Houston — A potential swing to a Democrat-controlled House of Representatives and a host of important energy-related state ballot initiatives make the US midterm election cycle a potentially transformational event for US energy. Oil, natural gas and power market players are bracing for the possibility of a new landscape after voters leave the polls November 6.
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Hanging in the balance on election day: the potential for tightening oil and natural gas supply due to significant restrictions on drilling in Colorado and Coastal Florida; major boosts to renewables at the expense of nuclear and fossil-fueled power generation; greater obstacles for developers of natural gas infrastructure in the Northeast; and a move to a market-based power structure in Nevada.
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"Energy sector developments are ultimately the result of a convergence of three forces -- markets, technology and policies," observed Roman Kramarchuk of S&P Global Platts Analytics, adding that "significant policy changes can happen quickly, particularly in a politically polarized and populist world."
He noted that in Colorado, Proposition 112 would "dramatically cut the land open to new oil and gas development in the prolific Denver-Julesburg basin." Platts Analytics estimates that this measure would reduce the number of wells drilled by nearly 80%, with a resulting drop off in oil production of 300,000 b/d and natural gas production of 1.5 Bcf/d by the end of 2023, compared with its reference-case forecasts.
If Republicans are able to hang on to their majorities in the House and Senate, President Donald Trump will have a clear path to pursue the full measure of his regulatory-rollback and pro-energy agendas. But if Democrats wrest control, even in just one chamber, the Trump march will be slowed.
There are nine state ballot initiatives that could impact a broad cross section of energy markets, companies and strategies. Meanwhile, races for governor in Michigan, New Mexico and New York, and for the US Senate seat in Texas, also could significantly shift decision-making on key energy issues.
Here's a quick rundown of key races and ballot measures:
US: HOUSE OF REPRESENTATIVES
Overview: Control of US House will impact Trump agenda progress.
Polls: As of October 16, polling firm 538 estimated a 84.7% chance that Democrats would win control.
Energy impact: If Democrats prevail, expect a message-heavy agenda that touts the "clean energy" economy and showcases concern over climate change, although little major legislation is expected. Oversight may heat up on such topics as methane emissions regulation, public lands decisions, and steps to keep coal and nuclear plants afloat. The chair of the House Energy and Commerce Committee is likely to be Representative Frank Pallone of New Jersey, and the gavel at House Natural Resources would likely go to Raul Grijalva of Arizona. Pallone said one of his priorities would be "holding the Trump administration accountable for dangerous policies that only make [climate change] worse." In the event a Democratic House votes to impeach Trump, a safe bet is that all policy debate and legislation would grind to a halt. One potential area of common ground is infrastructure legislation.
Overview: Control of the Senate is key for confirming judges, agency positions.
Polls: As of October 16, polling firm 538 estimated a 80.9% chance that Republicans would hold the majority.
Energy impact: The Trump approach to regulating power sector and oil and gas emissions will likely be resolved in court. Backers of the president's deregulation agenda see keeping Senate control as essential to confirming judges with an ultimate say in energy and environmental policy. Trump's choice to fill a fifth slot at FERC, Bernard McNamee, also faces longer odds in the unlikely event of a Senate flip.
The Senate Energy and Natural Resource chairmanship could be in question in that event. If Senator Maria Cantwell of Washington moves over to the Commerce Committee, the chairmanship could fall to either Joe Manchin of West Virginia or Martin Heinrich of New Mexico, according to Washington sources.
The elections also put in doubt the future of some pro-fossil fuel Democrats who make for key Senate energy dealmakers, such as Heidi Heidkamp of North Dakota.
NEW MEXICO: GOVERNOR
Overview: US Representatives Michelle Lujan Grisham, Democrat, and Steve Pearce, Republican, are campaigning to replace term-limited Republican Governor Susana Martinez.
Polls: The race has swung from a dead heat to a slight lead for Lujan Grisham.
