Oil, gas face headwinds, but opportunities remain

Oil and gas companies will face headwinds in 2024 as the Biden administration looks to implement several landmark environmental rules and courts address a myriad of issues that may impact the industry.

Legislative action—both pro- and anti-oil and natural gas—is not out of the question, despite a divided Congress and the upcoming presidential election, several experts told Oil & Gas Journal.

With the Senate controlled by Democrats and the House by Republicans, broad energy legislation is off the table this year, said Jeff Eshelman, president of the Independent Producers Association of America (IPAA). “Last year, the first thing Congress did was introduce HR 1, an energy bill. But then it went nowhere,” Eshelman said. “The House is in favor, and the Senate is against. Even if they were to agree and pass a bill, the president is not going to sign anything that is pro-oil and gas.”

But tweaks to energy policy are possible, said Dustin Meyers, executive vice-president of policy, economics, and regulatory affairs at the American Petroleum Institute (API). “Tradition makes it a little more difficult to pass significant legislation” in an election year, Meyers said.

But the presidential election could place energy in the spotlight this year, countered Andy Black, president of the Liquid Energy Pipeline Association (LEPA). “Candidates are going to talk energy” partly because there are “real differences” in the policies of the presumptive nominees, President Joe Biden and former President Donald Trump, Black said. Biden has shown interest in transitioning to a no-carbon energy future. His administration has made moves to prevent some new oil and gas projects, while approving others. Trump has talked about the need for all energy sources, especially oil and gas. The differences could draw the attention of lawmakers, leading to some movement on energy provisions.

API is keen to see Congress build on last year’s permitting-reform measures, Meyers noted. In 2023, Congress sought to fast-track permitting by adding several provisions—including clarifying the roles of regulators in the permitting process, setting deadlines, and seeking timely and unified environmental assessments—into a must-pass federal debt ceiling bill.

“While the window for [additional] permitting reform is closing, there is still a chance,” Meyers said. Policymakers from both sides of the aisle “recognize how broken the permitting process in this country is,” he said, partly because the federal and state regulatory snarls touch not only oil and natural gas, but also renewables, electric transmission, and other projects that are “critical to any decarbonization effort.”

Meyers suspects lawmakers might seek to tack on additional permitting provisions to unrelated, must-pass bills, just as they did last year.

Congress also could move to require more federal offshore oil and gas lease sales if pump prices rise closer to the election, added Erik Milito, president of the National Ocean Industries Association (NOIA). “There are a lot of geopolitical issues that could impact [gasoline] prices,” including the ongoing war in Ukraine and attacks by Iranian-based Houthi rebels on Red Sea tanker traffic, he said.

NOIA will press Congress to inject more certainty into the federal lease program by mandating annual lease sales for both oil and gas and wind, Milito said. In late 2022, Congress used the must-pass Inflation Reduction Act (IRA) to require the US Interior Department to reinstate three 2023 federal offshore oil and gas lease sales canceled by the Biden administration. But no offshore federal oil and gas lease sales are scheduled for 2024, Milito said.

While unrelated legislation may provide a vehicle for pro-industry provisions, those bills could prove problematic, Eshelman of IPAA said, since Congress often turns to the oil and gas industry to “pay for” desired tax cuts or funding new projects by seeking to impose windfall profit taxes or adding fees to operations.

“The threats are huge,” Eshelman said, noting that windfall profit taxes or methane fees could wipe out marginal wells that account for 6-10% percent of US production by making them too expensive to operate. “That might not seem like a lot, but it is what keeps prices economical for US consumers and enables the US to export LNG needed by our allies” in Europe after Russia sharply reduced piped natural gas supplies during the Ukrainian war, he explained.

The midstream sector expects the Pipeline Safety Act reauthorization “to be a big focus” on Capitol Hill this year, said John Stoody, LEPA vice-president of government and public affairs. While the act does not expire until 2025, lawmakers are already working on the next 4-year reauthorization. In December 2023, the House Transportation and Infrastructure Committee approved in a unanimous, bipartisan vote the Promoting Innovation in Pipeline Efficiency and Safety Act of 2023 (PIPES Act).

That panel’s bill would fund the Pipeline and Hazardous Materials Safety Administration (PHMSA) at $1.1 billion over 4 years and mandate that the regulator recruit more safety experts and inspectors, improve pipeline operations, and enhance rules to prevent excavation damage to pipelines.

Other provisions mandate the agency to:

• Create a Liquefied Natural Gas Regulatory Safety Working Group to clarify the jurisdiction of federal agencies over the approval and management of LNG plants.
• Examine current hydrogen-blending initiatives to determine if composite-material pipelines can safely transport hydrogen or hydrogen blended with natural gas.
• Increase stakeholder transparency and operator accountability.
• Require the development of minimum safety standards for the injection, extraction, and storage of carbon dioxide incidental to pipeline transportation.

