December 2017 Exclusive Story
Operators Lock In 2018 Oil Hedges
FORT WORTH–President Donald J. Trump took the oath of office on Jan. 20 promising to usher in an era of regulatory rollback and economic growth. While some Obama administration initiatives will likely continue, the president and members of his cabinet already have begun reversing course on several high-profile regulatory efforts initiated or completed during the last months of the Obama administration, many of which directly impact conventional and unconventional oil and gas development operations.
Since his inauguration, President Trump has issued three significant executive orders concerning federal regulations. First, the president issued an executive order on Jan. 30 intended to reduce regulation and control regulatory costs. Subject to certain limited exceptions, the executive order requires agencies to identify and repeal two regulations for each new regulation promulgated. Moreover, the cost of the two regulations identified and repealed must equal or exceed the cost of the regulation promulgated. The Office of Management and Budget has since clarified that the executive order applies only to significant regulatory actions.
Second, the president issued an executive order on Feb. 24 on enforcing the White House regulatory reform agenda. Specifically, the executive order requires federal agencies to form “regulatory reform task forces,” which in part are designated to oversee the implementation of the Jan. 30 executive order.
Regulatory reform task forces also must evaluate existing regulations and make recommendations to agency heads regarding the repeal, replacement or modification of regulations that, among other items, eliminate jobs or inhibit job creation; are outdated, unnecessary or ineffective; impose costs that exceed benefits; create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies; or derive from or implement executive orders or other presidential directives that have subsequently been rescinded or modified. Each agency must provide a report by May 25 that identifies regulations for repeal, replacement, or modification.
Third, on March 28, the President signed an executive order intended to promote energy independence and remove certain regulations that burden oil and natural gas development. Among other items, the executive order gives agency heads 180 days to submit a final report identifying regulations, orders, guidance documents, policies, and other administrative initiatives that “potentially burden the development” of domestically produced oil and natural gas. The executive order directs agency heads to, as soon as practicable, suspend, revise or rescind those regulatory initiatives identified in the final report.
The executive order also rescinds President Obama’s 2014 Climate Action Plan Strategy to Reduce Methane Emissions and orders agencies to identify and consider rescinding regulatory actions related to the plan. Among the final rules the executive order specifically identifies for reconsideration are the U.S. Environmental Protection Agency’s 2016 emissions standards for new and modified sources in the oil and gas sector, and the U.S. Department of the Interior’s Bureau of Land Management’s 2016 Waste Prevention Rule.
In addition to these executive orders, which represent a significant shift in federal regulatory policy toward operators, several agency heads have begun unwinding various regulatory initiatives implemented before President Obama left office.
Methane ICR Withdrawn
On March 7, EPA formally withdrew its 2016 information collection request (ICR) concerning methane emissions from the oil and gas sector. EPA drafted and released the ICR in anticipation of “addressing existing source emissions” in the oil and gas sector, possibly through the promulgation of more stringent regulations.
According to EPA, more than 15,000 operators were required to respond to the ICR. The ICR included two surveys: an operator survey and a facility survey. The operator survey requested basic information on the numbers and types of equipment at onshore oil and gas production facilities. The facility survey, which fewer operators were subject to, requested detailed information on sources of methane emissions and emissions control devices or practices in use. Many operators considered the facility survey time consuming and potentially expensive.
In the Federal Register notice withdrawing the ICR, EPA stated that it will “assess the need for the information that the agency was collecting through these requests.” The withdrawal is a significant victory for oil and gas operators not only because of the expense associated with the facility survey, but also because without the ICR, EPA is unlikely to propose new and more stringent existing source regulations in the immediate future.
