September 2019 Industry Digest

WASHINGTON–August offered a microcosm of the wild swings characterizing U.S.-China trade relations, with a spell of midmonth optimism book-ended by aggressive trade war saber rattling. Beyond the global economy’s influence on hydrocarbon demand, the implications for U.S. oil and gas producers included Chinese tariffs on U.S. crude and uncertainty for the next wave of U.S. liquified natural gas export terminals.

According to published reports, in the first week of August, China responded to President Donald Trump’s plans to add 10% tariffs to $300 billion in Chinese goods by allowing the People’s Bank of China to devalue its currency to its lowest level against the dollar since 2008. China also commanded state-controlled buyers to stop importing U.S. agricultural goods.

That constitutes a massive retaliation, advises Chris Krueger, managing director of Cowen Washington Research Group. “On a scale of 1 to 10, it’s an 11,” he is quoted. “While there were measures that could have been chosen with larger direct effects on supply chains, the announcements from Beijing represent a direct shot at the White House and seem designed for maximum political impact.”

By midmonth, however, headlines detected a thaw, with press accounts noting the Trump administration’s plans to postpone until Dec. 15, new tariffs on $156 billion in Chinese goods that had been scheduled to take effect on Sept. 1. “We are doing this for the Christmas season, just in case some of the tariffs would have an impact on U.S. customers,” Trump told reporters.

Nevertheless, a little more than a week later, press accounts note, China announced plans to place new 5%-10% tariffs on $75 billion worth of U.S. goods and revive duties on American autos, also effective on Sept. 1 and Dec. 15. The American Petroleum Institute notes the new duties include a 5% tariff on U.S. crude oil and several other petroleum products.

“This escalation of the U.S.-China trade war is another step in the wrong direction, the consequences of which will be felt by American businesses and families,” warns Kyle Isakower, API’s vice president of regulatory and economic policy. “In addition to the impacts on the U.S. economy and jobs, U.S. energy leadership and global competitiveness are threatened as U.S. natural gas and oil exports continue to serve as targets for retaliation.

“We urge the administration to quickly come to a trade agreement with China that will lift all tariffs under Section 301, including the damaging retaliatory tariffs on American energy exports,” Isakower implores.

API notes that even before China’s formal retaliation against U.S. crude imports, that country’s imports of U.S. crude oil dropped from 22% to only 3% of total U.S. crude exports since initial implementation of the Section 301 tariffs.

Moreover, API adds, the U.S. natural gas and oil industry is negatively impacted by the administration’s tariffs on more than 100 industrial products under Section 301 and by steel tariffs under Section 232, and is subject to a 25% retaliatory tariff on U.S. LNG exports to China.

Media reports note companies with plans to develop U.S. LNG facilities have cited the trade war as a major reason to delay final investment decisions.

Despite all the tumult between the United States and China, this summer has seen some encouraging signals regarding North American trade. Press accounts quote U.S. Representative Earl Blumenauer, D-Or., a key congressional negotiator in discussions regarding the U.S-Mexico-Canada Agreement, as reporting “significant progress.”

“The smart money in Washington is that USMCA will pass this fall following a bargain,” published reports quote Daniel Ujczo, an attorney specializing in North American trade.

WASHINGTON–The Trump administration in August intensified efforts to isolate the Venezuelan government and remove Nicolás Maduro from power, which included an executive order blocking all property and interests in property of the Venezuelan government in the United States. According to press accounts, the EO prevents the Maduro regime’s international creditors from seizing Citgo, the U.S. affiliate of Venezuela’s national oil company.

An Aug. 6 announcement by U.S. Secretary of State Michael Pompeo about the EO says it is designed to directly target Maduro’s regime and those who support it, while exempting transactions related to humanitarian activity, including the provision of articles such as food, clothing and medicine intended to relieve human suffering.

“While this is not an embargo, this significant action is in response to the continuing usurpation of power by Maduro and persons affiliated with him from the legitimate interim government of interim President Juan Guaido, as well as human rights abuses, including extrajudicial killings, torture, arbitrary arrest and detention of Venezuelan citizens; interference with freedom of expression, including for members of the media; and ongoing attempts to undermine interim President Guaido and the democratically elected National Assembly’s exercise of legitimate authority in Venezuela,” Pompeo stated. “Together, with our democratic partners in the region and around the world, the United States stands with interim President Guaido, the democratically elected National Assembly, and the people of Venezuela as they seek to restore constitutional order and democracy to their country.”

In remarks at an early August conference in Peru, White House National Security Adviser John Bolton noted that the EO marked the first time in 30 years the United States had imposed an asset freeze against a Western Hemisphere government.

