October 2020 Industry Digest

WASHINGTON–The U.S. House of Representatives in late September passed a bill to boost alternative energy that some oil and gas advocates deem the wrong approach at the wrong time. The month also saw the House approve legislation intended to prevent successful cyberattacks against the country’s power grid and other energy infrastructure.

The House passed HR 4447, the Clean Energy Jobs and Innovation Act, on Sept. 24. According to its sponsor, Representative Tom O’Halleran, D-Az., the legislation aims to invest in electric grid modernization and security, increase the availability and affordability of renewable energy and storage technology, and make targeted workforce investments as the country transitions toward renewable energy by:

• Creating and funding a career skills program through the U.S. Department of Energy to train workers for constructing and installing energy-efficient building technologies;
• Streamlining available federal energy efficiency programs and financing to help improve efficiency and lower energy costs for schools;
• Directing the secretary of energy to accelerate critical research, development and demonstration programs to increase the availability of renewable energy and storage technologies to increase power generation from solar, wind, geothermal and hydropower resources; and
• Allocating $15 million in grants for advanced and innovative technology regarding optimal use of water, wastewater, water reuse systems and energy, while directing the secretary of energy to establish an energy-water advisory committee.

American Petroleum Institute Vice President of Policy, Economics and Regulatory Affairs Frank Macchiarola says HR 4447 leaves much to be desired.

“This is a missed opportunity to advance bipartisan solutions to address the real risks of climate change and ensure long-term availability of affordable, reliable and cleaner American energy,” he assesses. “There was a chance to pass a bill that took an important step forward in promoting carbon capture technology, and yet here we are taking two steps backward with provisions that hurt consumers in the middle of a global pandemic.

“A serious effort to tackle energy and climate challenges would focus on making measurable progress rather than ramming through a 900-page bill that dramatically redefines the nation’s regulatory system without any hearings or time for debate through regular order,” Macchiarola insists.

The cybersecurity legislation came in the form of four bills, all of which passed the House in the final days of September:

• HR 359, the Enhancing Grid Security Through Public-Private Partnerships Act, sponsored by Representatives Robert Latta, R-Oh., and Jerry McNerney, D-Ca.;
• HR 360, the Cyber Sense Act, also by Latta and McNerney;
• HR 362, the Energy Emergency Leadership Act, sponsored by Representatives Bobby Rush, D-Il., and Tim Walberg, R-Mi.; and
• HR 5760, the Grid Security Research and Development Act by Representatives Ami Bera, D-Ca., and Randy Weber, R-Tx.

According to press accounts, all four bills were passed by unanimous voice vote. Among those lauding their success are Energy and Commerce Committee ranking member Greg Walden, R-Or., and Energy Subcommittee ranking member Fred Upton, R-Mi.

“The COVID-19 pandemic has underscored the importance of stopping supply chain threats, including ensuring the security of our electric grid. From electricity to WiFi, a secure, reliable grid is vital to all Americans,” says a joint statement from Walden and Upton. “We thank our House colleagues for supporting three bipartisan bills that will bolster our energy security and keep our grid safe from cyberattacks, and we urge our Senate colleagues to take swift action to keep our electric grid safe and running.”

WASHINGTON–The U.S. Environmental Protection Agency on Sept. 14 finalized a new set of guidelines and procedures it proposed in May pertaining to agency guidance documents (AOGR, June 2020, pg. 14). As described by the Texas Independent Producers & Royalty Owners Association, the new regulation “will provide the public new levels of transparency and ensure that EPA is not creating new regulatory obligations through its guidance documents.”

In a speech he gave on the day the regulation was finalized, EPA Administrator Andrew Wheeler said consistent requirements and procedures for issuing guidance documents was critical. “Today’s action is perhaps the biggest change in administrative procedures in a generation,” he affirmed. “This historic rule guarantees the transparency the public deserves when engaging with the agency. This is a massive step forward for EPA, bringing these legal documents into the light.”
According to the agency, the final rule, among other elements, will:

• Establish the first formal petition process for the public to request that EPA modify, withdraw or reinstate a guidance document;
• Ensure that the agency’s guidance documents are developed with appropriate review and are accessible to the public; and
• Allow public participation in developing significant guidance documents.