U.S. Waters Rulemaking
In June 2015, EPA and the U.S. Army Corps of Engineers published a final rulemaking defining the scope of waters protected under the Clean Water Act (CWA). The 2015 Waters of the United States rulemaking was widely viewed by the industry as expanding those waters over which EPA and ACE claimed jurisdiction, and therefore, those waters to which the CWA requirements and prohibitions apply. In general, the CWA may apply to development operations in or near waters considered jurisdictional, particularly with regard to National Pollutant Discharge Elimination System (NPDES) permitting and dredge and fill permitting.
Importantly, the 2015 rulemaking included as jurisdictional those non-navigable upstream waters that “significantly affect the chemical, physical or biological integrity of traditional navigable waters, interstate waters, or . . . territorial seas,” including some ephemeral streams and regional water characteristics not traditionally viewed as jurisdictional.
In October 2015, the Waters of the United States rule was enjoined by the U.S. Court of Appeals for the Sixth Circuit pending a review of whether the definition exceeded the authority given to the agencies in the CWA. In the interim, EPA and ACE reverted to the pre-2015 definition.
On Feb. 28, the president signed an executive order requiring EPA and ACE to consider whether the final rulemaking ensures that “navigable waters are kept free from pollution, while at the same time promoting economic growth, minimizing regulatory uncertainty, and showing due regard for the roles of the Congress and the states under the Constitution.” The executive order expressly requires that the agencies consider adopting a definition of “waters of the United States” that is consistent with the much narrower definition suggested by Justice Scalia in Rapanos v. U.S., 547 U.S. 715 (2006).
In Rapanos, Justice Scalia opined in a plurality opinion that the CWA only includes relatively permanent, standing or continuously flowing bodies of water, and not water bodies that flow intermittently or ephemerally. Scalia also stated that wetlands are not jurisdictional based on a mere hydrological connection to other jurisdictional waters. Instead, to establish jurisdiction, Scalia stated that the agencies must establish an inherent ambiguity concerning where the jurisdictional water ends and the wetland begins. Should EPA and ACE repeal the final rulemaking and replace it with a definition of waters of the United States that is consistent with Justice Scalia’s plurality opinion in Rapanos, the claimed jurisdiction of the agencies will likely shrink, particularly with respect to intermittent and ephemeral streams.
Risk Management Rule
Shortly before Trump assumed office, EPA published significant amendments to the Risk Management Program regulations. Nationally, the program affects approximately 12,500 facilities, including many midstream oil and gas facilities. Generally speaking, stationary sources must comply with Risk Management Program regulations if the facility holds more than a threshold quantity of a regulated substance in a process.
Facilities regulated by the Risk Management Program must assess the potential impacts of hazardous releases, undertake steps to prevent releases, plan for emergency response to releases, and summarize certain accident prevention and preparation information in a risk management plan submitted to EPA. In response to the 2013 explosion at the West Fertilizer Company in Texas, which resulted in 15 fatalities, Obama required EPA to review the chemical hazards covered by the Risk Management Program and expand the program as necessary to address any additional hazards found.
In response, the agency finalized a rulemaking that makes more stringent, among other items, the regulations applicable to the accident prevention program and emergency response preparation. On March 16, EPA announced a three-month delay in the effective date of the final rule, to June 19. Moreover, EPA also announced on March 16 that it would convene a proceeding for reconsidering the final rule to allow additional public comment.
Significantly, just before the close of the 2016 public comment period, the U.S. Bureau of Alcohol, Tobacco, Firearms, and Explosives announced that the West Fertilizer Plant explosion, the impetus for the regulatory changes, was caused by an intentional criminal act. On reconsideration, EPA may determine that the agency’s stated rationale for more stringent risk management regulations–namely that the existence of the West Fertilizer Plant explosion and other major industrial incidents evidence a weakness in the nation’s industrial safety regulations –is incorrect, and therefore, either withdraw or amend the final rulemaking.
