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 doesn’t 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 region’s 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. [T]he 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 world’s 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. [W]idespread 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 Mandate—7.5 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 Expensing—50% 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 Provisions—federal 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 study—differing 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 futures—recent 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 Industry’s Political Risks • Continue and increase Public Education efforts through advertising campaigns and other methods, particularly with the news media • Diversify political support—compare industry’s partisan volatility in political risk 1970s with today • Build/maintain relationships with Democratic elected officials within industry’s 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