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March 2020 Industry Digest

China Cuts In Half Its Tariff On U.S. Crude Oil

BEIJING–In a positive development for U.S. producers, in separate February announcements, China first said it was cutting its 5.0% tariff on imports of crude oil from the United States to 2.5%, and then indicated it would consider exempting both crude oil and liquefied natural gas imports from tariffs.

According to published reports, the Chinese Ministry of Finance announced Feb. 6 that it was cutting in half, 5%-10% tariffs on 1,717 U.S. products effective Feb. 14. The affected tariffs were imposed by China on $75 billion worth of U.S. goods effective Sept. 1 (AOGR, September 2019, pg. 14).

The “phase one” trade deal with China, which was signed by President Trump in January, included a pledge from China to purchase at least $52.4 billion more in U.S. energy products, but did not specify that the Chinese government would alter its tariff on crude oil (AOGR, February 2019, pg. 18).

Following announcement of the phase one deal, Frederick Lawrence, vice president of economics and international affairs at the Independent Petroleum Association of America, told AOGR that “progress on (Chinese tariffs) could lead to 500,000 barrels a day more U.S. crude exports (January 2019, pg. 26).”

On Feb. 18, additional reports say, China’s Ministry of Finance announced it would begin accepting applications for tariff exemptions on 696 U.S.-origin goods–including crude oil, LNG and refined products–effective March 2. Other commodities eligible for exemptions, the reports say, include petrochemicals, agricultural products, and coal and metals.

The exemptions will last for one year, starting from the date of approval, and will be granted on the basis of market value, the reports add, quoting “a company source” as saying that state-owned China National Offshore Oil Corp.–China’s top LNG importer–is likely to apply for tariff exemptions.

Those reports note that China imported 1.53 million and 1.64 million tonnes of U.S. LNG in 2017 and 2018, respectively, but only 258,955 tonnes in 2019.

Other reports mention that Cheniere Energy has a 1.2 million tonne-a-year contract with PetroChina, but say that while cargoes under the contract have continued to be lifted, they have been diverted since China raised its tariff on U.S. LNG last year from 25% to 10%.

DOI-Managed Leases Deliver 1 Billion Barrels

WASHINGTON–Crude oil produced on Department of Interior-managed leases exceeded 1 billion barrels for the first time in history in fiscal 2019, DOI has announced.

The 1.045 billion barrels produced in FY 2019 is 122.5 million barrels more than the amount produced on federal and American Indian-owned lands and offshore areas in FY 2018 and 236 million barrels more than FY 2016 production, the final year of the Obama administration, a 29% increase, DOI points out. The 92.26 million barrels produced on Indian lands in FY 2019 is a 52% jump from FY 2016, the agency adds.

“The Trump administration continues to appropriately develop our natural resources and be great stewards of conservation, benefiting all Americans,” says Interior Secretary David Bernhardt. “Disbursements paid to states and tribes from oil lease revenues go right back to the communities where the energy was produced, providing critical funding for schools, public services, conservation improvements, coastal restoration and infrastructure projects that create good-paying American jobs.”

Bernhardt credits the production increases to “common sense regulatory changes and improved internal processes to more efficiently issue permits” implemented by DOI in response to two Trump executive orders: EO 13783, “Promoting Energy Independence and Economic Growth,” issued in March 2017, and EO 13795, “Implementing an America-First Offshore Energy Strategy,” issued in April 2017.

According to DOI, the $7.5 billion in royalty revenues it collected in FY 2019 was a 21% increase over the $6.2 billion collected in FY 2018, and was 122% more than it collected in FY 2016. Oil and gas produced from DOI-managed lands and waters supported an estimated $85.4 billion in value added, $139 billion in economic output and 607,000 jobs, the department says.

BLM Opens Acreage Cut From Monuments To Mining, Leasing

SALT LAKE CITY–The Bureau of Land Management has released final management plans that open acreage that used to belong to two national monuments to mining and oil and gas development. The Trump administration reduced the size of the two monuments–Bears Ears and Grand Staircase-Escalante–in December 2017.

The agency released records of decisions and approved resource management plans and monument management plans for the areas, as well as an ROD and approved RMP for the Kaneb Escalante Planning Area, which encompasses the federal lands excluded from Grand Staircase-Escalante National Monument.