Energy impact: Lujan Grisham is seen as more likely to embrace drilling regulations, such as limits to methane emissions, while Pearce is expected to oppose any new state and federal limits.
In Congress last year, Pearce proposed withholding Interior Department funds to implement methane regulations, which he said were putting the state's small producers out of business.
New Mexico, the third top oil-producing state, has faced similar pipeline takeaway constraints as Texas, where natural gas flaring also has surged in order to keep oil wells producing. Departing Governor Martinez oversaw a deregulatory push to reexamine state rules and resist new federal rules.
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NEW YORK: GOVERNOR, STATE SENATE
Overview: The already difficult climate for natural gas project permitting may become more challenging if Governor Andrew Cuomo prevails over Republican challenger Marc Molinaro.
Polling: Cuomo is favored to win by 18% in September 20-27 Siena poll; State Senate is a tossup.
Energy impact: Natural gas infrastructure faces uncertainty in the state, where regulators have already nixed several pipeline projects and assertive environmentalists want further restrictions.
Incumbent Governor Andrew Cuomo was pulled further to left in the primary. When confronted by an activist, he stated he would not allow the construction of any new natural gas-fired power plants. How far he tacks to the center is an open question. Some industry groups say more natural gas is needed to meet the current target of 50% renewables.
But if a blue wave materializes and the state Senate flips to Democratic control, that would create an opening for stalled legislative efforts to make the state 100% fossil free by 2050.
Overview: Former state senator Gretchen Whitmer, recently endorsed by US Senator Bernie Sanders and the Sierra Club, is the Democrat, facing off against Bill Schuette, the current attorney general.
Polls: Various analysts have Whitmer ahead by 8-12 points.
Energy Impact: At stake is the future of Enbridge Energy's aging, 645-mile Line 5 oil and NGL pipeline running through the Straights of Mackinac. Current Governor Rick Snyder in early October inked a deal under which Enbridge would build a utility corridor tunnel running along the current route that would house a new pipeline as well as power and telecommunications cables. The existing line would remain in service during the project, which is estimated to take up to 10 years to complete.
If elected, Whitmer has vowed to move quickly to negotiate the shutdown of Line 5, which carries upwards of 540,000 b/d of crude and NGLs from Canada's oil sands to the US Midwest and Ontario.
Canadian throughput currently is so constrained that any lessening of capacity would make clearing the market even more challenging, according to Platts Analytics. Whitmer also has endorsed a goal of 100% renewable energy in the state.
TEXAS: US SENATE
Overview: US Senator Ted Cruz, Republican-Texas, faces well-funded Democrat Beto O'Rourke.
Polls: Recent polls show Cruz in the lead, but the race has generated considerable national attention, and Democratic campaign cash is streaming into the state.
Energy impact: Cruz has been one of the loudest voices in Washington for reforming the Renewable Fuel Standard, although the White House discarded his proposal to cap Renewable Identification Numbers at 10 cents. Cruz rallied Northeast oil refinery workers, complaining that the biofuel policy is putting the facilities out of business and threatening regional energy security.
Trump sided with ethanol interests in October, directing the Environmental Protection Agency to approve year-round sales of higher-ethanol blends, although Trump asked for new rules for RINs trading as a concession to refiners.
While presenting himself as pragmatic and a supporter of the broader elements of the Texas energy economy, O'Rourke wants to increase federal funding of climate research, rejoin the Paris climate agreement, increase EPA's independence and support stronger land-use policies in Texas.
COLORADO: PROPOSITION 112
Overview: Passage would increase oil and gas drilling setbacks from 500 feet to 2,500 feet.
Polls: Polling information is limited, but a recent internal poll funded by the oil and gas industry had the measure passing.
Energy impact: Colorado's drilling setback proposal would ban most new drilling in the prolific DJ Basin, the fastest growing production area in the Rocky Mountain region. New wells drilled in the basin would be reduced by about 78% starting in 2021, according to S&P Global Platts Analytics.
