Obama could put heat on drillers but stall gas exports

Wed Nov 7, 2012 1:37am EST

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By Timothy Gardner

WASHINGTON, Nov 7 (Reuters) - Barack Obama could toughen regulations on producing and burning natural gas, coal and oil early in his second term, raising some costs for energy companies, analysts said.

The president likely will take far longer to decide whether the United States should export its newfound shale oil and gas bounty. Opponents warn that exports would spike fuel costs for consumers and undermine a domestic manufacturing recovery.

Obama slowed regulation of fossil fuels during his campaign against Republican challenger Mitt Romney, who ran on expanding drilling and letting states dominate oil and gas regulation. Obama streamlined regulation on drilling for natural gas from shale and delayed finalizing rules on mercury emissions from power plants. The light touch may have helped the president gain support from voters anxious about jobs in gas-rich Pennsylvania and Ohio.

Now that the election is over, regulations proposed and studies undertaken by Obama's agencies will return to the forefront.

And environmental groups are increasingly lobbying centrist Democrats like Obama to tighten regulations on hydraulic fracturing - known as fracking - as efforts on pushing Congress to fight climate change wither.

"It's going to be a rougher second term for oil and gas given the way the environmental debate is going and the diminished incentive Obama has to protect oil and gas after his last election is behind him," said Robert McNally, a former White House energy adviser during the George W. Bush administration who now heads the Rapidan Group, a consulting firm.

EXPORT DELAYS

The Obama administration this year also delayed decisions on exporting vast new natural gas finds to countries besides those with which it has free-trade agreements. Skeptics on exports including Senator Ron Wyden, a Democrat in line to head the chamber's energy committee, have raised concerns about diverting fuel that could be used to support domestic manufacturing and raising prices in the process.

The Energy Department this year delayed a study on the economic effects of gas exports. But even if the study eventually projects limited effects, allowing the shipments would be a difficult decision for any president.

"Are we about supporting domestic industries, about the energy industry or about just low energy prices for American citizens?" said Sarah Emerson, the head of Energy Security Analysis Inc, in Boston, describing the difficulties of the decision. "I'm not convinced either Obama or Romney would do anything on any of this."

The lack of clarity means the United States faces huge questions about what fuels it will use to power its future as it inches toward greater energy independence.

During Obama's first four years, the United States unseated Russia as the world's top natural gas producer, and oil output last month hit a 17-year high. The gains were because of advances in fracking and horizontal drilling - not policy decisions.

Until decisions on exports are made, it could make investors hesitant to sink money into renewable energy or even know which fossil fuel to favor.

"We have regulations for safety and clean air, but we've never really had a concerted, careful and coherent energy policy, and I don't really see us developing one," Emerson said.

SLIM CHANCE FOR CLIMATE TAX

With many scientists blaming climate change for fueling stronger weather events like the deadly Superstorm Sandy, calls have risen for Congress to pass a carbon tax.

But such efforts face an uphill battle. Many Republicans would reject supporting anything resembling a tax. It could put an unfair burden on the poor and raise fuel prices for consumers weary of two years of high gasoline costs.

"Sounds great, but there are many issues with a carbon tax," said Whitney Stanco, an energy policy analyst at the Washington Research Group, in a note to clients. Washington Research advises institutional investors.

Until the U.S. economy significantly recovers, major climate legislation is unlikely to pass, especially after Republicans retained control of the House of Representatives.

As a result, the Environmental Protection Agency will likely move forward on regulating greenhouse gases, Stanco said.

CLUES TO FUTURE GAS RULES

The EPA is expected to release soon two fracking reports that could provide clues to how the Obama administration will treat natural gas drilling over the next four years. The agency is expected to finalize a report issued late last year that said fracking polluted water supplies in Wyoming.

The agency has insisted Wyoming's unique geological formations make it difficult, if not impossible, to assume that the sort of pollution that happened there could occur in other regions of the country. But if the final report confirms the initial results, gas investors may watch headlines closer than the details, Rapidan's McNally said.

In addition, the EPA is set to release initial results of a study on fracking's effects on groundwater supplies. And the Department of the Interior is expected to finalize draft rules later this year on fracking on public lands. The administration hopes these could be used as a template for rules on state lands.

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