Oil and Gas Investor Energy Policy: Science and Reality

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[Editor's note: A version of this story appears in the June 2021 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

They call it “sausage making” for a reason. Forging public policy is an ugly process, inexact, complicated and messy and often defies logic. This is not a process to which scientists and engineers, like those in the oil and gas industry, can easily relate.

Our energy complex, however, is also imperfect—composed of an intricate system of drilling, completion, production, gathering, separation, processing, pipelining, storage, refining, liquefaction, marketing, shipping, generation, transmission and distribution. Each segment has a complex series of laws and regulations requiring compliance. Each segment also is a target of politicians, NGOs and activist groups that initiate protests, permit challenges, lawsuits, legislative and regulatory challenges, shareholder proxies and media attacks.

Each section of the complex is also being scrutinized for its carbon content and carbon intensity. This is driving a thorough review of all the processes along the value chain to identify opportunities to reduce carbon. Many factors need to be considered when assessing these options: cost, availability, technical viability, as well as the impacts to quality, supply chain, regulatory frameworks, and ESG performance and the ability to recover or pass along costs.

Billions of dollars are being considered for capital investments in areas such as carbon capture and storage, renewable credits, carbon offsets and the creation of certified low carbon commodities.

Public policy, through new regulations, the reshuffling of tax incentives and the impacts to infrastructure will help decide which options are most viable and cost effective, and the timeliness of policy outcomes and their consistency with U.S. energy and climate needs will ultimately guide major technical and operational decisions on capital spending.

The European Union is currently going through a process to review all inputs— from energy to commodities like steel, aluminum and cement—to determine what constitutes acceptable carbon content. A border adjustment tax is likely for imported sources of energy or other commodities that fail to meet their targets.

The U.S. could be headed in a similar direction, but on a slower trajectory. U.S. legislative proposals such as the CLEAN Future Act that set forth new carbon targets, establish “clean energy” standards and reform energy markets, will likely pass the House but fail to advance in the Senate. The 50:50 split in the Senate is a safeguard against anti-fossil energy policy because, even under the budget reconciliation process where legislation can move under a simple majority, the presence of Sen. Joe Manchin (D-WV) and his opposition to an energy transition based on elimination rather than innovation means that sweeping anti-fossil energy bills are likely dead on arrival.

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Still, a lot of questions remain unanswered: Will a package include a higher corporate tax rate? Will it eliminate the percentage depletion allowance and expensing of intangible drilling costs? Will there be new or enhanced incentives for carbon capture and other greenhouse gas reduction technologies? Will there be a carbon tax as part of a “grand deal” regarding carbon?

Unfortunately, the legislative process is often not aligned with what is needed to accomplish our goals realistically, economically and based on science. Instead, it is based on rhetoric and aspirations, emotional appeals and platitudes that fail to provide a realistic path to achieving the goals at hand.

All too often, what results is a hodgepodge of targets, mandates and demands without the roadmap, tools and incentives needed for success. In the case of energy policy, it results in a disconnect with science and reality. It is what someone I recently served on a panel with described as “The Trilemma,” three qualities we would all like to have with energy: cheap, reliable and green. While it is fairly easy to achieve two of the three qualities, it is exceedingly difficult to have all three. Reliable, green energy is not cheap. Reliable, cheap energy is usually not as green, and cheap, green energy is usually not reliable. Achieving all three is virtually impossible without abundant natural gas.

This brings us to a fundamental question: Will the Biden administration and Congress recognize the role that natural gas needs to play in helping the U.S., the rest of North America and the globe meet our energy and climate needs? We need natural gas to continue to reduce greenhouse gas emissions in the U.S. We need it in North America and Europe as a baseload fuel to offset the intermittency of wind and solar as these markets increase their use of renewables. We need it in the emerging world to meet growing energy demand, offset energy poverty, reduce air pollution from burning coal and biomass, and meet climate goals in the places where carbon emissions are growing the fastest.

Let’s hope our policy aligns ambitious energy and climate goals with science and the realities of our energy complex. In order to be successful, we have no other choice.