Navigating The Transition: Key Upstream Issues To Watch In The Biden Administration

Vinson & Elkins LLP

Each new presidential administration brings with it its own set of policy goals and priorities. While the text of the environmental laws does not change without an act of Congress, agencies within the executive branch have a great deal of discretion in determining where to focus their limited resources, and they can even issue new regulations changing how they administer their programs and interpret those statutes, each in ways that may expand or constrict the ability of the regulated community to develop upstream assets. When upstream operations are located on federal lands, they also require federal permits, which can be impacted by new policies or which can be challenged in court by project opponents.

News stories and campaign rhetoric frequently create expectations of immediate shifts following an administration change, but most changes in the federal government happen slowly, and the constraint on resources means that many areas of environmental regulation and permitting policy will remain unchanged in the early years of the new administration. So where should the upstream business focus its near-term attention? Here are several key issues to watch over the upcoming year.

Environmental Enforcement

EPA focuses its enforcement and compliance assurance resources on the most serious environmental violations by developing and implementing national program priorities, called National Compliance Initiatives (“NCIs”). The current NCI strategy runs through September 2023, and includes six areas of focus. A Biden EPA might not wait until 2023 to put its own stamp on the NCIs and might consider moving the following regulatory programs from the day-to-day “core” enforcement program into a national initiative. There are a few ways this could impact the upstream industry:

  • Climate enforcement. A Biden EPA might develop a broad strategy around enforcement of federal and state greenhouse gas (“GHG”) emission regulations. This could include the following programs: federal GHG reporting, federal new source review GHG permitting, federal new source performance standards compliance, renewable fuels standards, and enforcement of emerging state CO2 and methane regulations that have been included in state implementation plans under the Clean Air Act.
  • Energy sector enforcement. A Biden EPA — like the Obama EPA — might target the energy sector specifically to achieve air, water, and waste pollution reductions. An energy sector initiative might include a focus on compliance with air quality requirements at upstream and midstream oil and gas operations and major and minor new source review permitting requirements in the oil and gas and power sectors.

Hydraulic fracturing regulation

During and following the election there has been a great deal of discussion about the extent to which the Biden administration can (or will) attempt to limit hydraulic fracturing. The administration does not have the legal authority to ban fracking on private or state lands. The administration could, however, issue a moratorium on new fracking on federal lands while it further studies the issue, or attempt to pass regulations prohibiting fracking on these lands. The Obama administration never went nearly so far. In fact, after the Obama administration’s Department of Interior’s Bureau of Land Management (“BLM”) passed regulations imposing additional limitations of fracking practices, a federal court held that the BLM lacked the legal authority to pass such regulations and halted them from going into effect. While the Biden administration may attempt its own regulations in this area, such regulations will take months, if not years, to complete and will then be subject to court challenges.

Methane Regulation

The Biden administration has pledged to “pull every lever” to address climate change. One way that climate policy could impact upstream operations is through the regulation of methane gas. Methane is a GHG that is released, along with volatile organic compounds (“VOCs”), through natural gas leaks. In August 2020, the Trump administration altered or “rolled back” a number of requirements in Obama-era methane regulations for “new sources” in the oil and gas industry. This included entirely removing the transportation and storage sector (midstream) from methane and VOC regulation, removing methane as a separately regulated pollutant for the rest of the oil and gas industry, adjusting some of the existing leak detection and repair requirements, and making the legal case that EPA must make more industry-sector and pollutant-specific findings before regulating under Section 111 of the Clean Air Act in the future.

Re-imposing methane regulations for the oil and gas industry is likely to be a priority for the Biden EPA, as it is seen as a legal stepping stone to regulating more (existing) sources of GHGs in the future. This could mean equipment upgrades and more stringent leak detection, repair, and reporting requirements, but don’t expect any changes to regulations on day 1 of the new administration. Revising a highly technical regulation like the methane emissions rule will take time and agency resources, and will be subject to court challenges that could further delay them from taking effect. As a result, it will likely take months, if not years, before industry is required to comply with new requirements. Change could happen more quickly, however, if the federal court currently hearing a legal challenge to the Trump methane rules finds legal flaws with the rules sufficient to send them back to the agency without letting them go into effect.