Senator James Inhofe, R-Ok., is among the policymakers lauding the agency’s move, and says it puts into the Federal Register changes that he has previously sought through legislation. “After previous administrations abused the guidance process to initiate regulatory changes that they could not achieve through the permissible regulatory process, I fought for reform of our federal regulations and guidance transparency for years,” Inhofe says. “Fortunately, Andrew Wheeler and President Trump agree with me and continue to strive for transparency while cutting unnecessary red tape.”

Before the rule was finalized, EPA notes, the agency debuted an online guidance portal for public access to its guidance documents. In doing so, EPA says it has, for the first time, placed more than 9,000 guidance documents onto a searchable database at www.epa.gov/guidance. 

WASHINGTON–The U.S. Forest Service has published a proposed rule it says is intended to improve its regulations for oil and gas development on national forest and grasslands.

The Sept. 1 Federal Register notice (RIN 0596-AD33) says the proposed changes to 36 CFR Parts 214, 228 and 261 are intended to “clarify internal processes related to oil and gas leasing and approving operations, clarify oil and gas operators’ responsibility to protect natural resources and the environment, clarify the agency’s procedures regarding inspections and compliance, and update material noncompliance procedures.”

“Updating our regulations about oil and gas resources will help us be more efficient while improving customer service,” states Forest Service Chief Vicki Christiansen. “The rule will promote responsible development of our nation’s vast energy resources while preserving the surface resources of national forests and grasslands.”

The Forest Service announcement notes the proposed rule supports Agriculture Secretary Sonny Perdue’s directives to boost productivity on national forests and grasslands.

WASHINGTON–President Donald Trump has extended his Atlantic Coast leasing moratoria to include Outer Continental Shelf waters offshore North Carolina, and hinted he may include Virginia as well.

On Sept. 25, the president signed a memorandum for the secretary of the interior that states, “I hereby withdraw from disposition by leasing for 10 years, beginning on July 1, 2022, and ending on June 20, 2032” federal OCS waters extending 200 nautical miles off the North Carolina coastline.

And at a campaign rally the same day in Newport News, Va., the president told supporters he would extend the moratorium to include Virginia, although published reports note he had not yet issued an official directive for that action.

However, the reports say the Virginia moratorium is not necessarily set in stone, quoting the president telling the crowd, “If you want to have oil rigs out there, just let me know. We will take it off.”

The announcement came 17 days after Trump signed an executive order extending the federal moratorium on leasing in the Eastern Gulf of Mexico and establishing new moratoria on Atlantic OCS leasing off the coasts of Florida, Georgia and South Carolina (AOGR, September 2020, pg. 16).

American Petroleum Institute Vice President of Upstream Policy Lem Smith decries the growing moratoria as “another move in the wrong direction for American energy security. (The moratoria) take thousands of new jobs and critical revenue for states off the table at a time when the economy is struggling.”

Smith cites studies indicating that leasing in the Atlantic OCS and Eastern Gulf of Mexico could:

• Create nearly 265,000 new jobs;
• Result in an additional $20 billion a year in private investment;
• Contribute as much as $22 billion a year to the U.S. economy; and
• Generate $5.9 billion in new government revenue.

Published reports point out that while touted as banning oil and gas development in the Atlantic, the moratoria also affect wind energy developments, citing an e-mail from Bureau of Ocean Energy Management spokeswoman Tracey Moriarty, saying, “The withdrawal includes all energy leasing, including conventional and renewable energy.”

National Ocean Industries Association President Erik Milito says the moratoria “needlessly jeopardize our nation’s log-term economic and national security.”

He points to a Wood Mackenzie analysis that a prospective 2020 or 2021 wind lease sale offshore the Carolinas could support 37,000 jobs and $3 billion in wages annually, more than $44.9 billion in capital investment and 11.5 gigawatts of electricity. 

WASHINGTON–The U.S. Bureau of Ocean Energy Management and the Bureau of Safety and Environmental Enforcement have proposed a rule they say is intended to clarify, streamline and provide greater transparency to financial assurance requirements for the offshore oil and gas industry.

A Sept. 17 announcement from BOEM notes that under current regulations, the BOEM regional director may determine that additional security is necessary to ensure compliance with the terms and conditions of a lease, including decommissioning liabilities.

“While BOEM’s existing regulations provide great latitude to the regional director to request additional financial assurance from operators, the previous administration attempted to inflict significant changes without notice and comment,” observes Deputy Secretary of the Interior Kate MacGregor. “Companies require certainty to operate effectively in the Outer Continental Shelf.”

