President Biden campaigned on pledges to greatly accelerate federal action on climate change and push a transition away from fossil fuels starting with such steps as leasing bans on federal lands. For the oil and gas industry, the big question yet to be answered is: How far and fast will he go?
Oil and gas association executives who recently spoke to the Oil & Gas Journal generally seemed to expect regulations that will be costlier and more time-consuming, especially air emission regulations, but not necessarily regulations that will bar new projects on federal lands, onshore or offshore.
The executives have been talking to people advising Biden who may become part of his administration. The talks include efforts to point the administration toward pragmatic regulations that protect the environment while fostering economic recovery from the COVID-19 pandemic.
“COVID has wreaked massive demand destruction on our industry,” said Chet Thompson, president of the American Fuel & Petrochemical Manufacturers (AFPM). The country, and with it the oil sector, needs vaccines and a reopening of economic activity, Thompson said, describing the pandemic as “far and away” the biggest headwind for oil companies.
“That dwarfs everything right now,” he said.
Fast first steps
During his campaign, Biden promised to block new oil and gas leases and hydraulic fracturing on federal lands. American Petroleum Institute President Mike Sommers was asked a week before the inauguration if he had heard any indications that those positions would be moderated. Apparently, he had not.
Instead, Sommers said, “We hope he changes course.”
On his first day in office, Biden issued an executive order designed to get regulatory rulemakings started fast, primarily with a focus on considering reversals of many of the regulatory decisions of the Trump administration, which had reversed many of the decisions of the Obama administration.
The order pointed the way toward rulemakings to strengthen controls on emissions of methane from new oil and gas production operations and emissions of methane and volatile organic compounds from existing oil and gas exploration, production, transmission, processing, and storage. An expeditious rulemaking procedure could produce final rules some time in 2022.
On the same day, an Interior Department official serving as acting secretary issued an order for a 60-day moratorium on leasing and permitting on federal lands, both onshore and offshore, though allowing for exceptions when a high-level political appointee signs off on a decision.
Pipeline projects and jobs
Nor did Biden shy away from severe economic and job impacts. His executive order revoked the cross-border permit for the proposed Keystone XL crude oil pipeline.
By the end of the day, a thousand workers had been told by pipeline company TC Energy Corp. that their construction jobs will be eliminated because of that decision, said Andy Black, president of the Association of Oil Pipe Lines. Biden’s decision also kills another 10,000 jobs that had been anticipated to build the line, Black said.
Oil producers in North Dakota had been expecting an “on ramp” pipeline connection that would have fed some of their crude oil into Keystone XL, but that now will not be built.
Trains carry crude oil from Canada’s Alberta province south through the US, but Black said past administrations, including those of Democrats, have recognized that rail transportation produces more greenhouse gases than do pipelines.
Pipeline decisions are a mix of federal and state jurisdiction, with the US Army Corps of Engineers in charge of Clean Water Act Section 404 dredge-and-fill permits for stream crossings. But even when that process is going well, it can be slowed by political appointees, as happened in the Obama administration with the Dakota Access crude oil pipeline, said John Stoody, vice-president of government and public relations at the Association of Oil Pipe Lines.
So, there is still plenty of opportunity for political decisions to contradict the professionals and the science, Stoody said. In the Dakota Access case, he was referring to the science involved in environmental analysis of the proposed project.
A recent market research report from investment bank Morgan Stanley said, “We expect an even more onerous approval process for new interstate pipelines and export terminals. Such a backdrop could limit new growth projects for midstream companies.”
Briefings for newcomers
Barry Russell, president of the Independent Petroleum Association of America (IPAA), said his group had begun participating in briefings with specialists working with the incoming administration and people on both sides of Congress, with the hope of providing them with the best information for making the best decisions.
Ryan Ullman, IPAA’s vice-president of government relations, said it is “very much open doors up there,” referring to Capitol Hill.
IPAA’s team tries to explain the basics where necessary, and the team goes through a deeper dive with the more knowledgeable people, of which there are quite a few, Russell said. But as for feedback to give indicators of what is coming, his description of briefing responses sounded like noncommittal courtesy: “They go, ‘Thank you very much for coming in.’”