Several Native American and anti-development groups filed lawsuits against President Trump’s move to reduce Bears Ears by 85% and Grand Staircase-Escalante by nearly half, and in 2019 U.S. District Court Judge Tanya Chutkan rejected the White House’s request to dismiss those suits. According to media reports, the judge now also is considering whether the move was illegal under the 1906 Antiquities Act.

Media reports point out few oil or gas companies have expressed interest in seeking leases on the 1.1 million acres removed from the original Bears Ears boundaries, while the mining industry has shown little interest in exploiting coal in and around Grand Staircase because of stiff operating and transportation costs on the remote Kaiparowits Plateau.

“The co-operatively developed and locally driven plans restore a prosperous future to communities too often dismissed and punished by unilateral decisions of those that would not listen to the voices of Utahns,” says Acting Assistant Secretary, Land and Minerals Management Casey Hammond.

BLM says the new management plans restore long overdue certainty to the public and provide responsible governance of these federal lands.

“As the Antiquities Act itself states, and as I have reiterated for years, monuments should be as small as possible to protect artifacts and cultural resources,” offers Utah Governor Gary Herbert. “And they should not be created over the objections of local communities. I am happy to see the administration develop management plans that protect areas with sensitive artifacts and yet still provide a way to use these lands for recreation, grazing and management practices that will keep the lands healthy.”

Wyoming Establishes Procedure To Designate Migration Corridors

CASPER, WY.–The Petroleum Association of Wyoming has signaled qualified support for an executive order signed Feb. 13 by Governor Mark Gordon intended to preserve migration routes utilized by big game herds in Wyoming while also protecting landowner rights and accommodating multiple-use opportunities.

“PAW supports Governor Gordon’s stated desire to pre-empt federal government overreach on state-managed wildlife and the need to end federal deferrals of oil and natural gas lease sales,” the association states. “Like the governor, we believe Wyoming elected officials–not Washington bureaucrats–are best able to balance the need to protect our wildlife with the need to produce the energy that powers our lives. The governor’s executive order appropriately seeks to keep Wyoming in charge of its own resources and destiny.”

However, PAW continues, “The oil and natural gas industry is at a crossroads in Wyoming. Persistent low prices, global instability and expanding regulatory burdens make exploration and production increasingly difficult. We appreciate that the governor meaningfully engaged PAW in the process of developing his executive order. We look forward to a thoughtful implementation that recognizes the need for balance and avoids further regulatory creep.”

Wyoming Executive Order 2020-1 designates Sublette Mule Deer, Baggs Mule Deer and Platte Valley Mule Deer migration corridors, which may be viewed at https://wgfd.wyo.gov/wildlife-in-wyoming/migration. It also establishes a process for designating additional migration corridors.

That process includes the Wyoming Game and Fish Department (WGFD) identifying potential migration corridors and submitting to the Wyoming Game and Fish Commission (WGFC) a publicly-available report that identifies the location, acreage and land ownership of various components of the corridor, the underlying scientific information and a biological risk assessment. After obtaining public input, the WGFC will submit the proposed migration corridor to the governor, who will appoint an area working group composed of various stakeholders.

EO 2020-1 calls for the working group to make a recommendation to the governor after evaluating the WGFD’s risk assessment and corridor components, along with potential socio-economic impacts, conservation opportunities, highway projects and other appropriate factors. Then, the governor may designate the recommended corridor formally, return the recommendation to WGFD for further refinement or formally reject the proposal.

Finally, EO 2020-1 calls for establishing a second area working group within five years after a migration corridor has been established to review its effectiveness.

“I believe we have crafted an excellent approach,” Governor Gordon says of EO 2020-1. “People in Wyoming love their wildlife and love their jobs, and we can do both. We are leading the nation in this effort.”

BLM Removes Acreage From Colorado Leasing

LAKEWOOD, CO.–The Bureau of Land Management has removed 8,700 acres from its March 26 oil and gas lease sale in Colorado, citing litigation concerns. The agency says the affected acreage lies in Moffat, Rio Blanco, Jackson and Mesa counties. The lease sale now covers 30,548 acres, BLM says, all in Jackson and Las Animas counties.

A lawsuit challenging the BLM’s Grand Junction field office’s resource management plan led to the decision to defer part of the Mesa County sale, while the other three counties were affected by a lawsuit involving greater sage grouse habitat, media reports describe. A 2019 injunction in a federal case in Idaho about BLM sage grouse management plans forced the agency to defer offering the acreage, which allows it to offer it in a later sale (AOGR, November 2019, pg. 80).