Further complicating any attempts by the Biden administration to re-impose methane regulation on the oil and gas sector is the recently finalized EPA significant contribution finding for GHG emissions from electric generating units. On January 12, 2021, the EPA established a new framework under Section 111(b) of the Clean Air Act for determining when GHG emissions from a source category “contribute significantly” to air pollution so as to warrant regulation under the Clean Air Act’s New Source Performance Standards. The rule determined that regulation of electric generating units under Section 111(b) of the Clean Air Act was appropriate because GHG emissions from this source category exceed 3% of total U.S. GHG emissions. In its rulemaking, EPA identified the following source categories as below the 3% threshold: oil and natural gas, petroleum refineries, and industrial-commercial-institutional steam generating units. Accordingly, under EPA’s new significance test, GHG emissions from these categories would not “contribute significantly” to air pollution so as warrant regulation under Section 111(b) of the Clean Air Act. While this rulemaking may be susceptible to challenges under the Administrative Procedure Act, until a final decision is made by the courts or the agency rolls back this rule, attempts to regulate methane emissions from oil and gas sources will be constrained.

Greenhouse Gases (“GHGs”) and Leasing on Federal Lands

Another way that climate policy could impact upstream operations relates to the federal government’s decision to hold oil and gas lease sales. About 26% of the federal land, or about 166 million acres primarily in western states, can be leased to private parties for energy development such as drilling for oil and natural gas. President-Elect Biden has promised to end fossil fuel leasing of public lands, though this pledge may run afoul of the Mineral Leasing Act. The new administration will have a difficult time trying to stop development of existing leases, but could curtail quarterly lease sales and lease renewals.

Even if the new administration did not go so far as to entirely freeze federal leasing, it has ample other mechanisms to limit lease development. Some courts have recently held up some BLM leases, finding that BLM did not adequately consider the impacts of GHG emissions. Efforts by the Biden administration to mandate additional analysis of GHG emissions and climate change impacts, and potentially to require expensive mitigation measures, may dampen interest in federal leases. Another example of downward pressure on federal leasing is protection of endangered species like the sage grouse. The Obama administration put in place sage grouse conservation plans that limited opportunities for energy development, particularly in large swathes of Wyoming. The Trump administration subsequently revised those plans to promote energy development. In late 2019, a federal court enjoined BLM from implementing the revised plans, and the Biden administration is likely to retreat from those proposed changes. Measures like these could limit opportunities to enter into future leases on federal lands.

Permitting timelines

Outside of formal federal policies, the pace and stringency of permit reviews can also impact upstream activity on federal lands. Operators must submit and obtain BLM approval of a site-specific Application for Permit to Drill (“APD”). The APD must provide the operator’s drilling plan; surface use plan, including plans to protect groundwater and surface water; plans for casing, including size, grade, weight, and depth of casing strings; proposed drilling fluids; and specifications for blowout prevention equipment. BLM evaluates the sufficiency of operators’ plans, particularly the plans to protect usable water zones. BLM may condition APD approval on the lessee’s adoption of “reasonable measures,” delimited by the lease and the lessee’s surface use rights, to mitigate the drilling’s environmental impacts. This gives BLM flexibility to seek additional information, or impose additional requirements on operators before granting permission to engage in drilling. In addition, there are a number of environmental laws that impose additional requirements on the Federal government before it grants a permit. As discussed below, the new administration will have some ability to affect the stringency of those requirements through regulations, which will in turn impact the timing of permit reviews.

National Environmental Policy Act (“NEPA”) Regulations

Before issuing certain permits, federal agencies must comply with an environmental law known as NEPA. NEPA requires federal agencies to analyze the environmental consequences of the major federal actions they take and to provide for public involvement. The regulations guiding how much and what kind of analysis and public involvement is required comes from two sources: (1) the Council on Environmental Quality (“CEQ”) within the Executive Office of the President, which issues regulations that guide all federal agencies in complying with NEPA, and (2) federal agencies themselves, as those agencies then issue their own regulations implementing NEPA and applying any agency-specific requirements.

Recent revisions during the Trump administration to the CEQ’s regulations on how federal agencies should implement NEPA were a long time in coming, as the last comprehensive overhaul of the NEPA regulations occurred more than 40 years ago. These revisions streamlined the NEPA process and arguably would make issuing federal permits faster, more efficient, and less susceptible to legal challenges by environmental groups. Federal agencies must promulgate their own rules to implement NEPA that are consistent with the CEQ’s rules. The Trump administration’s new rule requires agencies to propose updates to their own rules within one year of the new rule’s effective date, which was in mid-September 2020. The Trump administration has accelerated some of these rulemaking efforts, including efforts by the Department of Transportation to put its rules in place before the Presidential Inauguration in late January 2021, but the Biden administration will still have time to seek to dismantle the new rule entirely, alter its effectiveness date, or apply an overlay of revisions atop the current rule, as well as to affect the larger suite of other agency NEPA implementation rules, even if the current administration’s ‘midnight rules’ make it more cumbersome to do so.