Russell said his hope is that the administration will look at the demand side of energy—all kinds of energy—rather than bearing down only on the supply side. Reduced supply without a demand cut will increase cost to consumers and hit lower-income people, he said. Or it can simply shift production to other countries, as he and others have often said.
Reduced supply also will have economic repercussions. A study by a University of Wyoming economics professor released Dec. 14 estimated an indefinite leasing moratorium on federal lands could eliminate $372 billion in investment and $114 billion in tax revenues from 2021 through 2040 in eight Western states. The study was supported by the Wyoming Energy Authority and the State of Wyoming.
Climate change in everything
What may follow the 60-day moratorium on new federal leases and permits? “This is going to be a very large set of challenges that we are facing,” said Dan Naatz, IPAA’s senior vice-president of government relation and political affairs.
Climate change will be the subject threaded through everything—legislative and regulatory discussions and more congressional committees than might be expected, Naatz said.
For oil and gas regulations, the emphasis may come on methane emission cuts in such work as fugitive emission controls, well completions, liquids unloading (when liquids seep into a natural gas well), flaring, and pneumatic controller management, he said.
National Environmental Policy Act (NEPA) guidelines for regulators were revised by the Trump administration to make them less cumbersome but likely face an effort to reverse the guidelines back toward what they were previously Naatz said.
“On NEPA, yes, we expect a full-on attack,” Naatz said.
The environmental movement uses NEPA to delay and block projects, and the issue goes well beyond the oil and gas industry, he said. More than one industry representative has expressed the hope that the Biden administration will look at how NEPA can also bog down plans for wind farms, electric power lines, mass transit, and much else. The hope is that the administration will see the value of more clarity, concision, and predictability than what preceded the Trump changes.
The Bureau of Land Management (BLM) in 2016 tried to impose tighter emission controls on production on federal lands under authority of the Mineral Leasing Act of 1920, but a court decision in October overturned the regulation on the grounds that the Clean Air Act gave air emission regulatory authority to the Environmental Protection Agency (EPA).
If that court decision survives appeal, it could limit methane regulation by BLM but not EPA.
Offshore may dodge some fights
Air emission controls are much less of an issue for the offshore oil and gas sector, where two Interior Department agencies, the Bureau of Safety and Environmental Enforcement (BSEE) and the Bureau of Ocean Energy Management (BOEM), provide the regulations.
“Both venting and flaring are highly restricted by BSEE,” said Erik Milito, president of the National Ocean Industries Association (NOIA). The venting and flaring cannot be done without approval, he said. He did not sound worried about tighter regulations.
A few factors also give Milito hope of a nonpartisan approach to offshore energy: His group advocates for offshore wind farms as well as oil and gas wells; companies forming the service sector for offshore oil and gas also will serve offshore wind projects; and the “environmental justice” debate tends to be an onshore argument over community impacts, not significant for the offshore.
But the 60-day leasing and permitting moratorium announced by Interior applies to offshore as well as onshore work, and a longer moratorium could be a problem in both sectors. It especially could mean litigation by leaseholders who have been denied permits.
Leases are contracts, and government can be held in breach of contract if it blocks lease work, Milito said. Or a lawsuit could charge that permit restrictions amount to a “taking” requiring compensation, he said.
The Outer Continental Shelf Lands Act was written to provide for the orderly development of offshore resources, and under it Interior is required to maintain a schedule of lease sales. Whether lawsuits erupt over leasing depends on what a revised leasing program looks like, Milito said.
Standards for air, vehicles, fuels
The Biden administration may move to tighten national ambient air quality standards (NAAQS). That could lead states with nonattainment areas to toughen emission limits as a means of meeting more stringent NAAQS requirements, said AFPM’s Thompson.
Refiners also are closely following debates over corporate average fuel efficiency (CAFE) standards for vehicles. Thompson said refiners support efficiency improvements, but they worry that the government could set CAFE standards at a level not achievable with internal combustion engines, a strategy to force a shift to electric vehicles.
The renewable fuel standard (RFS) is a chronic problem for refiners. Thompson said they are awaiting a proposed rule from EPA for the latest, 2021, annual requirements for renewable fuel volumes to be included in gasoline.
