Greenwire, December 21, 2007

BIG OIL EMERGES LARGELY UNSCATHED FROM DEMOCRATIC ASSAULT

By Ben Geman, Greenwire senior reporter

When Democrats took over Congress this year, they vowed loudly and often that big oil companies' days of tax breaks and subsidies were numbered.

And their timing in the early going seemed perfect. Last Feb. 1, Exxon Mobil Corp. posted a record 2006 profit of $39.5 billion -- slapping an exclamation point on House approval of a measure two weeks earlier that would boost industry taxes to pay for renewable energy programs.

But that measure never became law, and now the industry has emerged with nary a scratch from several Democratic efforts to revise oil- friendly tax policies and repeal royalty incentives. The most recent failure came this month when Democrats -- facing GOP-led filibusters and a veto threat -- jettisoned oil provisions from a big year-end energy bill.

Why did the Democrats' assaults flop? "You know the answer to that," said Rep. Rahm Emanuel of Illinois, who heads the House Democratic caucus. "You have a guy at 1600 Pennsylvania Avenue who came in defending Big Oil and is determined to leave defending Big Oil." The White House had threatened to veto energy bills that raised industry taxes.

Meanwhile, a House Democratic aide pointed across the aisle and across the Capitol. "Two words: Republican senators," the aide said, referring to the filibuster this month that forced Senate Democrats to abandon repeal of $13 billion in tax incentives for large oil companies.

To be sure, the oil industry didn't get everything it wanted, and refiners say an increased ethanol mandate in the broad energy bill approved this month will be costly and tough to implement. But the industry managed to duck the Democratic haymakers.

The tax plan was only one of several proposals aimed at the industry to fall by the wayside this year. Among the others:

** Bids to repeal expanded offshore "royalty relief" that was provided in 2005 energy legislation.

** Efforts to place new environmental restrictions on oil and gas projects in the West and slow down the expedited approval of drilling permits.

** Proposals to all-but-force Gulf of Mexico producers to renegotiate late 1990s deep water leases that allow unrestricted royalty waivers. Plans to impose new rules and penalties against gasoline "price gouging" that industry opposed.

** Moves to require the federal government to craft an "oil savings" plan to curb oil use by 10 million barrels per day by 2031, with smaller interim targets starting in 2016.

Power plays

To a large degree, the story behind the failures is one of raw power. In a closely divided Congress -- especially in the Senate -- the majority of Republicans and some Democrats from oil producing regions can together keep Democratic leadership proposals in check.

The industry also flexed its muscle. According to the nonprofit Center for Responsive Politics, industry lobbying this year is on pace to surpass last year's spending of $74.7 million.

And Jim Ford, a top lobbyist with the American Petroleum Institute, says lawmakers heard from both oil industry officials and representatives of other industries that rely on oil and natural gas, such as manufacturers, about what they said were the harmful economic effects of the various proposals.

Measures aimed at oil companies were caught in the crosscurrents of a highly complex energy debate. The Democratic plans were part of a larger effort to boost domestic "energy security" and slow greenhouse gas emissions. Two pillars of this effort -- boosting auto efficiency and use of biofuels -- both became law this week.

But the industry argued vigorously that increasing taxes and adding other restrictions would work against this effort. Against a backdrop of worries about instability in foreign oil producing countries, they said -- over and over -- that raising their costs here would mean less money spent on domestic oil projects.

Industry sought to shift the debate, in other words, from one about fat corporate profits to one about national security. Scott Segal, a lobbyists who represents refining companies, said the tax provisions were at "loggerheads" with the domestic energy security goal.

"There was always an inconsistency between the anti-industry positions and the desire to spur energy independence," Segal said. While the most recent tax changes sought by lawmakers would have targeted major integrated companies, independent producers raised similar issues with respect to several other leasing policy proposals.

"We think we are at least getting people to pay attention to the energy supply consequences of these approaches," said Lee Fuller of the Independent Petroleum Association of America.

New twists

Elsewhere, the industry brought a somewhat more novel argument to the table. Independent energy producers increasingly argued this year that raising the costs or bureaucratic barriers to natural gas drilling would work against efforts to tackle global warming.

Increased natural gas supplies, they said, will be needed because future greenhouse gas emissions rules could shift electricity production away from coal and toward less carbon-rich energies. "There has been a growing appreciation that we are going to need more gas with climate change policy," said Bill Whitsitt, who lobbies on behalf of large independent oil and natural gas producers.

To be sure, drawing a line between industry lobbying and the approval -- or failure -- of a given bill is an inexact science. But Senate support for raising industry taxes did appear to erode over the last six months.

In June, when the Senate first debated broad energy legislation, lawmakers narrowly rejected the addition of billions of dollars in increased oil industry taxes to the bill. But Democratic leaders saw a chance for success later in the year. Two Democrats who missed the vote -- California's Barbara Boxer and South Dakota's Tim Johnson -- appeared to be enough to win the needed 60 votes to break a filibuster.

But earlier this month, a broad energy measure with tax provisions attached again failed to muster 60 votes, falling one vote shy. Crucially, three GOP lawmakers who voted for an earlier tax measure in June voted against it last week. Democrats then stripped the tax plan and the bill passed overwhelmingly, 86-8.

Bush signed the measure this week, which boost auto mileage standards, biofuels production, and building and appliance efficiency.

Of course, the one vote margin is also attributable to Sen. Mary Landrieu (D-La.), an ally of oil and gas producers who cast the lone Democratic vote against the tax measure. "This was a Democratic priority, and here she was voting for oil and gas interests. It is a problem," said Erich Pica of the environmental group Friends of the Earth.

'Not going away'

Other Democratic proposals also fell victim to the tricky dynamics of energy policymaking. Lawmakers have long tried to address deepwater gulf leases issued in 1998 and 1999 that allow "royalty relief" regardless of energy prices. The absence of clauses that end royalty waivers when oil and gas prices exceed certain limits could result in the loss of billions of dollars of royalty revenue.

But the two chambers never agreed on an approach. The House, in January and August, passed versions of broad energy legislation that would have denied holders of these leases the right to bid for any new gulf leases -- unless they agreed to include the price clauses in the late 1990s contracts or paid other fees.

The Senate tried a different approach. Sen. Jeff Bingaman (D-N.M.) had pushed for a provision that would create new taxes on deepwater gulf producers but provide credits against the tax for royalties paid. This effectively targeted the holders of leases that allowed unrestricted royalty waivers.

And amid the differences, industry warned that proposals aimed at the 1998-1999 leases could prompt litigation that halted new gulf leasing. Deepwater gulf production has been a success story, accounting for an increasing amount of domestic supply.

Several oil companies -- through Patton Boggs lobbyist and former Louisiana Democratic Sen. John Breaux -- warned in a November letter to Congress that legislation imposing price thresholds "directly or indirectly" on the 1998-1999 leases would violate contractual rights.

In the end, neither provision was included in the broad energy bill approved this month.

The absence of tax and other provisions addressing oil and gas companies disappointed environmental groups, in large part because increased tax revenues would have funded expanded renewable energy tax breaks.

The debate is only over, however, for the moment. House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry Reid (D-Nev.) both said they will revisit the tax plans next year.

And proponents of the various oil provisions debated this year say that with energy prices high, there is no basis to allege that the measures -- tax policy and otherwise -- will harm domestic production efforts.

Congress returns in mid-January. "Energy is an issue," API's Ford said, "that is not going to go away."