APRIL 2017 ///Vol 238 No. 4
What a difference an election makes
The upstream oil and gas regulatory structure has been turned upside-down on the federal level, and what was once thought nearly impossible, in terms of certain projects, now seems far more likely.
A Clinton administration would have meant increasingly heavy-handed efforts to control every aspect of the oil and gas development process from Washington D.C.; more stringent emissions requirements; a rapidly-expanding bureaucracy at the EPA—especially in the area of water enforcement in the wake of the implementation of the Waters of the United States (WOTUS) regulations; rapidly rising regulatory costs; and more and more withdrawals of federal lands and waters from the realm of oil and gas leasing. Even to those of us who believed that Donald Trump had at least an even chance to win, the conventional wisdom dictated that the best advice was to prepare for a Clinton administration while hoping for a big surprise to take place on Nov. 8.
Lo and behold, the big surprise came about, and the whole world of federal regulation of the oil and gas industry has been turned on its head. Upon assuming office in 2009, and embarking immediately on his campaign to vastly increase the federal bureaucracy and regulatory reach, Barack Obama famously said, “Elections matter.” That statement was completely true then, and it remains true today.
Let’s take a look at some of the many ways that this election matters in the realm of regulatory policy toward the oil and gas industry.
LET THE PIPELINES BE BUILT
Just four days after he assumed the office of the presidency, Donald Trump demonstrated conclusively that his proposed “America First Energy Plan” was more than just campaign rhetoric, as he signed executive orders designed to ensure the completion of two major oil pipelines—Keystone XL and Dakota Access—that had been held up for purely political considerations by former President Obama.
Keystone XL. The President’s order on Keystone XL invited the operator, TransCanada, to re-apply for its cross-border permit, and directed the U.S. State Department to “take all actions necessary and appropriate to facilitate its expeditious review.” The order further gave the State Department 60 days, from receipt of TransCanada’s new application, to issue a final decision.
That’s all very positive, and after suffering through six years of delays lacking much, if any, merit from the Obama administration, it no doubt seemed like a breath of fresh air to the company’s executives. Indeed, the company confirmed, later that same day, that it had already begun preparing its new permit application. That application was submitted several days later, and the State Department approved it in late March.
While some conflict groups continue to mount court challenges to the pipeline, and various state-level approvals will still need to be obtained by Trans-Canada, there is no doubt that the November election completely changed the equation related to this important pipeline project.
Dakota Access Pipeline (DAPL). The President’s order on DAPL (Fig. 1) was directed not to Energy Transfer Partners, the builder of the pipeline, but to the Army, ordering the Corps of Engineers to “take all actions necessary and appropriate,” to conduct this review and approve the pipeline “in an expedited manner… to the extent permitted by law and as warranted.” Within a few weeks, the Army responded affirmatively, withdrawing its requirement for conducting a full environmental impact study, which the Obama administration had forced in December for political reasons, and issuing the final easement necessary to allow the line’s final segment to move ahead to completion.
Fig. 1. The Dakota Access Pipeline is now a reality, after being held up for months on end. Photo: Energy Transfer.
That all had taken place by mid-February, and the completion of the final segment of the pipeline took less than a month, after having been held up for a half-year by the political machinations of the Obama administration in support of an often-violent and destructive protest action. Oil began flowing through the DAPL a week after a U.S. Court of Appeals rejected an appeal by the Standing Rock Sioux and Cheyenne River Sioux tribes on March 18.
All of which proves that, despite all information to the contrary, the federal government can move pretty rapidly when it is motivated to do so.
WATERS OF THE UNITED STATES REGULATION
When I last wrote about this atrocious expansion of the EPA’s regulatory reach (Fig. 2) under the auspices of the Clean Water Act in 2016, it had suffered an adverse decision in a federal district court, which had issued a nationwide injunction, prohibiting the EPA from moving ahead with its enforcement. The rule was still awaiting a hearing before an appellate court when President Trump assumed office on Jan. 20.