“I want to be clear that this sweeping executive order authorizes the U.S. government to identify, target and impose sanctions on any persons that continue to provide support to the illegitimate regime of Nicholas Maduro. It directly targets illegitimate Maduro-run or aligned institutions, and sends a direct signal to all who enable his dictatorship and undermine the democratically-elected Venezuelan National Assembly or interim president Juan Guaido,” Bolton stated. “We are taking this step to deny Maduro access to the global financial system and further isolate him internationally. In addition, we are sending a signal to third parties that want to do business with the Maduro regime: Proceed with extreme caution. There is no need to risk your business interest with the United States for the purposes of profiting from a corrupt and dying regime.”

According to Bolton, the United States has taken assertive actions to break the ties between Venezuela and Cuba. “Our sanctions against vessels transporting oil between the two countries are just the beginning,” he cautions.

After the EO, media reports indicate, Guido responded by tweeting, “Today, there is no possibility of losing Citgo.”

WASHINGTON–The Federal Energy Regulatory Commission is creating a new division within its Office of Energy Projects, and is adding a regional office in Houston to accommodate the growing number and complexity of applications to site, build and operate liquefied natural gas export terminals.

FERC Chairman Neil Chatterjee says FERC’s new Division of LNG Facility Review & Inspection will consist of 20 existing LNG staff members in Washington and eight new staffers based in the Houston regional office.

“As the demand for U.S. LNG, and the number and complexity of project applications has grown, the commission has experienced a similar growth in the need to expand its oversight in this program area,” Chatterjee says. “Most of the work related to these projects, and the expertise it requires, is based in and around Houston. For that reason, the commission has determined we should direct our newest efforts to recruiting staff in the area to build on the good work already being done at our Washington headquarters.”

Between April 2018 and his July announcement, Chatterjee observes, the number of staffers working on LNG applications grew from 13 to 20 people focused on completing engineering reviews, coordinating safety reviews with the Pipeline and Hazardous Materials Safety Administration, and preparing engineering analyses for inclusion in environmental documents.

OMAHA, NE.–The long-delayed Keystone XL crude oil pipeline took one more step forward on Aug. 23 when the Nebraska Supreme Court affirmed the pipeline’s route through Nebraska that was approved by the Nebraska Public Service Commission in November 2017.

“The Supreme Court decision is another important step as we advance toward building this vital energy infrastructure project,” responds Russ Girling, president and chief executive officer of TC Energy Corp. (formerly TransCanada Corp.), which is building the pipeline.

Premier of Alberta Jason Kenney calls the ruling “another step forward for this vital pipeline project after far too many years of regulatory delays and hurdles,” according to published reports.

Those reports say the Nebraska Supreme Court rejected opponents’ claims that the state utility commission had no authority to define a path for the pipeline.

TransCanada Corp. initially applied for a border-crossing permit in 2008 for the 1,187-mile pipeline intended to carry 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 application in November 2015, but President Donald Trump reversed that decision in March 2017 and issued a permit (AOGR, April 2017, pg. 28).

The U.S. District Court for the District of Montana granted an injunction against Trump’s permit in November 2018 (AOGR, December 2018, pg. 18), so in March this year, President Trump revoked his 2017 permit and issued a second, which also has been challenged by the Indigenous Environmental Network in the Montana district court. Meanwhile, the U.S. Court of Appeals for the 9th Circuit vacated the Montana court’s injunction in June (AOGR, July 2019, pg. 14).

SAN ANTONIO–EPIC Crude Holdings LP’s 24-inch Y-Grade pipeline began delivering crude oil from Crane, Tx., to various terminals in Corpus Christi and Ingleside, Tx., on Aug. 15, the company reports.

During interim service, EPIC says, its Y-Grade line will be able to deliver up to 400,000 barrels a day to multiple terminals in the Corpus Christi area. The company adds it will reserve 10% of pipeline capacity for walk-up shippers during interim service.

“Providing interim service adds much-needed take-away capacity in the Permian Basin, which supports continued development and highlights the strategic value of our assets,” says EPIC Chief Executive Officer Phillip Mezey.

EPIC notes that construction of its 30-inch permanent crude line–the Crude Oil Pipeline–is more than half complete, remains on budget and is expected to be complete in January. The Crude Oil Pipeline will have an initial capacity of 600,000 bbl/d when it begins ramping service in first quarter 2020, the company says, adding that when operations on the Crude Oil Pipeline commence, it will transition its Y-Grade pipeline back to natural gas liquids service.

A Reuters report mentions that Midland crude oil prices firmed as much as $0.50 a barrel above US. crude when oil began moving on the Y-Grade line. “A year ago, it had traded around an $18.25 a barrel discount,” Reuters says.

CALGARY, ALBERTA–A Wisconsin tribal group has filed a legal challenge to Enbridge Inc.’s Line 5 pipeline, which transports propane and other petroleum liquids from western Canada, through the U.S. Great Lakes region, and into to eastern Canada. The pipeline passes under the Straits of Mackinac, which connect Lake Michigan to Lake Huron.