BLM announced plans for the March sale early in October. Media reports note anti-development groups sued a week later. The injunction in the greater sage grouse habitat lawsuit was issued Oct. 16.

The Grand Junction lawsuit was filed in the U.S. District Court for the District of Colorado by the Center for Biological Diversity, Wilderness Society and Wilderness Workshop. It alleges the RMP violated the National Environmental Policy Act by failing to properly analyze the impacts of greenhouse gas emissions or consider management alternatives that would limit oil and gas leasing, court documents state.

The lawsuit is the second the groups have filed against BLM. The 2018 action challenged leasing on more than 45,000 acres in western Colorado. The later lawsuit seeks to block agency plans to lease as much as 935,000 acres for oil and gas leasing. The Western Environmental Law Center, which filed the lawsuit on behalf of the groups, says in addition to failing to consider leasing’s environmental impacts, BLM is ignoring likely public health risks from oil and gas activity.

According to media reports, no injunctions have been issued in the Grand Junction lawsuit, and BLM itself opted to defer any offer of the Mesa County acreage. Several state oil and gas associations, including the West Slope Colorado Oil & Gas Association, have moved to intervene in the case.

USFWS Seeks Change In Migratory Bird Act To Allow Incidental Taking

WASHINGTON–The U.S. Fish & Wildlife Service says it wants to redefine the scope of the Migratory Bird Treaty Act to clarify that the treaty only covers intentional harm to birds. Under the proposed revisions, conduct that leads to unintentional or incidental injury or death of migratory birds would not be prohibited. The agency says this change will provide regulatory certainty to the public, industries, states, tribes and other stakeholders.

The proposed action clarifies the 2017 Department of the Interior Solicitor’s Office Opinion M-37050, which, USFWS says, analyzed the MTBA’s scope. It determined the act only applies to the intentional take of migratory birds, and that the take of birds resulting from an activity is not prohibited when the underlying purpose of that activity is not to take birds. The agency adds the Endangered Species Act and the Bald and Golden Eagle Protection Act, as well as state laws and regulations, are unaffected by the proposed change.

“With five federal circuit courts of appeal divided on this question, it is important to bring regulatory certainty to the public by clarifying that the criminal scope of the MTBA only reaches to conduct intentionally injuring birds,” says Assistant Secretary for Fish and Wildlife and Park Rob Wallace. “That said, we will continue to work collaboratively with states, cities, conservation groups, industries, trade associations and citizens to ensure that best practices are followed to minimize unintended harm to birds and their habitats.”

USFWS says it has determined an environmental impact statement is the most efficient and comprehensive approach for considering the potential impacts of its actions on the environment. It is seeking public comment as part of the rule-making process. After the notice of intent was published in the Federal Register on Feb. 3, the agency says, it began a 45-day scoping process, including accepting public comments through March 19.

Comments can be submitted through the Federal eRulemaking Portal at www.regulations.gov, or by U.S. mail at Public Comments Processing, Attn: FWS-HQ-MB-2018-0090; U.S. Fish and Wildlife Service; MS: JAO/1N; 5272 Leesburg Pike; Falls Church, VA 22041-3803.

Erik G. Milito, president of the National Ocean Industries Association, says the proposal unifies MBTA’s intent with the repeated findings of U.S. courts. “NIMBY-inspired litigation has been used in the past to hold reasonable and responsible activities, including wind energy development, hostage,” he says, adding the revisions will continue to balance economic growth with environmental considerations.

Federal Judge Vacates Oil, Gas Lease Sales In Five Western States

BOISE, ID.–The Bureau of Land Management failed to follow federal policies when it issued a new instruction manual for leasing oil and gas rights on federal acreage, the U.S. District Court, District of Idaho, has ruled. The decision invalidates five lease sales involving sage grouse habitat in Wyoming, Utah and Nevada held between June and September 2019.

The ruling in Western Watersheds Project and Center for Biological Diversity v. Ryan Zinke, David Bernhardt and U.S. Bureau of Land Management targets the bureau’s instruction memorandum IM 2018-034.

Judge Ronald Bush ruled in favor of the plaintiffs, saying the document unlawfully restricted public participation in BLM’s leasing decisions. His decision vacates the lease sales held under IM 2018-034 and reinstates the rules put in place in the Obama administration (IM 2010-117) until the bureau changes the procedures through a notice-and-comment rule making.

