Energy Independence?  By Duncan Sutherland – Exclusive to Heavy Oil Investing News

In just over six months, American President George Bush will step down and a new Commander in Chief will be sworn into the White House. Mr. Bush’s resistance to ratifying the Kyoto Treaty and lacklustre efforts to negotiate a replacement have cost him support among an increasingly concerned public. These environmentalists are likely to be much happier with a John McCain or Barack Obama administration than they have been with that of Mr. Bush.

This is because both senators have made it clear that they disagree with President Bush’s record on the issue and will be more proactive in reducing greenhouse gas emissions.

Obamanomics:

Democratic Party Presidential nominee Barack Obama has made energy policy a central plank of his campaign platform. His website provides detailed information on both his energy and environmental plans.

Central to Mr. Obama’s plan is a cap-and-trade system for greenhouse gas emissions. If elected, his administration would set a ceiling for emissions and auction allowances to companies that release carbon. Auctioning avoids grandfathering licences to heavily polluting industries, and will thus raise money to pay for his second major energy & climate initiative.

The proposed Clean Technologies Deployment Venture Capital Fund will use the accrued money to “quickly deploy new technologies like cellulosic ethanol, carbon capture and sequestration, and other clean technologies like bio-based plastics”.

Other programmes favoured by the Democrat include more stringent fuel efficiency standards for cars, and the related National Low Carbon Fuel Standard. The LCFS would mandate a reduction in “lifecycle greenhouse gas emissions [of] 10 percent by 2020”. This standard would necessarily hit heavy oil and oil sands harder than light oil. His record as an Illinois State Senator and U.S. Senator suggests Mr. Obama also favours stricter environmental and labour safety regulations for refineries. During the early primaries in states like Ohio and Pennsylvania Mr. Obama spoke of the need to renegotiate the North American Free Trade Agreement to codify more demanding environmental standards.

McCain’s Lexington Plan:

Republican Party Presidential candidate John McCain’s plan is broadly similar to Mr. Obama’s, with some important differences. Though they both would implement a cap-and-trade system to develop a carbon market, Mr. McCain would not auction permits, but issue them in proportions roughly corresponding to current emissions. Mr. McCain’s plans have much less detail at this stage than Mr. Obama’s, but in recent weeks the Republican has been stressing his environmental credentials and more specific policy information is starting to appear.

Mr. McCain’s plan will phase in auctions for carbon allowances, but it does not specify when this will begin. These future auction proceeds will, in the website’s oddly capitalized syntax, “Eventually Be Auctioned To Support The Development Of Advanced Technologies”. Additionally, “John McCain Will Establish A Permanent Tax Credit Equal To 10 Percent Of Wages Spent On R&D”.

Conclusion:

Despite the broad agreement between the two campaigns on cap-and-trade, (eventually) auctioned permits to support R&D of cleaner technology, and the importance of renewable energy sources, there is substantive divergence on federal regulation of the oil & gas sector. For instance, Mr. McCain supports lifting the federal moratorium on offshore drilling, opposes windfall profits tax on oil companies, and is pushing for more Congressional oversight and investigation into oil markets and the trade in paper barrels (or, as he puts it, “John McCain Believes We Must Understand The Role Speculation Is Playing In Our Soaring Energy Prices”). Mr. Obama wants to preserve the ban on offshore exploration, has repeatedly raised the possibility of windfall profits taxes, and believes that current high oil prices are largely due to structural reasons, not excessive speculation.

Regardless of the election outcome, the next Commander in Chief will be much more concerned with environmental policy and greenhouse gas emissions than the current one. Midterm elections in 2006 saw increased public concern about climate change and environmental policy. The 110th Congress has consequently been very active in oversight and regulation of the oil & gas industry. Since the beginning of 2008, the Congress has held forty hearings on gasoline prices. Analysts are predicting expanded Democratic majorities in both houses in the 111th Congress, so even divided government will produce new legislation.

For investors in the Canadian oil & gas business, it would be prudent to take note of the Conservatives plan to address climate change. Though it remains a regulatory framework for now, it notes that “any decision in Canada on the transition to a fixed-cap regime for greenhouse gas emissions would take into account developments occurring in other countries, especially the United States, with the aim of establishing a North American emissions trading system”.

Some uncertainty remains, however. The strong federal system of the United States suggests that policies governing fuel and emissions may not be uniform across the nation. California has traditionally been an early and vocal advocate of more stringent environmental regulations. With more inhabitants than Canada, California has a unique ability to force industry to adapt to its standards, rather than defining its standards down.

Additionally, Mr. McCain and Mr. Obama both talk about the need to achieve “energy independence” and reduce dependence on “foreign oil”. Neither has clarified whether the foreign oil that they must be independent from includes the Alberta oil sands. Their dedication to reducing greenhouse gas emissions suggests that imports from oil sands and heavy oil will diminish. On the other hand, foreign policy considerations prioritize limiting imports from countries like Saudi Arabia, Venezuela, Nigeria, Algeria, Russia and Libya (all among the top fifteen sources of U.S. crude imports). This circle has yet to be squared by either campaign.

November’s results notwithstanding, the United States is going to make major regulatory changes come 2009. Canada may be subsumed into a larger North American cap and trade framework. The savvy investor will ask companies what their strategies are to adapt. Without a detailed and actionable plan, firms will be forced to internalize carbon emissions as an unexpected cost.

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