Natural Gas May Gain From Obama Win
Natural gas producers such as Exxon Mobil Corp. spent millions of dollars this year trying to defeat Democrats, such as President Barack Obama. His re-election may end up being a boon for them.
While Obama will continue with a series of environmental regulations that would curb the production and use of coal, his policies promise to boost demand for natural gas in vehicles and power plants and facilitate domestic oil and gas output to levels not seen in more than two decades.
“Facts are stubborn things and they often defy people’s ideology,” John Hanger, a special counsel at Eckert Seamans Cherin & Mellott, LLC in Harrisburg, Pennsylvania, and the former top environmental regulator in that state, said in an interview. Obama’s “policies on the demand side are most favorable.”
The re-election of Obama and continuation of Republican control of the House of Representatives opens the possibility for legislation to boost demand for gas, including incentives for natural-gas vehicles, Hanger said. Republicans may also limit actions the administration could take to regulate hydraulic fracturing or curb production on federal lands.
Coal is likely the biggest loser, while wind, solar and biofuel producers are set to gain. An expiring production tax credit for wind power is now more likely to be extended, said Denise Bode, chief executive officer of the American Wind Energy Association.
Oil faces a more uncertain fate. Pressure on Obama from environmentalists to turn down the Keystone XL pipeline from the Canadian tar sands began even before he gave his victory speech early yesterday. Obama pledged to raise taxes on oil companies, a move the industry says would stifle its growth. And Obama’s Environmental Protection Agency and Interior Department are considering regulations on hydraulic fracturing, which would raise costs for drillers.
“You’re going to see a much more aggressive attempt to regulate fracking,” Mike McKenna, an oil-industry lobbyist and president of MWR Strategies Inc. in Washington, said in an interview.
Oil, gas, coal and electricity interests donated in this election as if their fate depended on it. Together, energy companies spent more than $115 million on the election, more than on any campaign since at least 1990, according to the Center for Responsive Politics’ aggregation of federal data. Of that amount, 80 percent went to Republicans.
Now that the election is over, representatives of those industries say they are ready to work with Obama and other Democrats.
Obama “is now going for a full-throated endorsement of oil and natural gas production in the United States, which is 180 degrees opposite from where he started,” Jack Gerard, the president of the American Petroleum Institute in Washington, which represents producers such as Exxon and service companies such as Halliburton Co. (HAL), said in an interview. “The real question will be: Will the president’s actions match his words?”
Coal advocates, who had accused Obama of waging a “war on coal,” said they hoped for a change in approach.
“I think Obama and that administration heard a lot of things about coal and energy overall during the campaign,” John Eaves, CEO of Arch Coal Inc. (ACI), said in an interview. “Hopefully that will translate into a more positive approach to energy as we move forward.”
Environmentalists predict that the EPA will not let up. In the first Obama term, EPA issued rules to curb mercury and sulfur dioxide from coal-fired power plants. While those rules still face court challenges, other measures are coming from the EPA and together they will mean stricter standards on pollution, especially from coal-plants. The EPA is also considering rules on the water those plants use, and on their coal-ash waste.
“There is a lot of regulation in the pipeline,” James Lucier, managing director at Capital Alpha Partners LLC in Washington, said in an interview. “It will represent a substantial tightening in environmental standards.”
Next on the EPA’s agenda is finalizing the first-ever standards for greenhouse-gas emissions from power plants, a rule that Republican candidate Mitt Romney had said he opposed.
Those rules will put pressure on older, coal power plants, which will have a beneficial impact on demand for natural gas, according to Kevin Book, managing director at ClearView Energy Partners LLC, a Washington-based policy-analysis firm.
Peabody Energy Corp. (BTU) and Alpha Natural Resources Inc. (ANR) slid more than 9.5 percent yesterday on bets Obama’s re-election will mean more regulation for the industry. Standard and Poor’s 500 Energy Index (S5ENRS), which includes a cross-section of the energy industry including coal, declined 3.1 percent.
Less demand for coal could mean more demand for natural gas in the power industry.
The “next wave” of environmental standards for coal plants “will probably add another incremental gas demand share, which is pretty significant,” Book said in an interview. “Those numbers are real.”
Low natural gas prices have already prompted a shift. In 2008, about 48 percent of the U.S. electricity came from coal. In August, that total had slipped to 38 percent, according to the Energy Information Administration.
In addition, regulations issued to force automakers to improve the fuel efficiency for their vehicles through 2025 include incentives to boost the production of natural-gas powered cars. Romney had pledged to roll those back, as well.
While regulations on fracking could raise the costs of producing gas, the real challenge is boosting demand, given low gas prices, according to Hanger.
“Obama actually has been very good to the natural gas industry,” Joshua Greene, a Washington-based attorney at Patton Boggs LLP who specializes in energy, said in an interview.
Even for oil, the cost of higher regulations won’t lead to cutbacks or even substantially harm profits, since those additional costs are unlikely to exceed 50 cents a barrel, said Amy Myers Jaffe, executive director of energy and sustainability at the University of California, Davis.
U.S. output of oil and other liquid petroleum products is expected to surge by more than 80 percent through 2020, the kind of consistent growth that hasn’t been seen since the 1960s, said Edward Morse, global head of commodities research for Citigroup Inc. (C) Obama has made more acreage available to energy companies than any president since Ronald Reagan, and more drilling is taking place on federal land than at any time in history, Morse said.
“We intend to work constructively with the president and his administration,” Kenneth Cohen, vice president of public and government affairs, at Exxon, said in an e-mail. “Key focus areas are tax policy, free trade in energy, enhanced access to domestic oil and gas and including sound science and an economic cost-benefit analysis in future regulatory initiatives.”
Obama does face two imminent choices that pit his environmental supporters against energy producers.
Applications to export more than 27 billion cubic feet a day of liquefied natural gas from the lower 48 states were filed with the U.S. as of Oct. 26, according to a list on the Energy Department’s website. The U.S. isn’t expected to approve all pending applications, according to a Nov. 6 report from Washington Analysis.
Deciding on whether to permit the Keystone XL pipeline, is already shaping up as one of the earliest and most contentious energy decisions of Obama’s second term.
The pipeline would carry 830,000 barrels of Canadian tar sands oil a day to refineries on the U.S. Gulf of Mexico. Obama rejected developer TransCanada Corp. (TRP)’s permit application for the $7.6 billion project in January after pressure from environmentalists, and asked the company to re-submit a bid with a different route that won’t endanger water supplies in Nebraska. The company has filed a new proposal.
Gerard singled out the project’s approval as an immediate move that Obama could take to prove his support to that industry; thousands of environmentalists are pledging to rekindle demonstrations outside of the White House in the coming weeks in opposition to the pipeline.
“We’re talking huge infrastructure requirements,” said Charles Ebinger, an energy specialist and senior fellow at the Brookings Institution. “It will be Battle Royale” with environmental groups.
What also isn’t clear is if Congress will approve new funding or tax breaks for clean energy, especially extending expiring tax breaks for wind power, or will decide to tackle measures to attack global warming, such as imposing a carbon tax.
“There is a reckoning that needs to take place in the Republican Party, and it’s hard to figure out where they’ll come out,” Michael Brune, the executive director of the Sierra Club, said in an interview. “It’s hard to predict if Congress could agree on taking a long lunch break right now.”