billion
  gallons by 2012, future legislation likely to
  call for 12 billion gallons by 2012 or 15 billion
  gallons by 2015
• Recurring attention to gasoline prices in the
  Summer/Fall especially with Gulf hurricanes
• Continued attention/investigation on refining
  capacity and industry investment of profits
• Presidential politics in the Senate
• National security-themed alternative energy
  proposals
• Building pressure on climate legislation

12
Likely Actions in a Republican House in the 110th
Congress

• Continuing Increased Hearings Driven by Price
  Events
• Environmental regulatory obstacles such as NSR
  (but low likelihood of legislative action)
• Exchange trading and futuresrecent attention to
  NYMEX exchange and reserve requirements
• Re-runs of scaled back refinery revitalization
  and boutique fuels legislation possible

13
Likely Actions in a Democratic House in the 110th
Congress

• More Aggressive Consistent Oversight Hearings
• Cheney Energy Task Force
• Refinery capacity and use of refining/oil company
  profits
• Spark spread and gasoline pricing investigations
• Exchange trading and futures
• Budget and oversight power ? regulatory leverage
  over EPA, DHS, etc. ? a mix of rule tightening
  enforcement and controversy conflict
• Risk of repeal of targeted portions of the 2005
  Energy Policy Act such as Offshore Research
  Consortium
• Superfund oversight including legal developments
  and potential legislation restarting the funding
  stream for cleanup

14
Likely Actions in a Democratic House Part II

• Low risk of enactment of major controversial
  legislation, such as windfall profits tax, but
  royalty relief provisions (House voted 252 156
  to block those with royalty-free leases from
  future leases) and LIFO/FIFO issue (included in
  early version of Senate tax bill) are most
  vulnerable
• Low likelihood of major controversial bills
  moderates and process will keep Democratic
  leadership conservative (with a little c).

15
Recommendations for Industry to Manage Partisan
Volatility of Industrys Political Risks

• Continue and increase Public Education efforts
  through advertising campaigns and other methods,
  particularly with the news media
• Diversify political supportcompare industrys
  partisan volatility in political risk 1970s with
  today
• Build/maintain relationships with Democratic
  elected officials within industrys economic
  interest areas
• Welcome and develop future Democratic elected
  officials because the regional realignment is
  changing yet again with continued urban growth
  and Hispanic growth in the Sunbelt
• Offer responsive but realistic messages and have
  PATIENCE explaining economic issues