Fig. 2. The WOTUS went too far in defining what would be covered by the Clean Water Act, as exemplified by this stream and wetlands rendering. Source: U.S. Environmental Protection Agency.
On Feb. 28, the President issued an Executive Order, directing his EPA administrator, Scott Pruitt—who, as Oklahoma’s attorney general, had filed the lawsuit that resulted in the injunction on this rule—along with the Army Corps of Engineers, which also has jurisdiction to a lesser extent, to conduct a review of the rule and issue a revised rule that would bring it in line with the language of the Clean Water Act.
A key piece of this order, as NPR points out, is that:
Trump said that in any future proposed rule, the EPA and the U.S. Army Corps of Engineers should consider Justice Antonin Scalia’s opinion in a 2006 Supreme Court ruling, which focused on the scope of the Clean Water Act. In that case, Scalia stated that the “waters of the United States” are limited to “only relatively permanent, standing or flowing bodies of water.” He added: “The phrase does not include channels through which water flows intermittently or ephemerally, or channels that periodically provide drainage for rainfall.”
An adherence to this guidance from the President would result inevitably in a dramatically scaled-back regulation which, in its proposed form, would effectively give the EPA and Corps the right to exert federal authority over pretty much any body of water, no matter how small, man-made, ephemeral or temporary it might be, in the entire country. At that point, the rule truly would become what EPA, in its initial talking points on the matter, claimed it was: a rule largely intended to clarify jurisdictions between the EPA, Corps of Engineers and state regulators in specific circumstances. Heck, it could even turn out to be a regulation worth the industry’s support.
EXPANDED FEDERAL LEASE SALES
On March 6, the Interior Department announced that it would hold, on Aug. 16, a regionwide lease sale, which will include all available unleased areas in the federal waters of the Gulf of Mexico. Although most acreage within 125 mi of the Florida coast remains off-limits through 2022, the proposed Lease Sale 249 will include blocks in waters adjacent to Alabama, Mississippi, Louisiana and Texas. All told, more than 73 million federal acres will be offered in the sale.
“Opening more federal lands and waters to oil and gas drilling is a pillar of President Trump’s plan to make the U.S. more energy independent,” said Secretary of Interior Ryan Zinke, “The Gulf is a vital part of that strategy, to reduce our dependence on foreign oil.”
The Trump administration also promises that expanded onshore lease sales related to federal lands will follow in the near future, as a part of its America First Energy Plan.
ONRR ROYALTY VALUATION REGULATIONS
Another controversial last-minute act by the out-going Obama administration was the effort by the Office of Natural Resource Revenue (ONRR) to change the valuation requirements for royalty payments related to oil and natural gas produced from federal lands.
The regulations would essentially require lessees to value federal royalties on the same basis as they value Indian royalties. The problem here is that Indian leases contain provisions—the so-called “major portion” and “dual-accounting” clauses—that enable Indian lessors to collect royalties on a higher valuation standard than the federal government can demand from its leases, which lack these important clauses. Thus, this new ONRR regulation is a clear violation of federal lease terms.
The regulation went into effect on Jan. 1, but it was suspended by the Department of Interior on Feb. 24, due to concerns that the rule is, indeed, inconsistent with federal lease terms and would likely run into trouble in the federal courts, where it has been challenged by various industry groups.
The rule also had run into serious pushback from congressional Republicans. House Resources Committee Chairman Rob Bishop (R-Utah) issued the following statement upon learning of DOI’s decision to suspend the rule:
“The Trump administration made the right decision to suspend this illogical and legally dubious rule. It is already causing uncertainty for future investment and development on federal and tribal lands, and increasing electricity rates for rural communities, including those in my district. The next step is to do so permanently, and avoid Congress having to do it for them.”
A permanent pulling of the rule would, indeed, be an ideal final solution, but this temporary suspension is a good start, and yet another bit of proof that, as President Obama said, elections really do matter.