THIS MONTH, we're going to take a look at several areas in which the petroleum industry is starting to see some change – from energy regulations to trade barriers to executive compensation. Here are some comments and advice from several industry experts.
CONGRESS TARGETS ENERGY REGULATIONS
The Pillsbury law firm says the Trump administration has been busy overturning regulations passed when Obama was in the White House, including some that impact the oil and gas industry. Within the crosshairs of Trump and the GOP are key energy and environmental regulations, including one restricting methane emissions and another dealing with SEC requirements for reporting payments to foreign governments. These rollback efforts are being given a high priority.
Congress has been using an obscure 1996 law – the Congressional Review Act (CRA) – to overturn Obama administration regulations. In all, there are currently at least 25 CRA bills moving through the House and Senate, according to the EBW Analytics Group, which does energy market research and analysis.
The CRA has a fast-track procedure for overturning rules issued by federal agencies during the last 60 days of a legislative session. However, since it was enacted, the CRA has been successful only once, overturning a single ergonomics regulation in 2001. Among the reasons it is rarely used is the practical need for one party to control both houses of Congress and the White House, which the Republican Party now has as a result of the 2016 election.
TRUMP AND TRADE NEGOTIATIONS
The White House has considered imposing a 20% import tariff on goods from Mexico in order to pay for the proposed border wall between Mexico and the US. Many people, particularly businesses in Texas, see that as a bad idea. Stephen Moore, an economics analyst with the Heritage Foundation, noted recently that repealing NAFTA and creating such a tax would hurt Mexico, but it would also penalize American businesses and consumers. Undoubtedly, Mexico would retaliate against the US, which would be bad for US businesses in border states such as Texas, which shares the longest border with Mexico of any US state. "We don't need a trade war with Mexico," he concluded.
If the tariff were imposed, it couldn't come at a worse time for the US petroleum industry, which is engaged with Mexican officials about increasing cooperation in the wake of energy reforms in Mexico that give US companies an opportunity to invest in Mexican infrastructure and participate in oil and gas expansion in that country's onshore and offshore energy operations. If Mexican anger at a tariff were to erupt and affect the two countries' mutual business interests, European and Asian partners likely would move in quickly to fill the vacuum left by Uncle Sam's departure.
On the other hand, some leading conservatives approve of Trump's comments about the trade imbalance with China, according to Moore. "I think [Trump] views China as an adversary, and I've come to the conclusion that they are a bit of an adversary militarily and economically. They're not playing by the rules. They do cheat, they do steal, and I think taking a tougher stance with China is overdue."
EMPLOYEE COMPENSATION TRENDS
Joshua Ross with Aon Hewitt in Houston wrote an article in the February issue of OGFJ in which he outlines some of the changes oil and gas companies are making to adjust their annual spending practices to align with the current operating environment. Despite the downturn in commodity prices, the petroleum industry outpaces the general business sector in projected spending on variable pay for the non-executive workforce. This reflects the importance the energy industry places on aligning employees with the company's financial success to drive individual and team performance. The high spend on variable pay is mainly driven by the larger proportion of salaried-exempt employees in the business with deep technical knowledge and the impact those employees have on business results. The industry is searching for other ways than monetary rewards to impact overall employee satisfaction and engagement.
As far as executive compensation is concerned, a number of third-party shareholder advisors and political activists have been asserting that executive pay levels are unjust and excessive. This is most notable when compensation programs for executives are not aligned with company profitability that maximizes shareholder value. In addition, these activists point out that the gap between compensation for top executives and the average employee continues to widen.
A recent survey by Alvarez & Marsal examined the compensation of CEOs and CFOs in the 100 largest publicly traded E&P companies in the US. It broke the companies into four quartiles based on market capitalization. In general, higher amounts are paid at companies with greater market capitalization. As in prior years, about 80% of total direct compensation paid to these executives was derived entirely from incentive compensation.
The survey concludes that large caps will continue to pay as they have in recent years – in design, structure, and amount. Small-cap companies have been particularly constrained with lower pay amounts and no long-term incentives or cash-based LTI until prices stabilize at a higher level. Compensation committees are attempting to better align executives' interests with the direction of the business by setting performance goals and targets. Until that occurs, there will continue to be friction between shareholders and executives.