While BOEM previously has sought to implement changes to its financial assurance regime through guidance documents issued without advance notice or comment, it says its proposed rule would clarify and streamline the evaluation process it would use to determine whether OCS lessees, right-of-use and easement grant holders, and pipeline right-of-way grant holders must provide security above the base bond amounts prescribed by their lease and grant obligations.

BOEM says it also is proposing to remove restrictive provisions for third-party guarantees and decommissioning accounts, and to allow the regional director to cancel bonds and third-party guarantees in certain circumstances not covered by the existing regulations.

Although the summary of the proposed rule estimates the total amount of financial assurance required by BOEM would decrease from $3.3 billion to $3.1 billion, the National Ocean Industries Association says that if finalized without changes, the rule would force some companies to provide additional financial assurance, based on BOEM’s analysis of their credit ratings, the financial strength of co-owners, the value of the reserves and other factors.

Further, BOEM says, under the proposed rule BSEE would revise its process for issuing decommissioning orders to predecessor lessees and grant holders when current lessees and grant holders failed to fulfill their decommissioning obligations.

BSEE says it would issue orders to predecessors in reverse chronological order unless certain circumstances warranted pursuing all predecessors simultaneously. The proposed rule also would codify decommissioning practices for right-of-use and easement grant holders, and would require that a party appealing any final decommissioning decision or order provide a surety bond, BSEE says.

The proposed rule may be found at https://www.boem.gov/oil-gas-energy/risk-management/proposed-financial-assurance-rule.

SACRAMENTO, CA.–The California Independent Petroleum Association is criticizing an executive order issued by Governor Gavin Newsome that goes after both the state’s oil supply and demand. According to CIPA President Rock Zierman, EO N-79-20 will hurt the state’s economy, consumers and environment.

“Let us be clear,” Zierman said shortly after Newsome signed the EO on Sept. 23, “today’s announcement to curb in-state production of energy will put thousands of workers in the Central Valley, Los Angeles Basin and Central Coast on the state’s overloaded unemployment program, drive up energy costs when consumers can least afford it, and hurt California’s fight to lower global greenhouse gas emissions.”

Citing climate change mitigation, efforts to accelerate its transition to a carbon-neutral future, and the health and safety of California’s communities, the directives in EO N-79-20 include a goal that all in-state sales of new passenger cars, trucks and off-road vehicles will be zero-emission by 2035, and set the same goal for medium- and heavy-duty vehicles by 2045.

Moreover, the EO says that, “To support the transition away from fossil fuels consistent with the goals established in this order and California’s goal to achieve carbon neutrality by no later than 2045, the California Environmental Protection Agency and the California Natural Resources Agency, in consultation with other state, local and federal agencies, shall expedite regulatory processes to repurpose and transition upstream and downstream oil production facilities, while supporting community participation, labor standards, and protection of public health, safety and the environment. The agencies shall report on progress and provide an action plan, including necessary changes in regulations, laws or resources, by July 15, 2021.”

Among its other provisions, the EO says the Department of Conservation’s Geologic Energy Management Division is to:

• Propose a significantly strengthened, science-based health and safety draft rule that protects communities and workers from the impacts of oil extraction activities by Dec. 31, 2020, and
• Post on its website a draft rule at least 60 days before submitting it to the Office of Administrative Law.

Zierman points out that California’s oil production has been declining for years, while its volume of crude imports has skyrocketed. As a result, he says, Californians buy more oil produced in places without the state’s strict environmental standards.

“Our member companies embrace new and traditional energy sources working together. A state as large as California needs an all-of-the-above energy portfolio,” Zierman contends. “Our industry is uniquely poised to invest in technology such as carbon capture and sequestration, which unlike any other form of energy, can remove carbon from the atmosphere and actually result in negative emissions.

“At a time when Californians pay more for energy while experiencing man-made ‘green outs,’ it doesn’t make sense to hurt consumers, our economy and our environment by banning California production,” he adds. “We urge the governor to ignore the rhetoric, stand for science, and know that we are willing partners in California’s climate future. The focus should be on reducing overall emissions, not picking winners and losers.”

