October 2018 Industry Digest

WASHINGTON–Energy integration with Mexico, the United States and Canada has led to creating many opportunities to improve trade relations across North America, the Texas Independent Producers & Royalty Owners Association applauds as it urges Congress to approve the United States, Mexico and Canada Agreement (USMCA).

The United States and Canada reached an agreement in late September to add Canada to trade negotiations conducted between the United States and Mexico that would replace the North American Free Trade Agreement (NAFTA), the U.S. Trade Representative’s office reports.

“USMCA will give our workers, farmers, ranchers and businesses a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region,” U.S. Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland say in a joint statement.

Provisions of the agreement relating to the energy industry include continued market access for U.S. natural gas and oil production and investments in Canada and Mexico, zero tariffs on those products, and investment protections to which all countries commit, the trade office describes.

TIPRO says it has advocated for several USMCA provisions, including continued zero tariffs on oil and natural gas products, and preserving the investor-state dispute settlements (ISDS), which it calls a key provision that serves to protect multinational companies that invest abroad. While ISDS will be phased out for Canada, they will be included in Mexican investments, including the areas of oil and gas, power generation services, telecommunication, transportation and ownership/management of infrastructure, says Ed Longanecker, TIPRO president.

According to the U.S. Trade office, among its provisions, the new agreement:

• Requires 75 percent of auto content be made in North America;
• Imposes stronger rules of origin for automobiles and other industrial products that exceed requirements for NAFTA and the Trans-Pacific Partnership;
• Expands market access for U.S. food and agricultural products, including U.S. dairy exports to Canada; and
• Blocks the three countries from using export subsidiaries or World Trade Organization special agricultural safeguards for products exported to each other’s market.

“A continued priority for TIPRO is focused on lifting steel and aluminum tariffs, which were not addressed under the USMCA and currently are on a separate track with the administration,” Longanecker says. “Continuing to strengthen trade relations in North America supports increased production of domestic oil and natural gas, and expands both economic and geopolitical benefits for our country.”

Media reports indicate the leaders of the three countries are expected to sign the USMCA agreement before the end of November, after which it would be submitted to Congress for ratification.

GALVESTON, TX.–Under an injunction issued by the U.S. District Court, Southern District of Texas, Galveston Division, Texas, Louisiana and Mississippi have been ruled exempt from provisions of the waters of the United States (WOTUS) rule.

The three states filed a motion a month after David C. Norton, a South Carolina district judge, issued an injunction enjoining the U.S. Environmental Protection Agency and Army Corps of Engineers from suspending the 2015 Clean Water rule. That action defined what types of waters constitute a “WOTUS” and thus were covered by the Clean Water Act, court documents say. The definition included seasonal streams, wetlands and tributaries.

President Trump issued an executive order Feb. 20, 2017, directing the two agencies to review the WOTUS rule and proposing revisions. A suspension rule, published Feb. 6, delayed the WOTUS rule until 2020, with the agencies ordered to revert to the WOTUS interpretation in place before the 2015 rule. On Feb. 6, several environmental groups, including the South Carolina Coastal Conservation League, Charleston Waterkeeper and American Rivers, filed suit, alleging the federal government failed to adhere to the Administrative Procedure Act by acting in an arbitrary and capricious manner in suspending the rule and by not publishing the language of a substantive rule change.

Norton ruled for the plaintiffs, writing that while presidential administrations and regulatory priorities may change, the APA’s requirements remain the same. On Aug. 16, he issued a nationwide injunction against the suspended WOTUS rule.

Texas filed for a preliminary injunction on Sept. 12 in Galveston on behalf of itself, Louisiana and Mississippi, arguing if the South Carolina decision was not temporarily suspended, states and their citizens were likely to expend valuable resources and time “operationalizing a rule that may not survive judicial review.” U.S. District Judge George Hanks decided in favor of Texas, ruling that a preliminary injunction was in the public’s interest.

Texas Attorney General Ken Paxton hails the ruling, calling it a win for property owners in the three states that spares them from EPA regulation of ponds, streams and puddles on their private lands. “By restoring principles of federalism to this area of law, the ruling is an even bigger win for the Constitution and the fundamental liberties it protects,” he says.

WASHINGTON–The Department of Energy issued a short-term order to the Freeport liquefied natural gas project on Sept. 6 that authorizes it to export as much as 2.14 billion cubic feet a day of natural gas for a two-year period to both free-trade and nonfree-trade countries. DOE says the order authorizes Freeport’s initial commissioning volumes and other exports pursuant to short-term contracts. The Freeport LNG Liquefaction Project is under construction on Quintana Island, Tx.

