With the sequester forcing blunt and counter-productive cuts to federal investments in research and development, including an estimated $689 million to Fiscal Year 2013 Department of Energy innovation programs, President Obama's recent proposal to establish a dedicated fund for advanced energy research -- the Energy Security Trust -- is a welcome proposal. 

Energy innovation budget cuts under the sequester

Given that just about any energy expert understands we must be investing much more -- not less! -- in energy R&D, the concept behind the Energy Security Trust -- dedicating a small portion of revenues from current oil and gas production towards a fund to accelerate energy innovation -- is an excellent idea and one that I embraced back in April 2010 (see also here and here). 

President Obama unveiled his support for this concept in his 2013 State of the Union Address and followed that up with remarks last Friday at Argonne National Laboratory in Illinois. The president envisions an Energy Security Trust of $2 billion over 10 years "funded with revenue from profitable oil and gas companies." The Trust would "support research into a range of cost-effective technologies -- like advanced vehicles that run on electricity, homegrown biofuels, fuel cells, and domestically produced natural gas" -- each designed to reduce America's near-total dependence on oil as a transportation fuel. (For more, see this White House infographic at right or this fact sheet explaining the president's vision.)

Energy Security Trust infographic

Strong precedent for energy trust fund

The idea of a dedicated trust fund for energy research funded by small "user fees" on current energy production and/or consumption builds on the successful logic of the national Highway Trust Fund

For highways, a small gas tax paid by current users of the highway system ensures we are setting aside the necessary funds today to both maintain the current system and invest in the infrastructure of tomorrow. 

Likewise, dedicating a small fee on oil and gas production (or consumption) or a portion of increased royalties from energy production on public lands would ensure that as we enjoy relatively cheap and abundant energy supplies today, we are also setting aside the funds needed to make steady investments in the advanced energy technologies needed to secure cheap and abundant energy in the future.

This concept could also be extended to include a small charge on electricity usage, known as a "wires fee" that could generate additional funds for research and development of advanced power generation, storage, transmission, and demand response technologies. Several states, including New York, have already implemented similar charges often referred to as "system benefits" or "public benefits charges."  

From the 1970s-90s, a similar charge on the interstate transport of natural gas was dedicated to fund the Gas Research Institute, a public-private research consortia responsible for numerous advancements, including a key role in the development of commercial shale gas extraction technologies.

In short, several strong precedents exists for the Energy Security Trust concept.

Making the Energy Security Trust a reality

So in general, it is high time we begin a serious conversation about how to generate the necessary, long-term investments in energy research and innovation necessary to address national imperatives including improved security of supply, reduced public health impacts of our energy system, and climate change mitigation. The Energy Security Trust may be a big step in the right direction.

With that in mind, the thing that worries me about President Obama's proposed Energy Security Trust as it is difficult to tell how serious he and his administration are about this concept -- or how likely this proposal is to work its way through a politically charged Congress. 

If the White House is serious, they must know that the proposal as it currently stands, which does not envision opening up any new areas previously closed to oil & gas production, will not produce any new federal revenues, at least as far as the Congressional Budget Office (CBO) is concerned. 

The way CBO scores budgetary impacts already assumes revenues for any federal lands currently open to oil and gas production are part of the baseline revenue picture. That means that redirecting a a portion of those revenues -- say $2 billion over ten years -- from existing areas open to oil and gas production is actually going to be scored by CBO as deficit enhancing, rather than deficit neutral as the president has been portraying this

According to the White House fact sheet on the Energy Security Trust:

"The mandatory funds [for the Trust] would be set aside from royalty revenues generated by oil and gas development in Federal waters of the Outer Continental Shelf (OCS), already included in the administration’s five year plan. These revenues are projected to increase over the next several years based on a combination of leasing, production, and price trends, with additional revenues potentially generated as a result of reforms being proposed in the FY 2014 Budget. The Trust is paid for within the context of the overall budget." [emphasis added]

The problem with this concept is that even if oil and gas prices are likely to increase in the future, thus increasing federal revenues from oil and gas leases on public lands, any such revenue coming from areas already open to production will be considered by CBO as already included in the baseline revenue picture. 

So the only piece of this proposal that may result in new revenues that CBO would consider as "offsets" for new spending would be the "additional revenues potentially generated as a result of reforms being proposed in the FY 2014 Budget."