Fracturing Rule Withdrawn
On March 15, BLM announced that it will withdraw a final rule published by the Obama administration that updated regulations applicable to hydraulic fracturing operations on federal and Indian lands. The Obama regulations required, among other items, that operators:
BLM published the hydraulic fracturing rule as final in March 2015, but the final rule was enjoined by the U.S. District Court for the District of Wyoming preliminarily in September 2015 and finally in June 2016. The Obama administration appealed the Court’s injunction to the U.S. Court of Appeals for the Tenth Circuit, an appeal that the Trump administration will no longer pursue.
Waste Reduction Rule
On Feb. 3, the U.S. House of Representatives passed H.J. Res. 36, a resolution that would nullify BLM’s “Methane and Waste Reduction Rule” if passed by the Senate and signed by President Trump. The Waste Reduction Rule is designed to reduce venting, flaring and leaks during production activities on federal and Indian lands by amending federal regulations that specify when produced gas lost through venting, flaring or leaks is subject to royalties. Operators must pay BLM royalties on natural gas flared in excess of the capture requirements stated in the final rulemaking. The final rulemaking also requires operators to inspect certain equipment twice a year, make timely repairs to any leaks found, and update certain equipment that BLM believes contributes to lost gas.
Several industry groups have challenged the rulemaking in the U.S. District Court for the District of Wyoming, but on Jan. 16, the court denied a motion for a preliminary injunction. The Senate vote was expected to take place by mid-May and be very close.
FERC And FWS Update
On March 9, with only two of the five Federal Energy Regulatory Commission seats filled (both with Democrats), the White House announced that Trump would nominate Neil Chatterjee, Kevin McIntyre and Robert Powelson to be FERC commissioners. Once confirmed by the U.S. Senate, the three nominees will restore a full panel of commissioners to FERC until June 2017, when current Commissioner Colette Honorable’s term expires. Despite not having the minimum three commissioners required for a quorum since early February, FERC had a productive start to the year, approving the Rover pipeline project, the Atlantic Sunrise pipeline expansion and the Northern Access pipeline project, all of which greatly enhance operators’ ability to move natural gas from the Marcellus and Utica shales into favorable markets.
The U.S. Fish and Wildlife Service likewise appears unaffected so far by the change in administration. For example, on March 21, FWS rejected a request by operators to delay protections for the rusty patched bumble bee. A final rulemaking listing the species as endangered was published on Jan. 11, 2017, in the Federal Register. Several industry associations requested a delay of the final rulemaking to ensure that industry practices do not result in an incidental take of the species, and therefore, a violation of the Endangered Species Act. The associations expressed concern that incidental takes might occur through the inadvertent destruction of underground nests during construction or through the general use of herbicides or insecticides. Although the protections for the bee are national in scope, the final rulemaking is expected to impact operators in the Marcellus and Utica area.
The Trump administration, particularly through EPA and BLM, has actively–and thus far successfully–reversed several regulatory initiatives begun or completed in the final months of the Obama administration. Moreover, the Trump administration has successfully halted future regulatory initiatives, such as more stringent regulations for existing facilities in the oil and gas sector, which the previous administration was actively pursuing in 2016.
The Trump administration also has instituted three executive orders, with potentially more to come, aimed at structural reform of both future agency initiatives and existing regulations. The rollback of Obama-era regulations, combined with the potential removal of existing regulations identified as “job inhibiters,” could greatly reduce the regulatory burden on operators and spur additional development.
MICHAEL REER is an associate in the Fort Worth office of Harris, Finley & Bogle P.C., and also manager of the firm’s Oil and Gas Law Blog. Reer joined Harris, Finley & Bogle’s litigation team in 2016 after practicing oil and gas law in Pennsylvania. He has assisted with oil and gas litigation in some of the most significant shale plays in the country, including the Barnett, Eagle Ford, Haynesville, Marcellus, Utica and Wolfcamp. He also has significant regulatory experience, and has assisted clients with compliance and enforcement matters concerning several federal and state agencies. Reer holds a bachelor’s from Boston College, a J.D. from the Boston College Law School, and a master’s of law in energy, environment and natural resources from the University of Houston.