During this two-year authorization period, DOE says Freeport LNG will be allowed to export LNG to any country not prohibited by U.S. law or policy. The export term will become effective the day the facility first exports LNG, expected to be in the third quarter of 2019.

DOE points out this short-term authorization is not additive to any of the prior long-term export authorizations it has issued to Freeport LNG. Freeport is one of four additional large-scale LNG export projects expected to be completed in the next two years. Two facilities–Sabine Pass and Dominion Cove Point–are operating with a combined export capacity of 3.5 Bcf/d. Once the four projects under construction are finished, DOE estimates U.S. export capacity will reach 11.0 Bcf/d. Another 12 large-scale projects under review would add more than 20.0 Bcf/d of LNG export capacity if approved, the agency says.

According to the agency, since exports of U.S. LNG began in 2016, more than 1.3 trillion cubic feet of U.S. natural gas has been exported to 30 destinations in Europe, Africa, Asia, the Middle East, North America, South America and the Caribbean.

The U.S. Energy Information Administration predicts natural gas exports will average 9.9 Bcf/d in 2018, up 15 percent from 2017 levels. EIA says it expects gas exports to rise an additional 38 percent in 2019, to 13.7 Bcf/d.

WASHINGTON–The U.S. State Department gave another thumbs-up to the Keystone XL Pipeline in September, concluding in a supplemental environmental impact statement that the alternative route through Nebraska proposed by TransCanada Corp. “would have no significant direct, indirect or cumulative effects on the quality of the natural or human environments.”

The Nebraska Public Service Commission last November approved an alternative route through the state for Keystone (AOGR, December 2017, pg. 16), and the State Department determined in July that it would not harm water supplies or wildlife. However, that decision was challenged by the Indigenous Environmental Network and other plaintiffs, and in August, U.S. District Judge Brian Morris for the District of Montana ordered State to perform a full environmental impact statement.

The 338-page SEIS released in September concludes that the impacts of Keystone’s normal operations “would be negligible to moderate.” The SEIS says impacts from an accidental release of crude oil would not likely be significant because:

• The risk of a spill is unlikely.
• Keystone will use continuous monitoring systems and automatic shutoff valves to quickly identify a leak and halt pumping on detecting pressure fluctuations.
• Prompt implementation of Keystone’s response plan should mitigate effects.

The SEIS notes that while the depth of groundwater along the alternative route varies from near surface to more than 200 feet, “prompt cleanup response likely would be capable of remediating contaminated soils before the hazardous release reaches groundwater depth.”

TransCanada filed its initial application in 2008 for a border-crossing permit for the 1,187-mile pipeline intended to carry up to 800,000 barrels a day of crude oil from Hardisty, Alberta, to Steele City, Ne., for eventual shipment to Gulf Coast refineries.

President Barack Obama eventually denied that permit application in November 2015, but under President Trump, the State Department reversed that decision and granted Keystone XL a presidential permit in March 2017 (AOGR, April 2017, pg. 28).

TransCanada Chief Executive Officer Russ Girling was quoted in published reports in August saying the company could make a final investment decision on moving forward with the pipeline late this year or early next, pending regulatory approvals and court challenges.

WASHINGTON–The U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration has rescinded a rule requiring high-hazard flammable unit trains (HHFUTs), including those transporting crude oil and ethanol, be equipped with electronically controlled pneumatic (ECP) braking systems.

In a Sept. 24 announcement, PHMSA says its analysis “shows that the expected costs of requiring ECP brakes would be significantly higher than the expected benefits.”

ECP brakes were mandated in a May 2015 regulation announced jointly by DOT and Transport Canada in response to a spate of HHFUT derailments and subsequent explosions and fires. In addition to requiring ECP brakes, the regulation set new operation protocols for trains moving large volumes of flammable liquids, and changed sampling and testing requirements (AOGR, June 2015, pg. 124).

However, PHMSA notes, the Fixing America’s Surface Transportation Act, which was passed by Congress later that year, required the agency to update its regulatory impact analysis to determine whether ECP brakes were justified based on expected costs and benefits.

That analysis, PHMSA says, determines the total safety and business benefits–set-out relief, fewer brake tests, and wheel and fuel savings–range from $131.0 million to $197.9 million over 20 years discounted at 7 percent, while the costs range from $375.6 million to $491.7 million.