CHARLOTTESVILLE, VA.–The Trump administration’s revisions to the National Environmental Policy Act survived their first legal challenge in September when a federal judge in Charlottesville denied opponents’ request for a preliminary injunction.

The White House Council on Environmental Quality published a final rule to update and modernize NEPA in the July 16 Federal Register. Among other things, those changes set time and page limits for environmental assessments and impact statements, streamlined procedures for EISs involving multiple federal agencies, allowed applicants/contractors to assume greater roles in preparing EISs, and required analysis of only those affects that were reasonably foreseeable and had a reasonably close causal relationship (AOGR, August 2020, pg. 28).

Two coalitions representing more than 35 environmental organizations challenged the rule changes in two lawsuits filed July 29. One of those was filed in the U.S. District Court for the Western District of Virginia by the Southern Environmental Law Center on behalf of 17 groups.

It was in that case, Wild Virginia, et al v. Council on Environmental Quality, that Judge James P. Jones denied the plaintiffs’ motion for a preliminary injunction, finding, “The plaintiffs here may ultimately succeed in this case, but at this point they have not made that clear showing.”

The second lawsuit challenging the NEPA rewrite was filed by Earthjustice and the Western Environmental Law Center on behalf of 20 additional groups in the U.S. District Court for the Northern District of California.

HOUSTON–In a federal tax refund case that the winning counsel says carries significant implications for the oil and gas industry, a federal district court has sided with a claim by Trafigura Trading LLC that challenged the constitutionality of 26 U.S.C. §4611(b), which imposes a “tax on . . . domestic crude oil . . . exported from the United States.”

According to Trafigura’s counsel, Chamberlain Hrdlicka, the taxes are one of the sources of funding for the Oil Spill Liability Trust Fund, enacted as part of the Oil Pollution Act (OPA) of 1990.

On Sept. 8, Chamberlain Hrdlicka reports, a federal court determined that §4611(b) was an unconstitutional tax on exports because the tax obligation varied according to the quantity of crude exported, and “the charge does not fairly match the exporter’s use of the services provided by the funds raised from the charge.” The court has deferred its decision as to the remedy.

For the tax periods in question, the law firm details, Trafigura paid more than $4.2 million in taxes on its crude oil exports. After being denied a refund by the Internal Revenue Service, Trafigura filed a lawsuit in the U.S. District Court for the Southern District of Texas.

Trafigura argued that §4611(b) violated the Export Clause of the U.S. Constitution, which states, “No tax or duty shall be laid on articles exported from any state.” Chamberlain Hrdlicka says the government did not dispute that Trafigura paid the taxes, but argued that §4611(b), though deemed a tax, was a user fee paid by exporters in exchange for statutorily-capped liability under the OPA. If characterized as a user fee instead of a tax, the government maintained, the export clause would not forbid the charge.

According to analysts at Deloitte, the ruling does not impact the oil spill tax imposed under Internal Revenue Code §4611(a).

“Further, the U.S. district court has not yet ruled on whether a taxpayer seeking a refund of §4611(b) taxes previously paid will need to demonstrate that it ultimately bore the economic liability of the tax by not effectively passing the burden of the tax on to its customers,” Deloitte relates. “Finally, to the extent that the taxes imposed (by) §4611(b) were deducted in the computation of taxable income in prior periods, companies should consider whether any refunds granted may need to be included in taxable income to avoid any double benefit.

“In the meantime, companies that pay the oil spill tax under IRC §4611(b) should consider whether to file protective refund claims pending a decision by the court on the remedy issue and/or a potential appeal of the constitutional issue,” Deloitte adds. 

Blue states and environmental groups continued legal challenges to Trump administration regulatory rollbacks and leasing decisions in August and September.

Two environmental groups–the Southern Environmental Law Center (SELC) on behalf of six environmental organizations, and the Sierra Club on behalf of itself and three tribal groups–filed lawsuits against the Environmental Protection Agency’s final rule clarifying procedures states must use in performing Section 401 water quality certifications under the Clean Water Act.

On Sept. 9, 15 attorneys general led by Maura Healey of Massachusetts and Bob Ferguson of Washington, challenged the U.S. Department of Interior’s decision to allow oil and gas leasing on the Arctic National Wildlife Refuge Coastal Plain.

In other legal developments, the states of Delaware and Connecticut and the cities of Hoboken, N.J., and Charleston, S.C., became the latest to sue oil companies for climate change.