The state's oil production would sink to 275,000 b/d by end-2023, a 54% decline from current projections, and natural gas output would fall to 1.9 Bcf/d, down 45% from the current outlook, S&P Global Platts Analytics estimated.
The figures reflect natural well declines, assuming operators would leave currently producing wells in place, but not drill any new wells after 2020, as Colorado's approved drilling permits are valid for two years. Colorado is the sixth largest producing state, both for oil and natural gas.
CALIFORNIA: PROPOSITION 6
Overview: If approved, the proposition would repeal a recent 12-cent/gallon gasoline tax increase and prevent state lawmakers from increasing gas taxes in the future without voter approval.
Polls: A September poll by the Public Policy Institute of California of 964 likely voters found that 39% supported the proposition, 52% opposed it and 8% were undecided. An August poll of 900 likely voters by Probolsky Research found that 36% supported the proposition, 48% opposed it, and 8% were undecided.
Energy impact: California is the most populous state in the US and one that consumes about 43 million gallons of gasoline every day. The proposition, if approved, would repeal a 12-cent/gallon increase in the gas tax and also a 20-cent/gallon diesel fuel tax that went into effect on November 1. The tax increase is intended to help fund mass transit and transportation infrastructure projects.
Sam Ori, executive director at the Energy Policy Institute at the University of Chicago, said the increase is unlikely to impact statewide gasoline demand, which is relatively inelastic, but it is unclear if voters would approve future tax increases that could have more meaningful impacts on demand. "On the one hand, people, generally speaking, don't like to pay more for gasoline," Ori said in an interview with the Platts Capitol Crude podcast. "On the other hand... Californians are pretty ambitious on climate policy and addressing climate change."
FLORIDA: AMENDMENT 9
Overview: If approved, the amendment would prohibit drilling, either for exploration or extraction, of oil or natural gas in state waters. The ballot item is a state constitutional amendment that also includes a possible ban on electronic cigarettes and other vapor-generating devices in certain workplaces. The amendment, which requires a 60% supermajority vote for approval, has been challenged in Florida's Supreme Court because the offshore drilling ban and vaping issues are unrelated, but included in the same amendment.
Polls: A June poll commissioned by the Florida Chamber of Commerce of 605 likely voters found that 55% supported the amendment, 31% opposed it and 14% were undecided.
Energy Impact: The amendment would prohibit drilling in all state waters along Florida's shoreline, which includes submerged lands 10.36 statutory miles off Florida's west coast and 3 nautical miles off the east coast. The amendment would not impact the transportation of oil, refined products or LNG through state waters by pipeline or ship nor possible future drilling in federal waters. The amendment would have no apparent impact on supply since no drilling currently takes place in state waters, but would prohibit future development. Its potential passage may serve political purposes as the Trump administration works to finalize its offshore oil and gas lease sale plan. Interior Secretary Ryan Zinke has told Governor Rick Scott that Florida waters will be excluded from the final plan, but has declined to offer specifics and has said that a final decision has yet to be made. The federal offshore plan has been an issue in the current race for US Senate between Scott and Senator Bill Nelson, a Democrat. Nelson has criticized Scott for not getting federal waters offshore Florida explicitly removed from future offshore leasing plans.
WASHINGTON: INITIATIVE 1631
Overview: Carbon fee set at $15/mt starting in 2020, increasing by $2/mt annually until the state meets its existing greenhouse gas reduction goal for 2035 and is on track to meet its 2050 goal.
Polls: Appears to have broader support than a similar carbon tax proposed in 2016, which was rejected by 59% of voters.
Energy impact: Oil refineries, natural gas-fired power plants and other large users of fossil fuels would be hit by the fee, which would generate an estimated $2.3 billion in the first five years. Washington has 3.4% of the nation's oil refining capacity.