The Bad River Band of the Lake Superior Chippewa sued Enbridge in the U.S. District Court for the Western District of Wisconsin, alleging the easements granting the pipeline right of way have expired, and the pipeline’s placement near the Bad River could cause an environmental catastrophe, court documents state.

According to the tribal filing, when Line 5 was built in 1953, the easements granted by the Bureau of Indian Affairs had 20-year lifetimes, and were extended in the 1970s and 1993. After 15 of the easements expired on June 2, 2013, the company expressly promised to remove all pipeline infrastructure and restore the land to its prior condition.

“Rather than doing so, or seeking the Band’s consent to a renewal of the easements prior to their expiration, Enbridge has continued to operate the pipeline as if it has an indefinite entitlement to do so,” the court filing says. “This constitutes an unlawful possession of the subject lands, and an intentional, ongoing trespass upon them.”

The Bad River Band insists that federal regulations prohibit renewing expired rights of way on Indian lands, and so Enbridge would need to seek approval for new easements from the BIA, as well as from the tribe.

Enbridge contends the majority of its easements through the Bad River Band reservation extend until 2043, and those in question affect only a fraction of the 12 miles of pipeline lying within reservation land. It adds it has considered rerouting Line 5 and has been in discussions with tribal representatives.

“Over the years, we have been successful in establishing trust along our pipelines based on respect for the environment and the unique cultures of tribal communities. We look forward to our discussions continuing with Bad River to that end,” says Brad Shamla, vice president of Enbridge U.S. operations.

Enbridge’s Line 5 also faces state-level legal challenges, with Michigan Attorney General Dana Nessel filing a request for a circuit court to declare the easement under the Straits of Mackinac to be invalid and to enjoin it to discontinue operation as soon as possible. Both Nessel and Michigan Governor Gretchen Whitmer are seeking to shut down Line 5 (AOGR, August 2019, pg. 22).

WASHINGTON–A coalition of 22 states and seven local governments are suing the Environmental Protection Agency over its Affordable Clean Energy (ACE) rule, which the Trump administration unveiled in early July to replace the Obama administration’s Clean Power Plan (CPP).

The lawsuit, which was filed in the U.S. Court of Appeals for the District of Columbia Circuit on Aug. 13, follows litigation that a pair of U.S. health organizations filed against ACE shortly after it was published (AOGR, Aug. 2019, pg. 18).

The litigants claim ACE ignores scientific facts about climate change and fails to recognize the dire threat it poses to people’s health, the economy and the environment, while also disregarding Clean Air Act requirements. “The CAA requires that limits on air pollutants, such as greenhouse gases, must be based on the emission reductions achievable through the ‘best system of emission reduction,’” holds a statement from New York Attorney General Letitia James. “However, in the ‘dirty power’ rule, EPA has ruled out as such a ‘best system,’ the most cost-effective, proven and successful approach to controlling GHG emissions: shifting from coal-fueled generation to less carbon-intensive generation.”

However, West Virginia Attorney General Patrick Morrisey defends ACE in media reports, saying the lawsuit misconstrues the CAA. “The CAA was not written to compel one type of energy producer to cross-subsidize another,” Morrisey is quoted. “Neither it nor the (U.S.) Constitution allow the EPA to serve as a central energy planning authority.”

Press accounts go on to cite Morrisey as vowing, “West Virginia will fight this 22-state big government ‘power grab’ lawsuit and advance some of the same arguments that helped our 27-state coalition obtain a stay of the . . . CPP at the U.S. Supreme Court in 2016.”

Unlike the CPP, which EPA adopted in August 2015 only to see it halted, ACE does not set specific carbon dioxide-reduction goals, but authorizes states to establish unit-specific standards of performance that reflect the emission limitations achievable though applying best system-of-emission-reduction technologies (AOGR, July 2019, pg. 29).

Joining New York’s James in the lawsuit against ACE are the attorneys general of California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, Washington, Wisconsin and the District of Columbia, and the chief legal officers of Boulder, Co., Chicago, Los Angeles, New York City, Philadelphia and South Miami.

WASHINGTON–A July ruling by U.S. District Judge Rudolph Contreras goes in favor of the Bureau of Land Management and industry intervenors, but the judge warns that the way is not yet clear for the agency to authorize drilling on more than 460,000 acres of lands leased for oil and gas drilling in 2015 and 2016.

On July 19, Contreras, sitting in the U.S. District Court for the District of Columbia, denied two motions brought by WildEarth Guardians and Physicians for Social Responsibility in WildEarth Guardians, et al v. David Bernhardt, et al.

