VNF's Tom Roberts Quoted in Petroleum News

November 25, 2007

There was a time not too long ago when the forces that guided what passed for a U.S. energy policy in the corridors of Washington, D.C., could be summed up as a three-statement mantra: maximize supply, keep it cheap and keep the government out of the production and consumption of energy, energy consultant Thomas Roberts of Van Ness Feldman told the Law Seminars International Energy In Alaska conference in Anchorage on Nov. 12.

“That is changing, and it is changing dramatically,” Roberts said. “In the last 18 to 24 months I have seen a remarkable transformation in Washington with respect to how policymakers view energy.”

Those three traditional pillars of energy decision making have been replaced by a focus on U.S. energy security and climate change, with climate change seen as the top priority, Roberts said.

Radical change

Evidence for what is happening in Washington can be gleaned by comparing the Energy Policy Acts of 1992 and 2005 with recent actions in Congress. Whereas the Energy Policy Acts tended to “nibble around the edges” of the energy issues facing the United States, recent bills introduced in Washington indicate a radical change in direction, just two years after the major 2005 bill was passed, Roberts said.

“The fact that it’s back two years later is indicative of what has happened to energy policy in Congress,” Roberts said. “… There’s an ever growing consensus in the public, the elected officials, the political parties that it is important, that it is in fact mandatory, that the federal government gets its act together and does something about climate change and national energy security.”

But adjusting to the new emphasis represents a major departure from the past and does not come easy.

“If we address climate change the way the majority of the scientists say that we need to, energy will no longer be cheap, it will no longer depend on maximizing supplies and the government will be in every aspect of energy production and consumption,” Roberts said. Reducing the U.S. dependence on imported crude oil would have similar impacts, he said.

Everyone is struggling to understand what this major change in direction will mean in practice — massive reductions in U.S. greenhouse gases would be enormously expensive.

“People will continue to believe that you can have your cake and eat it too,” Roberts said. “Politicians and consumers will complain about the price of energy.”

Rep. John Dingle, D-Mich., has said that a bill he recently introduced to impose a carbon tax would enable people to understand the cost of achieving the greenhouse gas emission reductions that people are talking about, Roberts said.

Government involvement

Government involvement in the production and consumption of energy will occur in two ways: direct intervention in fuel consumption and indirect intervention through a cap on greenhouse gas emissions, Roberts said.

Direct intervention will involve mandatory programs such as fuel efficiency standards for automobiles.

“Certainly before the 2008 election Congress will enact a modification to the existing program that will raise mandatory fuel efficiency levels for all automobiles and light trucks,” Roberts said.

Roberts also thinks that there will be further legislation for the mandatory use of renewable fuels in the mix of transportation fuels. The 7.5 billion gallon renewable fuel mandate of the 2005 Energy Policy Act has resulted in a boom in the construction of ethanol plants, has doubled the price of corn and has put the program on target for achievement of the mandate in 2008, four years ahead of schedule, Roberts said.

So, politicians are now proposing a mandate of 36 billion gallons of renewable, alternative transportation fuel in the mix by the early 2020s, he said. And regardless of how that particular proposal pans out, more federal mandates on the use of renewable transportation fuel are coming.

“Congress will act directly to say ‘when you are consuming energy in your automobile … a minimum percentage of that must come from alternative fuels’,” Roberts said.

There may also be a federal mandate that a certain percentage of electricity production must come from renewable sources. That type of legislation will be tough to enact in Congress — the utility sector is adamantly opposed to it and some individual states have already taken the initiative on this, thus raising a big federal pre-emption issue, Roberts said.

Cap on greenhouse gas

While mandatory limits on how fuels are consumed will target specific types of energy consumption, caps on greenhouse gas emissions will affect every aspect of energy use.

“It will affect the price of food. It will affect the price of transportation. It will affect the cost of heat and lighting homes,” Roberts said.

On Nov. 1 a subcommittee of the Committee on Environment and Public Works drafted a climate change bill, the America’s Climate Security Act. That is the first time in history that Congress has recorded a comprehensive, economy-wide regulatory program dealing with climate change, Roberts said.