The plaintiffs challenged what they contended were unlawful actions by the Trump administration to promote and expedite oil and gas leasing on public lands in a way that “will adversely impact essential habitats and populations across the range of the greater sage-grouse … and violate bedrock environmental laws,” court documents state, including the Federal Land Policy and Management Act, National Environmental Policy Act, Administrative Procedure Act, and the 2015 sage grouse plan amendments to BLM’s resource management plans.

BLM claimed the 2018 IM was intended to serve as a guide for agency policymakers, not as a final agency action, and thus was ineligible for court review. Bush rejected that defense, stating IM 2018-034’s language was too demanding and specific to be merely a general statement of policy. He wrote the document implemented a required template for BLM’s leasing process by using “language that can only be understood as ‘finally determinative of the issues or rights to which it is addressed.’”

Bush’s ruling limits its impacts to future lease sales where the sage grouse habitat will be most affected by oil and gas activities, and requires use of the former requirement for a 30-day comment period and 30-day protest period for those areas.

The Western Energy Alliance and the state of Wyoming successfully sought to intervene after the complaint was filed.

IRS Issues Guidance On Carbon Capture Credits, But Questions Remain

WASHINGTON–More than two years after Congress passed the FUTURE Act to reform and expand Section 45Q tax credits for geologically storing or beneficially using captured carbon dioxide, the Internal Revenue Service has published guidance and a revenue procedure to start defining how to claim the credits. While carbon capture advocates express encouragement at the development, they also say the guidelines have been a long time coming and urge the agency to expand them as soon as possible.

The newly published guidance defining beginning and continuous construction parameters to qualify for the credit and the procedure to establish rules for business partnerships with investors claiming the credit show the IRS has considered Carbon Capture Coalition recommendations, affirms group Director Brad Crabtree.

“The beginning guidance adopts well-established precedents based on years of experience with wind and solar tax credits and adapts that experience to carbon capture,” he relates. “Importantly, the guidance incorporates both the well-understood physical work test and 5% safe harbor for determining whether a carbon capture project has begun construction to qualify for the credit.

“We are especially pleased the IRS has embraced our recommendation to provide for a longer six-year continuity requirement to complete construction of carbon capture projects (wind and solar have a four-year requirement),” he says. “Similarly, the revenue procedure on partnerships draws on well understood precedents that should provide confidence to project developers and investors structuring financial deals to move forward with carbon capture projects.”

But while Crabtree expresses appreciation for the IRS’ work, he also laments how much time it has taken, saying “this work took far too long and has delayed hundreds of millions if not billions of dollars in investments in the development and deployment of carbon capture, use and geologic storage projects that Congress sought to incentivize through its bipartisan reform of 45Q.”

According to press accounts, Baker Botts partner Barbara De Marigny says plenty of questions remain before companies will feel confident greenlighting carbon capture and sequestration projects. “This guidance alone is not sufficient to give great comfort to companies that are concerned about whether their sequestration is sufficient,” she is quoted. “Without that piece, knowing how to allocate the credit or whether you have built your facility in time is not going to resolve the basic investment questions.”

Crabtree suggests a rule to address remaining long-term issues associated with the credit’s implementation is the final remaining piece of the puzzle that must be placed to unleash private investment in carbon capture projects. “The Coalition urges Treasury officials to (complete) the rule as quickly as possible to avoid any further delays in project development that threaten to undermine the full potential of the 45Q policy to help foster economywide deployment of carbon capture to meet midcentury emissions reduction goals while supporting domestic energy and industrial production and high-wage jobs,” he says.

The notice containing the Section 45Q guidance can be found at www.irs.gov/­pub/irs-drop/n-20-12.pdf.

Constitution Stymied; Jordan Cove In Limbo

ALBANY, N.Y.–A pair of natural gas infrastructure projects targeted by anti-development activists sustained significant blows in February, and in the case of the Constitution Pipeline, the blow appears to be fatal.

First, the Federal Energy Regulatory Commission postponed a final environmental analysis for the $10 billion Jordan Cove liquefied natural gas terminal planned for Coos Bay, Or. According to published reports, FERC’s announcement came one day after Oregon Department of Land Conservation and Development Director (DLCD) Jim Rue announced his agency had concluded the project would undermine the state’s coastal scenic and aesthetic resources, endangered species, critical habitat, fisheries and commercial fishing. Press accounts cite Rue’s words in a letter to project supporters in which, the director says, neither FERC nor the U.S. Army Corps of Engineers “can grant a license or permit for this project unless the U.S. secretary of commerce overrides this objection on appeal.”