The fee would not apply to the state's sole coal-fired power plant, which is already required to close by 2025. Competing ballot initiatives 1601 and 1602 would prohibit state and local governments from imposing a carbon tax and collecting revenue from one.
If passed, the carbon fee would be a first of its kind nationally and would likely lead to similar proposals in other states to curb emissions.
ARIZONA: PROPOSITION 127
Overview: Passage would increase Arizona's renewable portfolio standard to require electric utilities to get 50% of their electricity from renewables by 2030, up from the current mandate for 15% renewables by 2025.
Polls: A late-September Suffolk University/Arizona Republic poll showed 46% of voters oppose the measure and 33% support it.
Energy impact: The high proportion of renewables and quick deadline proposed in Proposition 127 would decrease emissions from the state's electric sector, but would create a number of challenges for grid stability.
The state's utility, Arizona Public Service, has opposed the proposal, citing the mismatch between renewable generation and customer demand patterns. Advocates criticize the utility's opposition and say the measure would lower energy bills.
APS says the proposition could lead to early retirement of the 3.9-GW Palo Verde nuclear plant in 2025 and the 1.5 GW Four Corners coal-fired plant. Palo Verde's unit licenses run through 2046 and 2047.
NEVADA: QUESTION 3
Overview: Amends the state constitution to require Nevada to transition away from its vertically integrated utility system to a competitive, market-based structure. Large commercial customers are expected to see benefits in the form of reduced rates, and the biggest backers of the measure are data-storage firm Switch and the Las Vegas Sands Corporation. The state's incumbent utility, NV Energy, opposes the measure, as do the Sierra Club and Natural Resources Defense Council, who say the move would interrupt NV Energy's commitment to boost renewables.
Polls: A September Suffolk University/Reno Gazette poll showed 51% of voters opposed the initiative while 32% supported it. The measure passed in 2016, but it needs to be approved again to become a part of the Nevada Constitution.
Energy impact: If the measure passes, NV Energy would likely be forced to divest its generating assets and assign its contracts to new owners, according to a report by the Nevada Public Utilities Commission.
The PUC also found the change can be implemented by the measure's 2023 deadline, but it would be a heavy lift. A report by the Governor's Committee on Energy Choice recommended that if the measure succeeds, Nevada should join an existing grid operator, presumably California Independent System Operator.
NEVADA: QUESTION 6
Overview: Increases Nevada's renewable portfolio standard to require utilities to get 50% of their electricity from renewable resources by 2030, up from the current mandate for 25% by 2025.
Polls: An April poll by the Mellman Group showed 68% of voters supported the measure and 20% opposed it. As a constitutional amendment, Question 6 needs to be approved by voters twice; if it passes in November, it would appear again in 2020.
Energy impact: NV Energy is on pace to surpass the current standard, reaching an overall 23.8% RPS in 2017. And the utility plans to double its renewable energy by 2023, potentially putting it on track to meet the increased RPS even without the mandate.
But NV Energy announced in May that it might not pursue its planned investment in 1 GW of new renewable energy if Question 3 passes, saying it wants to avoid increasing liabilities for customers.
MISSOURI: PROPOSITION D
Overview: If approved, the proposition would raise the state's gasoline tax by 10 cents/gallon, to 27-cents/gallon, over four years. The proposition also would create a fund for road projects and exempt Olympic prizes from state taxes.
Polls: There is no polling on the ballot, but Missouri voters have previously defeated five proposed gas tax increases and approved three, including the state's initial, 2 cents/gallon gas tax in 1924.
Energy Impact: The proposition, if approved, is unlikely to impact demand since it is a relatively minor tax increase phased in over time. The proposition increases the tax for gasoline and diesel by 2.5 cents/gallon per year by 2022.
The tax increase on compressed gas, LNG and propane used as an alternative fuel would take effect in 2026.
The measure sets up an equivalent tax rate from all alternative fuels. Revenue from the gas tax increase would be used for state highway patrol funding.
--Staff reports, email@example.com