PHMSA points out that the regulatory change does not affect the ability of a railroad to implement ECP brakes voluntarily, nor does it affect any other aspect of the 2015 regulation.

NEW YORK–Eight Democratic attorneys general are suing the Trump administration in federal court, claiming its interpretation of rules on migratory birds will increase the likelihood of bird deaths.

The lawsuit against the Department of the Interior and U.S. Fish & Wildlife Service, filed in the U.S. District Court for the Southern District of New York, says more bird deaths will harm states because the migratory birds perform “ecological services” that benefit their citizens, including eating insects, pollinating plants and dispersing seeds.

“All of these benefits directly or indirectly generate economic activity and tax revenue for the states, which are lost or diminished when bird numbers are depleted,” says the lawsuit filed by California, Illinois, Maryland, Massachusetts, New Jersey, New Mexico, New York and Oregon.

The legal action follows the Department of Interior’s clarification that incidental takings of migratory birds as a result of otherwise legal activities are not criminal acts under the Migratory Bird Treaty Act. The states’ action also follows MBTA suits that anti-development groups filed in the same venue earlier a few months earlier (AOGR, June 2018, pg. 18).

In a memorandum dated Dec. 22, 2017, DOI said interpreting the act to apply to incidental or accidental actions “hangs the sword of Damocles over a host of otherwise lawful and productive actions, threatening up to six months in jail and a $15,000 penalty for each and every bird injured or killed.” The department held that the text, history and purpose of the act limit its penalties to affirmative actions that purposely lead to the taking or killing of migratory birds.

According to the states’ lawsuit, DOI’s clarification “is inconsistent with the act’s text and purposes, is contrary to the defendants’ previous longstanding interpretation of the act and decades of consistent application of that interpretation, drastically limits the scope of the act, subjects migratory birds to increased likelihood of death or injury from industrial or other human activities that immediately take or kill or are foreseeably likely to take or kill migratory birds.”

The attorneys general’s lawsuit states courts must “hold unlawful and set aside” agency actions that are arbitrary, capricious, an abuse of discretion or otherwise unlawful, and claims the DOI’s misinterpretation of the MBTA contravenes the act’s text and purpose, and is inconsistent with subsequent legislation confirming the act regulates incidental take.

HELENA, MT.–The U.S. Bureau of Land Management has been ordered by a federal court to reinstate an oil and gas lease it cancelled after holding it in abeyance for more than three decades, the Montana Petroleum Association reports.

MPA Executive Director Alan Olson calls the Sept. 4 ruling by the U.S. District Court for the District of Columbia a victory for the whole industry. “This decision sends the message that certainty in the permitting process is being restored,” he states.

William Perry Pendley, president of the Mountain States Legal Foundation, which represented Louisiana oilman Sidney M. Longwell and his company, Solenex LLC, adds, “There could not be a more important case for the oil patch than this one, and we are delighted with the victory and thankful for Longwell’s courageous fight. We have a long way to go, however. (Presiding) Judge (Richard) Leon concluded this case would go all the way to the U.S. Supreme Court.”

Pendley previously had said the case was so important the U.S. Chamber of Commerce filed a brief on Longwell’s behalf, fearing, “If the federal government can cancel a lease like this, it can cancel any contract into which it enters” (see story page 103).

Pendley explains that in 1982, Longwell obtained a federal lease on 6,247 acres in the Badger-Two Medicine Area of the Lewis and Clark National Forest in northwestern Montana. Longwell and his assignees obtained permits to drill in 1985, 1987, 1991 and 1993, which Pendley recalls were temporarily suspended four times between 1993 and 1997 by then-Interior Secretary Bruce Babbitt, and indefinitely suspended in 1998.

Longwell sued the federal government in 2013, Pendley continues, and in July 2015, Judge Leon ordered DOI to expedite a final decision. That came when then-Interior Secretary Sally Jewell cancelled the lease in March 2016, he says, on the grounds that BLM’s prelease environmental assessment violated the National Environmental Policy Act and the National Historic Preservation Act.

MSLF’s suit alleged that Jewell’s action was arbitrary and capricious under the Administrative Procedure Act, and Leon agreed. In his opinion, the judge notes, “The secretary of interior canceled Solenex’s lease after 33 years without notice and based on a supposed prelease violation of NEPA and NHPA. Additionally, the secretary cancelled Solenex’s 27-year-old APD after twice approving it and similarly giving no indication the underlying lease was invalid.