In March, Contreras ruled that when BLM auctions public lands for oil and gas leasing, it must consider greenhouse gas emissions from past, present and foreseeable future leases nationwide in the case then styled WildEarth Guardians v. Zinke (AOGR, April 2019, pg. 125). That lawsuit was brought by WildEarth Guardians and Physicians for Social Responsibility in 2016, challenging leases in Wyoming, Colorado and Utah, but Contreras trifurcated the case to first address 303,000 acres of leases in Wyoming, which were the subject of his March 19 ruling.

Contreras did not vacate the Wyoming leases, but remanded BLM’s environmental assessments and findings of no significant impact (FONSIs) for the agency to redo in light of his ruling, and enjoined the agency from issuing any permits to drill until the new analyses were completed.

On May 24, according to court documents, BLM told the court it had completed a new EA and FONSI for the Wyoming leases and therefore believed it was free to issue drilling permits. BLM also requested permission to begin redoing the Utah and Colorado EAs and FONSIs, which Contreras granted on May 29.

The two environmental groups then filed separate motions asking the court to enjoin BLM:

• From issuing drilling permits for the Wyoming leases until the court had found the second EA and FONSI were satisfactory; and
• From issuing drilling permits for any of the Colorado and Utah leases until their environmental analyses were found to comply with the National Environmental Policy Act.

However, in his July ruling denying the plaintiffs’ motions, Judge Contreras finds on the first motion that the plaintiffs have “received all relief required,” by his March 19 ruling because the new EAs “correct the NEPA deficiencies this court previously identified.”

In addition, Contreras writes, “The court owes BLM ‘the presumption of regularity accorded to agencies in performing their duties.’ To the extent that plaintiffs wish to challenge the adequacy of BLM’s new NEPA analysis, they must supplement their complaint to raise new claims.”

Regarding the second motion, Contreras notes, his May 29 order did not enjoin BLM from issuing drilling permits for the Colorado and Utah leases, and says the plaintiffs are free to challenge the adequacy of the agency’s new EAs and FONSIs, once completed. “Because it declines to speculate about BLM’s analysis on remand . . . this court will deny plaintiffs’ motion,” he writes.

However, Contreras also warns BLM not to shortchange any of its environmental analyses. “The court underscores that (denying) plaintiffs’ claims does not lessen defendant’s obligation to issue EAs and FONSIs that comply with NEPA’s requirements for all the Wyoming, Colorado and Utah leases. If it is appropriate to do so at a later stage, the court will not hesitate to unwind any improper grants of authority to drill,” the ruling states.

PROVIDENCE, R.I.–A federal judge has rebuffed oil companies’ attempt to move a lawsuit attempting to hold them liable for damages caused by climate change from state to federal court.

Rhode Island’s attorney general filed a lawsuit in July 2018 in Providence County, R.I., Superior Court, alleging 21 defendants, including ExxonMobil, Chevron Corp., Shell and BP contributed to creating a public nuisance by extracting fossil fuels and selling petroleum products (AOGR, August 2018, pg. 20). The lawsuit accuses the defendants of concealing the dangers of fossil fuels and undermining support for greenhouse gas regulations.

The oil companies attempted to move the case to federal court, but on July 22, U.S. District Court Judge William E. Smith in the District of Rhode Island held there “is no federal jurisdiction under the various statutes and doctrines adverted to by defendants,” and denied their motion.

Several federal courts have dismissed lawsuits that attempted to hold oil companies liable for damages caused by climate change (see “Federal Court Denies California Cities’ Claims for Climate Damages,” AOGR, July 2018, and “Federal Judges Dismiss Climate Change Charges Against Energy Firms,” AOGR, August 2018).

According to Smith’s opinion in State of Rhode Island v. Chevron Corp. et al, the defendants asserted that several federal statutes, including the general removal statute found at 28 U.S.C. § 1441, the Clean Air Act and the Outer Continental Shelf Lands Act, pre-empted state jurisdiction.

However, “None . . . allows defendants to carry their burden of showing the case belongs here,” the ruling declares.

WASHINGTON–Underground natural gas storage in the United States stood at 2.857 trillion cubic feet on Aug. 23, 3.4% below the five year average, according to the U.S. Energy Information Administration. That was 363 Bcf more than a year ago, when gas storage stood at 2.494 Tcf.

According to EIA, gas storage in the East Region was 682 Bcf on Aug. 23, 4.2% below the five-year average, but 49 Bcf more than it was a year ago.

Gas storage in the Midwest Region stood at 790 Bcf on Aug. 23, 0.9% above the five-year average and 126 Bcf more than a year ago.

In the Mountain Region, EIA says, gas storage was 173 Bcf on Aug. 23, 6.5% below the five-year average and 17 Bcf more than a year ago.

Gas storage in the Pacific Region was 278 Bcf on Aug. 23, 6.4% below the five-year average and up 38 Bcf from a year ago.

In the South-Central Region, gas storage levels on Aug. 23 were 934 Bcf, 4.7% below the five-year average and up 133 Bcf from a year ago.