The reelection of President Barack Obama, combined with continued divided government in the Congress—Democratic Senate and Republican House—virtually ensure that major changes to federal energy and environmental policy will be based on existing regulatory authority rather than new legislation. With a continued strong House Republican majority and a larger Senate Democratic majority, the contentiousness of most energy and environmental policy issues will likely preclude major new legislation. Most producers of oil, natural gas, and coal, would likely feel that the lack of legislation is an advantage. Law addressing production of those resources is already permanent. While some fine tuning of those laws would be advantageous, the legislative process frequently results in changes not envisioned nor desirable. The situation is very different for producers of renewable energy. Many of their tax provisions are temporary law and must be extended, and many loan and grant programs supportive of renewable energy projects have been found to be in need of legislative changes to make them more workable.

Regulatory Agenda

A number of environmental groups have made statements today that they feel emboldened to pursue an aggressive environmental agenda, with the intent to exert significant pressure on the Obama Administration for strong regulatory actions from this point forward. Numerous regulatory decisions are pending or in the regulatory pipeline, with major potential impacts on oil and natural gas producers, refineries and electric power producers. In the near future, we expect a final Environmental Protection Agency (EPA ) regulatory decision on Clean Air Act New Source Performance Standards (NSPS ) for new power plants and refineries, to be followed in 2013 by regulations on NSPS for existing power plants and refineries. Additional EPA regulatory actions to expect include coal ash, revised Boiler and Cement Kiln MACT s, the PM 2.5 NAA QS, and the Ozone NAA QS. Finally, because a legislative option is highly unlikely to be successful, EPA is expected to continue its push to control greenhouse gases through regulatory methods.

Another early regulatory decision facing the Administration is the approval of the Keystone XL Pipeline bringing oil from Canadian oil sands to U.S. refineries. Disapproval of this pipeline is one of the primary objectives of the environmental community, and they cannot be expected to give the Administration a pass on this key issue.

“The election largely ratified the status quo: a nation dependant on foreign oil, slow to develop alternatives. The national debate from here will focus on how to develop new energy sources, while maximizing the benefits from the glut of new natural gas that has emerged outside of the ambit of federal energy policy. The election rhetoric on energy is unlikely to produce a coherent national energy policy, but will likely give way to a contentious debate over the role of coal, shale gas and biofuels in our domestic energy future, and the role of prescriptive regulation and tax policy in driving change.”

Former Representative Philip English

The greatest threat facing continued, rapid expansion of production of oil and natural gas from shale and tight rock plays like the Marcellus, Bakken, and Eagle Ford, is the potential EPA federalization of regulation of hydraulic fracturing, which has always been primarily regulated by state authorities. EPA seems determined to assert its regulatory authority, although the form and extent that will take remains undetermined at this time. EPA ’s report on water safety issues associated with hydraulic fracturing is due by the end of the year. EPA guidance on the use of diesel fuel in frack fluids under the Safe Drinking Water Act is expected soon. Further, the Department of the Interior likewise seems determined in the near future to issue its own regulations on hydraulic fracturing on public lands, with the strong potential for these regulations to conflict with pertinent state regulations. Producers will need to remain vigilant in their review of and response to proposed regulatory changes. Leasing of oil, natural gas, and coal from onshore and offshore federal lands is not likely to be expanded during the Administration’s second term. These lands are under the control of the Department of the Interior which has significantly reduced new leasing. Producers should expect additional regulations and requirements related to all aspects of production of oil, gas, and coal from federal lands.

Old habits die hard. Neither the Congress nor the Administration has adjusted to the new reality in energy, which is that we are dealing with a surplus rather than a shortage. President Obama campaigned on ‘all of the above’ as his approach to which forms of energy we should pursue, but Republicans don’t believe him. Environmentalists are hoping the Republicans are right, and that a second Obama Administration will drag its feet on all forms of fossil fuels.

“The likely scenario goes between these two options. The Administration cannot turn its back on the tremendously beneficial impact of America’s newly realized energy resources, but it won’t adopt a “drill, baby, drill” position, either. There will be a serious discussion about where to go to thread the needle, and it will be less contentions than the fights over Health Care and taxes because both sides have something to gain if the talks go well.”

Former Senator Robert Bennett

Legislative Agenda

To a large degree, we already know how a divided Congress functions—we have seen it over the past two years. Committee leadership changes in the new Congress may provide opportunities for moving legislation that did not exist previously. The most significant change is the likely elevation of Senator Ron Wyden (D-OR ) to Chairman of the Senate Energy and Natural Resources Committee upon the retirement of Senator Jeff Bingaman (D-NM ). Senator Wyden and Ranking Republican Senator Lisa Murkowski (R-AK) have traveled extensively together and appear to be working diligently to find common ground on policy matters. Senator Murkowski is keenly interested in obtaining offshore oil and gas revenue sharing for Alaska, and this should be expected to be a mandatory provision of any significant energy bill that she would support. With Senator Wyden’s focus on renewable energy and Senator Murkowski’s focus on hydrocarbon production, major legislation could be moved through the Committee if the two Senators can find common ground. Ultimate enactment of such legislation would still need to be considered unlikely.

The Obama Administration can be expected to maintain its strong support for the production of renewable energy on public, private, state, and Native American lands. However, the expiration of numerous renewable energy tax provisions at the end of 2012 place the expansion of renewable energy at risk. Further, Senator Ron Wyden recently stated that the renewable energy production tax credit law should be amended to be fair to hydropower. Given the bleak federal budget outlook, reauthorization of the existing renewable energy production tax credit faces significant hurdles. The most likely avenue for reauthorizing some of the renewable energy tax support would be in an overall tax bill.

“The American economic engine runs on energy. And we need a new energy plan that includes new production, more conservation and a commitment to research that will make our country more energy secure well into the future.”

Former Senator Byron Dorgan

Tax provisions related to production of oil and natural gas will continue to be prime targets for repeal by the Administration and many Democrats in Congress. However, with appropriate vigilance by producers, any changes are likely to be limited.

Other leadership changes of importance to energy and environmental policy include Senator David Vitter (R-LA ) becoming the Ranking Member of the Senate Environment and Public Works Committee, while current Ranking Member Senator James Inhofe (R-OK) becomes the new Ranking Member of the Senate Armed Services Committee. In the House, Representative Doc Hastings (R-WA) is the likely new Chairman of the House Rules Committee, while Representative Rob Bishop (R-UT) is the likely choice to succeed him as Chairman of the House Natural Resources Committee. The elevation of Senator Vitter should not provide for a significant change of emphasis for EP W Republicans other than a likely significantly increased focus on offshore oil and gas. The change of leadership for the House Natural Resources Committee is not likely to change the agenda. Chairman Hastings has been viewed as an exemplary chairman by Republicans. A Chairman Bishop could be expected to maintain the Committee’s aggressive oversight of Department of the Interior operations, as well as the U.S. Forestry Service, and various elements of the National Oceanic and Atmospheric Administration.

Environmental groups are urging the President to make a number of legislative initiatives including proposing a Clean Energy Standard, climate legislation, and others. Even if legislative proposals are submitted, there is almost no chance for their enactment. A few matters where there is broad bipartisan agreement may be exceptions to this rule.

The most likely area for legislation addressing energy and environmental matters will be appropriations limitation provisions originating in the House which will try to reduce and/or prevent various regulatory actions within the Administration. The House has been successful in having some of its energy and environment appropriations limitations enacted during the current Congress, and it can be expected to continue to push that avenue of legislative power to the maximum that it can.