What those reforms would constitute is unclear. In response to an inquiry for additional details, a White House staffer told me that "those reforms will be made clear when the [FY 2014] budget is released."

A bipartisan proposal?

Lisa Murkowski's Energy 2020 blueprintThe president likes to say that his Energy Security Trust "builds on a proposal supported by a broad bipartisan coalition, including retired military leaders." The coalition he refers to is known as "SAFE" (for Securing America's Future Energy), and he's right that this idea was once embraced by the Republican side of the aisle. In fact, a 2008 energy blueprint released by House Republicans, the "American Energy Act," included the concept of a trust fund for advanced technology research funded by oil and gas royalties. The idea has been championed in particular by Representative Devin Nunes of California in the House and Senator Lisa Murkowksi of Alaska in the Senate.

Given these bipartisan bonafides, one might think this concept was a slam dunk.

The tricky situation though is that each of the Republican proposals envision dedicating royalty revenues from expanded domestic production of oil and gas, including opening up new areas previously closed to production in the Outer Continental Shelf (OCS) and places like the Alaska National Wildlife Refuge (ANWR). 

So both the CBO budget procedures and the GOP's position on using royalties for an energy R&D trust fund means that if President Obama wants to secure truly bipartisan support for this new Energy Security Trust proposal and ensure it doesn't increase the deficit, he's ultimately going to have to offer a real trade: new oil and gas production areas for new revenues dedicated to clean energy R&D. 

Unfortunately, Obama already agreed to open up new areas of the OCS for offshore oil and gas production in April 2010 -- and he did so without demanding any concessions from the GOP regarding the use of revenues for advanced energy R&D. He's unlikely to get any credit for his previous actions in any new negotiations with Republicans, and even if he did, CBO's scoring would now take into account revenues from these areas in the budget baseline. 

In short, the president missed a big chance to put this energy trust fund into action in 2010. To get another chance now, he'll have to find some new carrot to entice GOP cooperation.

A rock and a hard place

Presumably the president already knows all of this. So perhaps this is simply his opening bid, and he's fully prepared in the future to make this a real deficit neutral proposal by offering new areas for oil & gas production in exchange for support from Congressional Republicans. I don't doubt that Senator Murkowski would demand something like that, and the House GOP most certainly would. So maybe, for once, President Obama hasn't pre-capitulated and is saving his cards for the negotiating table. But it's not clear.

Even if he can find a proposal palatable to the GOP, the idea may be doomed on his own side of the aisle. Given the current uproar over Canada's tar sands and the Keystone XL pipeline as well as past pitched battles over expanded oil and gas production, I have a hard time imagining Congressional Democrats or their environmentalist supporters getting behind the idea of opening ANWR to oil and gas drilling. 

So can President Obama find some new area in the OCS that is still closed to drilling which greens and Democrats will find palatable and will serve to entice a combative GOP to the table? Or will this Energy Security Trust end up stuck between a rock and a hard place?

Another option: raising royalty rates

If he can't find new lands or waters to open to oil and gas production, the only other other alternative is to propose an increase in royalties and fees on existing oil and gas producing lands. 

Infographic: raising revenues for an Energy Security Trust FundAbout 594 million barrels of oil and 3,724 billion cubic feet of natural gas were produced on federal lands and waters in 2012, according to the Congressional Research Service

Raising $2 billion over ten years -- or a modest $200 million annually -- would thus require increasing royalties by just 15.8 cents per barrel of oil and 2.7 cents per million British thermal units (MMBtus) of natural gas (assuming the necessary revenues were spread across oil and gas on an equal energy-content basis). That's an increase of less than 0.2 percent over current WTI crude oil prices and 0.7 percent over current NYMEX natural gas prices.

Put another way, Congress could raise all of the funds needed to support long-term investments in this Energy Security Trust by increasing royalties paid for producing oil and gas from public lands and waters by an amount less than the typical daily fluctuations of oil and gas commodity prices. The increased royalties would be lost in the daily noise of the oil and gas commodity markets and would have a negligible impact on the marginal production of oil and gas on public lands.