The House Energy and Commerce Committee, which also has jurisdiction over reauthorization, and the Senate Commerce Committee still must act before the bill, or some version of it, becomes law. The committees should advance the legislation this year, Stoody said.

Significant court rulings ahead

Major court cases could turn some environmental regulations on their heads in 2024. The Supreme Court will hear oral arguments in February in a case that could overturn a nearly 40-year precedent (known as the Chevron deference) that allows federal agencies to interpret their regulatory power when statutes are unclear.

While the specific case, Loper Bright Enterprises v. Raimondo, asks whether fisheries should have to pay the salaries of federal observers that prevent overfishing, it has broad implications for the federal government’s authority across agencies, including the Environmental Protection Agency’s (EPA) interpretation of the Clean Air Act, said API’s Meyers.

“This is the biggest case of the year,” Meyer said. If the high court overturns the Chevron doctrine, as expected, it could impact a host of the Biden administration’s signature energy and environmental cases moving through federal courts, including the National Highway Transportation Safety Administration’s fuel economy standards, the EPA’s power plant, methane, and tailpipe-emissions rules, and upcoming Securities and Exchange Commission (SEC) climate disclosure rules, he explained.

Raimondo builds on the Supreme Court’s decision last year in West Virginia v. EPA that determined the EPA did not have clear authorization from Congress to curb greenhouse gas emissions from existing power plants, Meyers noted. “All [new federal environmental] regulations will have to abide with the contours of that decision,” he explained. “There are a lot of open questions whether these landmark proposals [by the Biden administration] can abide by those contours.”

Many of those landmark proposals are making their way through federal courts and have the potential to move to the Supreme Court.

For example, the US Court of Appeals for the District of Columbia (DC Circuit) in October heard three separate cases on the legality of the Biden administration’s rules on car and truck emissions and mileage. Transportation is the largest source of greenhouse gas emissions that contribute to climate change.

Those cases involve a 2021 EPA rule that tightened tailpipe pollution limits and a 2020 EPA decision that restored California’s right to set its own tailpipe pollution standards for cars and SUVs. About 15 states have signed-on with California’s more-stringent-than-EPA standards. The third case challenges rules to require vehicles sold in the US to average at least 40 mpg in 2026, up from about 28 mpg. Losers in the court’s decisions will likely appeal to the Supreme Court.

The Supreme Court will hear oral arguments on Feb. 21 on whether to halt an EPA plan to lower ozone levels across the nation, while a federal appeals court continues to look at the merits of the case, Kinder Morgan v. EPA. Kinder Morgan and other petitioners, including the Interstate Natural Gas Association of America (INGAA), requested that the court rule on the stay by June, an INGAA spokeswoman said.

EPA’s Good Neighbor Rule (GNR) mandates reductions of NOx from power plants and certain industrial sources, including engines that provide compression for natural gas pipelines rated at 1,000 hp or greater, INGAA explained. “Lawful efforts to address NOx emission in themselves are not bad policy, but the GNR is based on faulty assumptions and did not consider the regulation’s effect on natural gas reliability, resulting in a flawed final rule that vastly overregulates pipeline engines, is unrealistic, and is costly,” the INGAA spokeswoman said. “Additionally, we anticipate it will cause pipeline service disruptions that are likely to negatively affect electric grid and gas reliability.”

While the Supreme Court looks at an emergency halt of the program, the DC Circuit will accept briefs on the merits of the rule through summer 2024, with a decision expected in the fourth quarter, or more likely in 2025, the INGAA spokeswoman added.

The oil pipeline industry is awaiting a decision from the same court in Liquid Energy Pipeline Association v. EPA on whether the Federal Energy Regulatory Commission (FERC) can prevent indexed oil pipeline rates from rising with inflation, LEPA’s Black said. That case, related to a 2022 FERC policy, was argued in October 2023, with a first- or second-quarter 2024 ruling expected, he said.

The midstream sector will also monitor several other court cases around the country in which opponents to new fossil fuel infrastructure sued to block FERC certificates to build new natural gas pipelines and LNG plants, added Deena Wiggins, president of the Natural Gas Supply Association. “We need to review what the courts do in review of these certificates because every court decision adds to the body of law” that FERC uses in future decisions, Wiggins explained.

In December 2023, the EPA issued its power plant rule requiring all new and existing gas-fueled plants to capture 90% of their emissions by 2035. That case will see court action in 2024.

Government policies threaten drilling

The US Bureau of Energy Management (BOEM) has no offshore oil and gas leases planned for 2024. BOEM’s 5-year lease plan, issued in December, includes just three Gulf of Mexico sales—one in 2025, one in 2027, and one in 2029—with no sales scheduled for the Atlantic and Pacific Oceans or offshore Alaska. Historically, the Interior Department offers 11-20 lease sales in a 5-year period.