“This is the marker for all other markers to compare themselves to,” Roberts said.

This new bill shoots for a reduction in greenhouse gas emissions to 70 percent below 2005 levels by 2050 by imposing a cap on emissions across the economy. Any electricity generation facility or any industrial facility that emits more that 10,000 metric tons of carbon dioxide and carbon dioxide equivalents per year will have to reduce its emissions by an ever increasing amount. A similar cap would also apply to any entity that imports petroleum-based or coal-based transportation fuel or non-fuel chemicals that involve carbon dioxide emissions.

Regulated entities would have to turn in annual allowances for the emissions cap, either by reducing emissions or by buying offsets from entities that have cut emissions below the cap, or that have implemented some form of greenhouse gas reduction program.

This proposed cap-and-trade program would likely cover entities that together create 85 percent of the U.S. greenhouse gas emissions, even though the 10,000-metric ton limit would only bring about 3 percent of U.S. industrial facilities into the scheme.

The proposal would in effect make the refiners of gasoline responsible for automobile emissions — the alternative of trying to impose a greenhouse gas regulation on each of perhaps hundreds of millions of U.S. vehicles would prove impossible in practice, Roberts said. Under a cap-and-trade program the refiners would likely try to reduce their carbon footprints by supplying fuels that produce fewer greenhouse gas emissions. And the price of gasoline would rise to cover the cost of the refiners purchasing carbon dioxide allowances from elsewhere.

Similarly, the greenhouse gas emissions from natural gas usage would likely be capped at the producer or utility level.

“Congress has never done anything like this before … that will have such a comprehensive economy-wide effect,” Roberts said.

The complexity and potential impact of what is involved is going to make this legislation difficult to enact.

“But the fact is that there is a massive public sentiment to do this,” Roberts said. “Poll after poll after poll consistently shows 60 to 70 to 80 percent of respondents saying that it is important that Congress do something about climate change.”

Impact on Alaska

So what does all this mean for Alaska?

On the plus side, there will be a huge effort to develop and commercialize alternative and renewable energy sources. That effort could pay big dividends in Alaska, particularly in terms of finding stable, reliable and cost efficient sources of energy in rural Alaska, Roberts said. Those benefits would especially come from the development of any new technologies that bring down the cost of alternative energies.

Alaska may also benefit from the impact of greenhouse gas emissions on climate change, through the reduction of problems such as coastal erosion. However, that type of benefit is highly theoretical, Roberts said.

There’s a large potential downside in Alaska to what is happening in Washington. For example, capping greenhouse gases would likely pose problems for the development of Alaska’s coal resources.

“It’s one more bump in the road, along with distance from market, harsh conditions, transportation to get it to export,” Roberts said.

The opening of the Arctic National Wildlife Refuge for oil and gas development also looks improbable under the prevailing climate of opinion.

“I think it means the end of the road for ANWR, certainly in the foreseeable future,” Roberts said. “… I think this is icing on the cake for those who do not want to see ANWR developed.”

Gas line opportunity

But Roberts thinks that the evolving situation at the federal level is creating a significant opportunity for the development of the Alaska gas pipeline.

“There will be strong … growth in demand for natural gas if and when climate change legislation is enacted,” Roberts said.

The United States will see a continuing demand growth for electricity, while power companies will experience difficulty in making decisions regarding long-term investments. Although the price of coal makes that fuel attractive, the burning of coal results in huge greenhouse gas emissions requiring unproven techniques for carbon dioxide sequestration, Roberts said. Nuclear power is extremely expensive and politically sensitive, he said. And, although there will be a substantial increase in the use of renewable fuels, these will not be sufficient to supply the base load that the country needs.

So future electricity supplies must come predominantly from natural gas, despite the price volatility and probability of future price increases, Roberts said.

“The market dynamic from the consuming end says natural gas is the way to go,” Roberts said.

And since the import of liquefied natural gas runs counter to the drive for U.S. energy security, the trillions of cubic feet of proven gas on Alaska’s North Slope constitute an obvious source of gas for the United States, he said.

Reprinted with permission.