A couple days later, press accounts indicate, Williams Partners LP announced it was pulling the plug on the 124-mile Constitution Pipeline, which would have transported 650,000 dekatherms of natural gas a day from Pennsylvania into New York’s Southern Tier. “Williams–with support from its partners Duke, Cabot and AltaGas–has halted investment in the proposed Constitution project,” the company is quoted. “While Constitution did receive positive outcomes in recent court proceedings and permit applications, the underlying risk-adjusted return for this green-field pipeline project has diminished in such a way that further development is no longer supported.”

The Constitution Pipeline project had drawn opposition from New York Governor Andrew Cuomo, whose administration used the state’s Section 401 water quality authority to stymie the project, a move U.S. Environmental Protection Agency Administrator Andrew Wheeler deemed “the worst environmental decision by an elected official in recent history” (AOGR, December 2019, pg. 29).

“Our existing pipeline network and expansions offer much better risk-adjusted return than green-field opportunities, which can be impacted by an ambiguous and vulnerable regulatory framework,” Williams is quoted. “We are prepared to deliver the clean energy benefits of natural gas now through infrastructure projects such as Regional Energy Access, Leidy South and the Northeast Supply Enhancement.”

The fate of the Jordan Cove LNG project, meanwhile, remains undecided. The area’s citizens have supported the project by decisively rejecting a ballot measure intended to stop the project (AOGR, July 2017, pg. 23). However, state regulators have tended to agree with project opponents. One such example before February’s DLCD announcement occurred when Oregon’s Department of Environmental Quality refused to issue a Section 401 certificate for the project (AOGR, June 2019, pg. 18).

When FERC considered the project in February, media reports note, Commissioner Richard Glick voted against the project, as did Commissioner Bernard McNamee, who expressed a desire for more time to review Oregon’s permit denials.

Rule Makings Progress Under Watchful Eye Of N.M. Industry Groups

SANTA FE, N.M.–Even as they hail the 2020 New Mexico Legislature as a success, the state’s oil and gas industry representatives also have been occupied with issues arising from the 2019 session. According to Independent Oil & Gas Association of New Mexico President Jim Winchester, industry groups have spent much of the past nine months focused on the state’s plans to revise regulatory violations and methane emissions.

“These are the issues that were passed last year and then taken up by the departments to work out the details,” he says.

Among them is a rule making and the finalization of a revised approach to operator violations.

With the signing of the final order earlier this year, inspectors with the Oil Conservation Division have regained the authority to issue violation notices directly to the operator without having to file a civil action in state court.

The revision was directed by the 2019 passage of HB 546. With the potential for fines as great as $10,000 a day up to $200,000, the impact on smaller independent operators can be significant, Winchester warns.

As last year’s session waned, IPANM was unable to support the compromise bill, Winchester recalls, and IPANM’s reservations remain. The final OCD rule on administrative penalties is vague and leaves too many questions unanswered, he describes.

“We were assured that if we participated in the stakeholder process, our concerns would be heard,” Winchester relates. “Unfortunately, our arguments in favor of defining violations and a table of penalties were not adopted.”

As written, the rules grant too much discretion to inspectors, leaving operators open to being singled out or falling victim to inconsistent application, Winchester warns. “Our view is that OCD will try and figure things out as it goes along; we have some real concerns about that,” he admits.

Meanwhile, industry groups also are responding to proposals from the Energy, Minerals and Natural Resources Department and the New Mexico Environment Department to respectively develop regulations to reduce and capture methane and emissions of volatile organic compounds from oil and gas operations.

Following a period of public comment last winter, a 27-member Methane Advisory Panel (MAP) was convened and met 14 times from August to November. The panel included 17 oil and gas company representatives and ten members representing environmental or conservation groups. The panel’s 300-page draft technical report was issued Dec. 19 with a public comment period that concluded Feb. 20.

“The stakeholder process has been a useful exercise in methane rule making and not just a ‘check the box’ token for the administration,” Winchester affirms. “For now, we are in a wait and see mode” while the departments produce draft documents.

New Mexico Oil & Gas Association Executive Director Ryan Flynn says the panel’s report offers a summary of current emissions control technology and regulations but offers no recommendations. “The ball is in the agencies’ court. They have to take that list of ideas and produce a draft of how to make it work,” Flynn relates.

Both departments are expected to issue drafts of final rules for public comment before the end of the year, Winchester adds.