BOEM indicated that it would not have moved forward with even these three auctions had it not wanted to continue to hold offshore wind lease sales. Congress in 2022 required the Interior Department division to hold at least one offshore oil and gas sale within a year of any offshore wind lease sale, NOIA’s Milito said.

The offshore oil industry worries that the government could further limit the acreage offered in the three sales by adding new restrictions, including those to protect Rice’s whales, an endangered species known to live in the Gulf of Mexico. While the whales’ habitat in the northeastern Gulf of Mexico is not on offer, the government last year proposed to designate about 6 million acres included in GOM Lease Sale 261 as a protected area and impose speed limits and bans on overnight voyages of oil and natural gas vessels, but not other vessels, in the area, Milito said.

The state of Louisiana, Chevron Corp., and API sued in September 2023 to require the government to put the acreage back on the auction block as part of the November 2023 sale without new restrictions for the whales. A US District Court judge ruled in favor of Louisiana and the oil industry, forcing the government to include the acreage. 

“While the court knocked down some of the restrictions, Interior is still trying to move forward with the limitations,” which Milito said could force oil companies and their investors to rethink plans for the region. “For oil and gas, it could be significant,” he said, calling the acreage “prime real estate.” Environmentalists understand the region’s significance to the industry and will continue to pursue legal cases to keep the acreage protected as a “pathway to shut down the offshore Gulf of Mexico” to oil and gas development, he added.

While timely permitting of pipelines and infrastructure remains the most significant impediment to onshore oil and gas development, new Endangered Species Act designations could impact development there as well, said IPAA’s Eshelman. The Fish and Wildlife Service (FWS) in 2023 proposed listing the Dunes Sagebrush lizard as an endangered species. The lizard’s primary habitat is the Permian basin and listing it could add new barriers and delays to drilling, he said.

DOE’s LNG export rules

The LNG sector is watching potential changes to LNG export rules this year, as President Biden faces election-year pressure from environmental groups to halt its expansion.

The US, already the world’s largest LNG exporter, is awaiting approval of a host of permits and project plans at the Department of Energy (DOE). On Jan. 26, the White House ordered a halt of new export authorizations while the DOE beefs up its review process to consider the climate and economic effects of greater exports (OGJ Online, Jan. 26, 2024).

“There simply are not enough LNG facilities to satisfy all the demand,” said Charlie Riedl, executive director of the Center for Liquefied Natural Gas. “A change in this policy could add enough uncertainty to the approval process to deter new investment” in the capital-intensive projects. “We have historically enjoyed some predictability in DOE’s reviews. Changes to the policy could turn that on its head,” he said.

LNG is a battle ground for activists and a difficult issue for the Biden administration’s foreign policy. The administration has pledged to help its allies in Europe obtain natural gas after Russia cut supplies. Plus, many developing countries are now using imported LNG to switch from coal in power generation. While the change would help lower carbon emissions, environmentalists fear that investment in a new long-term source of fossil fuels ultimately hurts the planet.

FERC, PHMSA, SEC

Industry will continue to monitor FERC and PHMSA rulemakings and policy decisions this year. But both regulators are missing key personnel.

“We don’t have a full complement of FERC commissioners, with two vacant seats,” NGSA’s Wiggins said, adding that it is causing many to wonder if the commission, under the leadership of Chairman Willie Phillips, will continue to vote on orders on a regular basis.

The White House has not nominated new FERC commissioners, and a third commissioner’s term will expire this summer, which could leave the regulator, which decides if new gas pipelines and electric transmission lines are built, without a quorum.

In addition to deciding whether to grant certificates on specific projects, FERC could act on two major policies this year: its revised certificate policy statement and new gas-electric rules, the INGAA spokeswoman noted.

Meanwhile, the White House has failed for 3 years to nominate a leader for PHMSA, the nation’s pipeline safety regulator. Tristan Brown has been running PHMSA since February 2021, but only as the acting or deputy administrator.

PHMSA has several key issues bubbling this year, including action on a Congressional order that the agency update its CO₂ pipeline regulations. LEPA’s Black said the rules will likely focus on extending regulatory oversight to pipelines delivering CO₂ in gas form, because current rules apply only to compressed CO₂ in liquid form, and updating models of potential CO₂ releases from pipelines to factor in things like weather, topography, and wind.

INGAA said it expects PHMSA to advance this year its class-location rulemaking that specifies more stringent monitoring and safety measures based on the number of people living or working near a pipeline.

The SEC should issue its final rule requiring companies to disclose climate-related risks, emissions, and their risk-management practices (expected in April). That initiative will likely draw the ire of—and a lawsuit from—the industry.