The Supreme Court will review the RFS program of hardship exemptions for small refiners, a program upended in six states by the US Court of Appeals for the Tenth Circuit. The circuit court issued a novel interpretation of a phrase in the law contrary to EPA’s interpretation under Republican and Democratic presidents.
When the Supreme Court agrees to review a case, a common suspicion is that the court is leaning toward overturning a lower court, otherwise the Supreme Court might not have bothered with the review. But Thompson, a longtime environmental attorney, has learned like many lawyers and court watchers how hard it is to predict outcomes, and he would not do so in this case.
“The RFS in our opinion is a broken system. It needs to be reformed,” he said, without suggesting he expects reform anytime soon. The farm lobby, including ethanol producers, has proved very capable of defending RFS mandates that force blending of corn-based ethanol into gasoline.
Gas pipeline obstacles
State and local lawmakers and regulators have imposed barriers to natural gas pipelines and new gas hookups to one degree or another recently. New pipelines and hookups are blocked in parts of New York and Massachusetts. San Francisco has banned gas use in new buildings starting this year, joining more than 30 other cities in California with similar bans, and California is considering a statewide ban on gas air heating and water heating in new homes.
At the federal level, barriers to gas mainly develop through litigation to block gas pipelines. The Federal Energy Regulatory Commission (FERC) regulates interstate gas pipelines, and Biden has named Democrat Richard Glick the new FERC chairman.
Glick does not oppose gas pipelines, but he wants climate impact analyses for the downstream (user) destinations of pipelines.
Dena Wiggins, president of the Natural Gas Supply Association, had encouraged FERC to consider letting regional transmission organizations—the operators of regulated wholesale power markets—experiment with ways to accommodate demands for “greener” power and ideas such as carbon pricing.
Republican FERC commissioners have in the recent past resisted such environmental moves, saying regulations to favor renewables are outside the purview of the agency. Some FERC commissioners also see no point in analyses of downstream gas emissions. Now the agency may be pushed—or dragged—in that direction.
Biden’s executive order on his first day in office required all agencies to take into account global damages of greenhouse gas emissions that can come from projects and policies. Because of the exceptional difficulty of determining such costs, a working group will be established to devise a system for calculating the costs.
Some courts have ordered such analyses under NEPA, and some have not. Marc Hildenbrand, an energy specialist at environmental permitting company Dawson & Associates, said he has never heard of an analysis of climate impacts actually stopping a pipeline project. Hildenbrand is a former colonel in the US Army Corps of Engineers, the agency tasked with permitting stream crossings by pipelines.
Taxes or infrastructure
The prospect of some form of carbon tax looms. Canada and several European nations have carbon taxes—not without political and social repercussions. A planned increase in France’s carbon tax kicked off mass protests across the nation in November 2018 that continued in diminishing scale through all of 2019.
Any carbon tax passed by the US House of Representatives probably would need a supermajority in the Senate to overcome a filibuster, said Steve Everley, a managing director in strategic communications at FTI Consulting Inc., where he specializes in energy and natural resources.
“The politics of imposing a new tax right now, when you have a down economy, is a tough sell,” Everley said.
In 2009, a cap-and-trade bill for greenhouse gas emissions was passed by the House by a very narrow majority and did not even get a vote in the Senate, he noted.
Biden likes to make deals, find compromises, and can find opportunities for deals in such areas as a legislative package promoting infrastructure, Everley suggested. Some industry representatives and Republicans in Congress have pointed to carbon capture and storage or reuse as an area for compromise that would require infrastructure development.
The president also may want a federal program to plug abandoned oil and gas wells, a program that could put a lot people to work, Everley said. Some states do that already. Texas in 2018 plugged about 1,400 orphan wells, he said.
Everley generally suggested Biden in office may be less aggressive about trying to force change than his campaign rhetoric implied, partly because of legal limits on what a president can do but also because administrations do not want to hamstring economic development.
In addition, he pointed out that shale gas production boomed under Obama despite Obama’s preference for tougher regulations on fossil fuels, and renewable energy boomed under Trump despite Trump’s insistence on promoting fossil fuels.
“Let’s never underestimate the power of market developments,” Everley said.