“As such, even assuming the authority to administratively cancel leases, the failure to consider the reliance interests at stake in cancelling plaintiff’s lease and the accompanying APD after three decades is ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,’” Leon’s opinion reads.

It later adds, “This ‘wait and see’ approach–although convenient from a policy perspective–wreaks havoc on the interests of individual leaseholders. The secretary’s cancellation of Solenex’s lease, without notice, is precisely the sort of action that undermines the government’s credibility at the bargaining table and increases the cost of its engagements.”

WASHINGTON–The U.S. Energy Information Administration estimates the United States now is the largest global crude oil producer, likely surpassing Russia and Saudi Arabia. In its latest Short-Term Energy Outlook, EIA calculates U.S. production topped Russia in June and August for the first time since February 1999, after surpassing Saudi output in February.

The EIA says while it doesn’t publish crude oil forecasts for Russia or Saudi Arabia in the Short-Term Energy Outlook, it expects that U.S. crude production will continue to exceed the other countries’ outputs for the remaining months of 2018 and through 2019.

U.S. crude oil production, particularly from light sweet grades, has increased rapidly since 2011, the agency says. The oil price decline in mid-2014 resulted in U.S. producers reducing their costs and temporarily scaling back production. However, EIA says, after crude oil prices increased early in 2016, investment and production began increasing later that year. By comparison, it notes Russia and Saudi Arabia have maintained relatively steady crude oil production growth in recent years.

The nation’s new oil-producing ranking has been anticipated for several months, says Ron Ness, president of the North Dakota Petroleum Council.

“We are very proud that our industry in North Dakota has contributed to this production achievement. Our industry gets more efficient and cost-effective every day as we continue to increase production from the Bakken Shale,” he says.

SANTA FE, N.M.–A record-breaking oil and gas lease sale generated $972.8 million in bonus bids for 142 parcels in New Mexico’s Lea, Eddy and Chaves counties, the U.S. Bureau of Land Management says. The agency points out the amount generated from the Sept. 5-6 sale in the Carlsbad Field Office is nearly three times the $358.0 million earned from all 2017 sales.

Apart from the lease sale’s record for total income, the auction also produced the highest bid ever for a single parcel and the highest per-acre bid ever received by BLM. The agency says the top bid generated $101.5 million for a 1,240-acre parcel in Eddy County, representing $81,889 an acre. The record for a single parcel was $76.7 million, set in September 2016 in New Mexico. The previous mark for a per-acre bid was $40,001 in December 2017.

“This historic lease sale shows what is possible when we leverage the vast natural resources we have in our country, using innovation, best science and best practices,” Secretary of the Interior Ryan Zinke says. “We can ensure reliable, safe, abundant and affordable energy for all Americans and New Mexico is a centerpiece of our all-of-the-above-energy future.”

New Mexico will reap $467.0 million from the sale, with the rest heading to the U.S. Treasury. BLM notes the lease sale funds will increase New Mexico’s budget for the current fiscal year significantly. State legislators had projected the auction would raise $200 million and that the state surplus would reach $900 million. The sale results push New Mexico’s surplus to $1.17 billion.

“New Mexico is at the forefront of the oil and gas industry. We will see more records being broken going forward,” Ryan Flynn, executive director of the New Mexico Oil & Gas Association, is quoted. “We are not only seeing record-setting production, but sustained growth that we expect to continue over the next five-10 years.”

WASHINGTON–Underground natural gas storage in the United States stood at 2.768 trillion cubic feet on Sept. 21, 18.3 percent below the five year average, according to the U.S. Energy Information Administration. That was 689 Bcf less than a year ago, when gas storage stood at 3.457 Tcf.

According to EIA, gas storage in the East Region was 729 Bcf on Sept. 21, 11.6 percent below the five-year average and 117 Bcf less than it was a year ago.

Gas storage in the Midwest Region stood at 800 Bcf on Sept. 21, 15.1 percent below the five-year average and 160 Bcf less than a year ago.

In the Mountain Region, EIA says, gas storage was 173 Bcf on Sept. 21, 14.4 percent below the five-year average and 43 Bcf less than a year ago.

Gas storage in the Pacific Region was 259 Bcf on Sept. 21, 21.8 percent below the five-year average and down 47 Bcf from a year ago.

In the South-Central Region, gas storage levels on Sept. 21 were 807 Bcf, 26.0 percent below the five-year average down 322 Bcf from a year ago.