March 11, 2010 / 1:11 AM / in 8 years

CERAWEEK-U.S. oil industry braces for carbon rules

* Pressure rises for oil industry to weigh CO2 emissions

* Chevron, ConocoPhillips factor CO2 into planning

By Bruce Nichols

HOUSTON, March 10 (Reuters) - As oil and natural gas prices settle into an equilibrium for now, a new variable is emerging as the most worrisome for Big Oil: the cost of carbon.

Major international oil companies say they are factoring carbon prices into their long-term planning calculations, but assessing that cost is a challenge as U.S. policymakers struggle to come together on how to combat climate change.

The legislation could recast the playing field for energy producers and place a premium on low-carbon energy sources like wind and solar.

“Climate change regulations must be treated like business risk on par with other risks in this business,” said Helge Lund, chief executive of Norway’s Statoil (STL.OL), speaking at the CERA Week conference. “The pressure in this industry only will increase.”

He said Statoil assesses the carbon cost of every project it evaluates, but declined to say the price it uses today.

Chevron Corp (CVX.N) estimates potential carbon costs involved before making investment decisions, even though the eventual shape of U.S. regulation is unclear, said William Koetzle, manager of legislative and regulatory affairs for the second-biggest U.S. oil company.

And ConocoPhillips (COP.N), the third-biggest U.S. oil firm, is focusing on efficiency gains to slim down its carbon footprint, said Sabrina Watkins, manager of sustainable development for ConocoPhillips.

“Carbon is included in all our decision-making,” Watkins said.

Despite the high-profile pullout of BP Plc (BP.L) and ConocoPhillips from the U.S. Climate Action Partnership earlier this year, the oil industry is preparing for eventual greenhouse gas regulation at the same time it is trying to influence the shape of the rules, officials said.

The U.S. House of Representatives passed a bill last July based on a “cap-and-trade” system that would phase in decreased limits on emissions while allowing trading of emission credits between those who can comply quickly and those who cannot.

    The bill is stalled in the U.S. Senate, and nothing final is expected until after 2010 midterm elections in November, but President Obama and key senators are working on a compromise.

    The Environmental Protection Agency, meanwhile, is preparing regulation of emissions using its authority under the existing Clean Air Act, which panel participants said could be tougher on the industry than new legislation.

    Uncertainty is a problem, Watkins said. As Congress debates and EPA advances new rules, companies have a hard time making decisions and that costs money, Watkins said.

    Without a comprehensive solution, the existing web of state and federal regulations affecting various parts of the industry will continue to grow, including more stringent rules from EPA, officials said.

    “I think we’re going to have a patchwork,” Koetzle said.

    Comprehensive legislation from Congress is still in the future but remains a likelihood, said Aaron Brady, a director at IHS-CERA specializing in the subject.

    “When we look at the most likely case, we don’t think anything’s going to happen this year, but after the 2010 midterm elections, we see the possibility of a grand compromise,” Brady said. (Editing by Marguerita Choy)

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