NATIONWIDE: An Introduction to Energy: Oil & Gas (Regulatory & Litigation)
The following Overview featured in Chambers USA 2023 and is awaiting update from the firm.
US Federal Regulatory Issues Affecting Oil & Natural Gas
The US oil and gas sector is subject to many of the same conditions impacting other significant sectors in the US economy. Concerns about inflation, recession, reliable access to energy resources, and the best means to reduce greenhouse gas emissions continue to top the list of issues oil and natural gas companies must navigate. These challenges are presented at a time of global unrest that is coupled with a surge in the level of violent acts – both physically and technologically – directed at energy facilities that have heightened concerns regarding the resilience of energy infrastructure generally. This overview takes a brief look at current economic conditions, development trends in the oil and gas sector, new legislation that directly affects the industry, to provide perspective regarding the hurdles energy companies must overcome to continue to survive and thrive.
Current economic conditions affecting the oil and gas sector
Inflation was the primary economic concern in 2022 as the USA experienced a sharp increase in interest rates with the Federal Reserve raising rates seven before year’s end. Year over year inflation was 6.5% in December 2022. The Congressional Budget Office (CBO) projects interest rates will keep increasing while inflation is expected to decline to 3.3% in 2023. Overall, the current economic conditions continue to point to a slowdown of the economy with the Chief Economists Committee of the US Chamber of Commerce predicting a mild and short recession is likely in the middle of 2023. The current economic outlook of the oil and gas industry is not as grim as the general economic outlook. Following the invasion of Ukraine by Russia, momentum has shifted away from the phasing out natural gas to reducing emissions from natural gas while cleaner alternatives are developed and deployed. Supported by the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, investment in natural gas is expected to increase in 2023. Similarly, certified low carbon natural gas and lower-carbon LNG are expected to continue increasing momentum in 2023.
New legislation effecting the US oil and gas industry
The Infrastructure Investment and Jobs Act (IIJA) is one of the main pieces of recent legislation that supports investment in the oil and gas industry while combating climate change. The IIJA sets up a grant program for acquisition and installation of publicly accessible natural gas fueling infrastructure. Even though private entities are not eligible to directly receive grant funds under the program, eligible entities that received grants under this program are required to use the funds to contract with a private entity for acquisition and installation of publicly accessible natural gas fueling infrastructure. The IIJA promotes regional hydrogen hubs and electrolysis and clean hydrogen manufacturing and recycling programs at a total cost of USD9.5 billion. So far, the US Department of Energy has allocated nearly USD1.5 billion in loans for two major hydrogen projects. The Appalachian regional energy hub for natural gas and natural gas liquids is another initiative under the IIJA, which also sets up a natural gas distribution infrastructure safety and modernization grant program in the amount of USD1 trillion.
The Inflation Reduction Act (IRA) is hailed as the single largest investment in climate and energy in American history. The Act includes the Energy Infrastructure Investment Loan Program (EIR) to help retool, repower, repurpose, or replace energy infrastructure that has ceased operations or to improve the efficiency of infrastructure that is currently operating. The Act appropriates USD5 billion through September 30, 2026, to carry out EIR, with a total cap on loans of up to USD250 billion. The IRA also provides for methane emissions and waste reduction incentive program for petroleum and natural gas systems in the amount of USD850 million, which will remain available through September 30, 2028. While the IRA extends incentives for methane mitigating and monitoring measures, it also imposes a waste emissions reduction charge on methane emissions that exceed an applicable waste emissions threshold from an owner or operator of petroleum and natural gas facilities. The charge will be imposed and collected with respect to emissions reported beginning calendar year 2024.
Federal regulatory reforms also demonstrate the shift in focus regarding natural gas and oil resources. FERC issued an interim policy in 2022 that requires consideration of downstream and upstream GHG emissions of natural gas infrastructure projects when approving certificate of public convenience and necessity for construction of gas pipelines. Initially, the interim policy was planned to be implemented immediately pending public comments. However, FERC suspended the application of the interim policy following an outcry from fossil industry groups and Members of Congress. The interim policy came in response to a series of court decisions that ruled FERC must consider downstream emissions from construction gas pipelines in its NEPA reviews. The Council of Environmental Quality (CEQ) also has issued interim guidance which federal agencies may use to respond to the directive to consider reasonably foreseeable direct and indirect effects of their proposed actions including reasonably foreseeable emissions related to a proposed action that are upstream or downstream of the activity resulting from the proposed action.
Finally, the American Energy Independence Act of 2022 also potentially will impact the US oil and gas industry as it calls for US energy independence by 2024. The draft Act requires the Secretary of Interior to conduct a review of existing federal programs relating to leasing of federal land for oil and natural gas production and based on such review promulgate regulations and issue guidance that promote the leasing of federal land for oil and natural gas production and reduce regulatory burdens on US energy companies. The proposed legislation would require FERC to review and reconsider all applications concerning construction, leasing or operation of one or more pipelines denied by the Commission during the ten year period prior to enactment and to presume all applications will have a positive effect on US national security by contributing to the energy independence of the US requiring that FERC grant such applications based on that presumption.
Oil industry activity, trends and developments
Notwithstanding targeted legislation that is more favorable toward US oil and gas interests than what has been seen in recent years, US economic concerns, global unrest, and continued pressure to reduce greenhouse gas emissions, are likely to suppress opportunities for oil and gas companies in the USA and globally. The US Energy Information Agency identifies four new liquefied natural gas (LNG) export projects are expected to come online worldwide, with a combined capacity of 1.0 billion cubic feet per day (Bcf/d). EIA predicts that total annual LNG capacity additions will be the lowest since 2013. Between 2014 and 2022, annual LNG capacity additions ranged from a low of 1.8 Bcf/d in 2021 to a high of 5.6 Bcf/d in 2018.