WTI and Brent crude oil prices and volatility

(As an aside: Congress could likewise fully eliminate the $689 million in counter-productive and damaging sequester cuts to DOE energy innovation programs by increasing royalties by just 54.3 cents per barrel of oil and 9.4 cents per MMBtu of gas) 

That's a proposal I'd certainly embrace. As a citizen and thus part owner of the oil and gas stored beneath federal lands, I'd certainly like to see a portion of my finite national endowment of oil and gas dug up today dedicated to ensuring we have the clean, advanced energy technologies needed tomorrow. 

But then again, I can already hear the cries of "ENERGY TAX!!!" from the oil and gas industry and their allies in the Republican Party.

So how serious are we to take this Energy Security Trust proposal? How hard is the White House planning to work with Congress to make this law? How serious are GOP leaders like Lisa Murkowski about standing up a long-term trust fund to secure the advanced energy technologies this nation will soon require? Or is all of this just posturing from both sides? Those questions are still at the front of my mind as I think about how to react to this new proposal.

 

Update, March 20, 2013

Nick Juliano at E&E News ($ubscription required) puts several key White House and Congressional figures on the record on their stance towards expanded drilling and possible revenues for the Energy Trust, illustrating the tough road this proposal must walk to become a reality:

White House energy adviser Heather Zichal was clear yesterday that new drilling was not part of the president's proposal, which was first outlined in his State of the Union address and reiterated in a heavily promoted speech last week. Opening the Arctic National Wildlife Refuge (ANWR) is "off the table," and the approach envisions using revenue from the administration's "existing" outer continental shelf exploration plan and "nothing more," she said (Greenwire, March 19).

The proposal already was facing resistance in Congress -- especially among House Republicans -- and Zichal's reiteration that new drilling would not be considered puts another nail in the coffin.

"It was dead on arrival as far as I was concerned anyway. That ... statement confirms their thinking -- it just doesn't make sense to me philosophically or politically," said Rep. Doc Hastings (R-Wash.), who leads the House Natural Resources Committee, which has jurisdiction over energy production on federal lands.

...

The Senate may have an opportunity to weigh in on the split later this week, as [Alaska Senator and ranking member of the Senate Energy Committee Lisa] Murkowski is considering offering an amendment to the budget resolution that would pay for the trust fund by expanding oil companies' access to federal lands and waters, a spokesman for the senator, Robert Dillon, said yesterday.

... 

Dillon said Murkowski recognizes that ANWR is likely too controversial to be opened to drilling in conjunction with a trust fund but said that some expanded access would have to be part of any trust fund legislation. Murkowski is in the process of drafting legislation to enact the proposal that could be introduced after Congress returns from its upcoming Passover and Easter recess.

...

Sen. Ron Wyden (D-Ore.), chairman of the Energy Committee, said his focus has been elsewhere, including on today's scheduled confirmation vote on Interior secretary nominee Sally Jewell, and did not offer a position on the trust fund.

"I'm going to have to have some more discussions with the administration before I have a fix on it," Wyden said yesterday.

Sen. Mark Begich (D-Alaska), a moderate who supports expanded drilling, said he would not support an energy trust fund that was funded without increased access, but he said he was encouraged by the administration's continued commitment to oil drilling offshore from his home state.

"I think obviously we would like to see a more robust plan on oil and gas development," he said. "But we are pleased that they have not slowed down or stopped what's going on in OCS in Alaska, which is critical."

Meanwhile, Sen. Ben Cardin (D-Md.), who typically sides with environmentalists when it comes to drilling, said he could not back a plan that would open his state's coastline to oil rigs, although he said he would have to study the specifics of any particular proposal.

"It's a non-starter for me for any offshore drilling off the Maryland coast," Cardin said yesterday. "So I need to know whether there's an explicit or implicit ... position on that drilling. If it deals with existing drilling and doesn't expand it, then I would be supportive."

 Juliano was kind enough to offer me the last word on this, concluding:


A royalty increase of less than 16 cents per barrel could raise the necessary revenue for the trust fund, said Jesse Jenkins, an energy researcher pursuing a master's degree at the Massachusetts Institute of Technology. But such an approach likely would generate sharp resistance from the oil industry and its allies in Congress who would dub it another tax increase on energy production. At the same time, expanding drilling would face head winds on Capitol Hill from environmentalists in the Democratic caucus.

"That's why I question how serious this proposal is," Jenkins said, "because if they're serious about it, they're going to have to cross one of those two bridges."

E&E subscribers can read the full story here.