EPA released its final rule on Section 401 on June 1. It requires states to conclude water quality reviews within one year of receiving a certification request, and limits the scope of states’ reviews to assuring a discharge from a federally permitted activity will comply with “water quality requirements” as defined in the rule (AOGR, June 2020, pg. 46).

The SELC filed its lawsuit against the rule on Aug. 27 in the U.S. District Court for South Carolina, and the Sierra Club took similar action on Sept. 1. Those two lawsuits join a challenge launched previously by 21 attorneys general led by California, Washington and New York (AOGR, August 2020, pg. 18).

The states’ lawsuit against leasing in ANWR contends DOI’s record of decision “is based on a flawed, wholly deficient and unlawful environmental review that fails to account for greenhouse gas emissions, climate change impacts and harm to migratory birds,” according to an announcement from Healey’s office.

The lawsuit filed in the U.S. District Court for the District of Alaska claims DOI violated the National Environmental Policy Act, National Wildlife Refuge System Administration Act, Alaska National Interest Lands Conservation Act, 2017 Tax Cuts and Jobs Act, and the Administrative Procedure Act.

The ROD also has been challenged by Earthjustice on behalf of five environmental groups and the Gwich’in Steering Committee on behalf of Indigenous hunting communities (AOGR, September 2020, pg. 16).

Delaware’s climate lawsuit, which was filed Sept. 10 in Delaware Superior Court, names 31 oil companies and the American Petroleum Institute. Connecticut’s lawsuit was filed on Sept. 14 in Connecticut Superior Court and names ExxonMobil. The Charleston lawsuit was filed on Sept. 9 and names 24 oil companies. The Hoboken lawsuit, which was filed Sept. 2 in the Superior Court of New Jersey, Hudson County, names 12 oil companies plus API.

It alleges violations of the New Jersey Consumer Fraud Act and makes claims for negligence and common law remedies to prevent and abate hazards to public health, safety, welfare and the environment, while seeking “hundreds of millions of dollars to compensate the city for past, current and future costs associated with climate change adaptation, remediation and economic losses,” according to Mayor Ravi S. Bhalla.

Delaware Attorney General Kathy Jennings says her state’s lawsuit also seeks monetary compensation for current and future climate damages. “(This case) is not about stopping climate change; it’s about Delaware surviving it,” Jennings is reported saying at a press conference announcing the lawsuit. 

WASHINGTON–Underground natural gas storage in the United States stood at 3.831 trillion cubic feet on Oct. 2, 11.5% above the five year average, according to the U.S. Energy Information Administration. That was up 306 billion cubic feet from the 3.525 Tcf in storage on Sept. 4, which was 13.1% above the five-year average. The Oct. 2 storage number was 442 Bcf more than a year ago, when gas storage stood at 3.389 Tcf.

According to EIA, gas storage in the East Region was 893 Bcf on Oct. 2, 4.8% above the five-year average and 88 Bcf more than on Sept. 4, when storage stood at 805 Bcf, which was 6.5% above the five-year average. East Region gas storage on Oct. 2 was 47 Bcf more than it was a year ago.

Gas storage in the Midwest Region stood at 1.062 Tcf on Oct. 2, 8.5% above the five-year average and 109 Bcf more than the 953 Bcf in storage on Sept. 4, which was 12.2% above the five-year average. Oct. 2 gas storage in the Midwest Region was 63 Bcf more than a year ago.

In the Mountain Region, EIA says, gas storage was 236 Bcf on Oct. 2, 12.9% above the five-year average and 20 Bcf more than the 216 Bcf stored on Sept. 4, which was 11.3% above the five-year average. Gas storage in the Mountain Region was 34 Bcf more than a year ago.

Gas storage in the Pacific Region was 318 Bcf on Oct. 2, 2.6% above the five-year average and 10 Bcf more than the 308 Bcf stored on Sept. 4, which was 3.7% above the five-year average. Pacific Region gas storage on Oct. 2 was up 23 Bcf from a year ago.

In the South-Central Region, gas storage levels on Oct. 2 were 1.322 Tcf, 21.5% above the five-year average and up 79 Bcf from the 1.243 Tcf in storage on Sept. 4, which was 21.7% above the five-year average. The Oct. 2 gas storage level for the South-Central Region was up 275 Bcf from a year ago.