Some environmental groups argue that the revisions go too far and have brought challenges in multiple federal courts, and the Biden administration is likely to face pressure to rescind the Trump administration rules, returning to a more stringent and comprehensive, and therefore time consuming, set of NEPA regulations. These groups argue that the Trump CEQ regulations would allow agencies to ignore issues such as cumulative GHG emissions resulting from potential infrastructure projects. This can be very consequential in the NEPA analysis for certain energy projects, as it touches on whether an agency must analyze, for example, induced upstream production and ultimate downstream combustion of hydrocarbons transported through a proposed pipeline project.

The Biden administration’s selection of Brenda Mallory to lead CEQ is also a clear signal that changes to the NEPA regulations are coming. For example, Mallory was influential in the Obama administration’s creation of guidance on how agencies should incorporate climate reviews into NEPA analyses, and she will be leaving a position with an environmental organization that is currently challenging the Trump administration’s NEPA regulations. Between the court fights and time it takes to revise regulations within the federal government, we expect the state of NEPA review to be in flux for the short to medium term, with the potential for more expansive impact analysis requirements with respect to climate change to be proposed in the future.

Endangered Species

The Endangered Species Act (“ESA”) is designed to protect and recover at-risk species and the habitats on which they depend. Two federal agencies administer the ESA: The U.S. Fish and Wildlife Service (“FWS”) oversees terrestrial and freshwater species, and the National Marine Fisheries Service (“NMFS”) oversees marine and anadromous species. When ESA-listed species or their designated critical habitat are within a project’s footprint, obtaining the necessary permits can pose difficulties.

The most notable changes to ESA regulations during the Trump administration that a Biden administration may seek to revise came from three rules finalized in August 2019 and two rules finalized in December 2020. The August 2019 rulemaking removed what is known as the FWS’s “Blanket 4(d) Rule,” which had automatically extended the more stringent requirements that apply to species listed as endangered to those species listed only as threatened. NMFS does not automatically extend these requirements to threatened species, opting instead to promulgate species-specific rules; the FWS framework is now aligned with what NMFS has long done. Other changes include: (1) returning agency practice on the designation of unoccupied critical habitat to what it was before certain Obama-era revisions; (2) defining habitat as settings that currently or periodically contain resources and conditions necessary to support a species (and thus excluding habitat that presently lacks capacity to support the species); (3) defining factors FWS may consider when deciding to exclude critical habitat from designation; and (4) limiting what qualifies as the “foreseeable future” as part of agency analysis, a topic many environmental groups cite as important to analyses of potential climate change impacts over the long-term.

Litigation in federal district court over the August 2019 rules is ongoing, and litigation over the December 2020 rules is likely. The Biden administration has numerous tools at its disposal to undo these recent changes. Because the Democrats control both houses of Congress, recent rulemakings may be susceptible to being overturned under the Congressional Review Act (“CRA”), as discussed further below. The new administration may also seek to pause the litigation to reconsider the rules or otherwise undertake its own independent rulemaking activities to strengthen the ESA regulations, for example, by making it easier for the agencies to designate critical habitat (even if not occupied by the species) and to list and manage species that may be affected in the long-term by changing conditions associated with climate change. These changes could all increase the time and cost associated with obtaining federal permits to operate renewable projects in areas where listed species or their habitat may be located.

Protection of Birds

The Migratory Bird Treaty Act (“MBTA”) criminalizes the “taking” (which includes the harassment, killing, or capture) of migratory birds. There has long been friction about whether the MBTA prohibits only intentional conduct (such as hunting), or also applies to “incidental take” (such as birds harmed from wind turbine blades, electric transmission lines, or oilfield pits and evaporation ponds but where the point of the activity was not to achieve the “take”). The central question is what such laws require project developers and operators must do, if anything, to minimize or fully prevent incidental take. In short, the interpretation of this law and whether it prevents only “deliberate take” or also “incidental take” has serious implications for the risks associated with certain projects. Courts that have considered the question have split, and the regulatory pendulum may continue to swing in the new administration.

Two weeks prior to the start of the Trump administration, the Obama administration’s Department of the Interior issued a memorandum concluding that the MBTA prohibits incidental take. The Trump administration withdrew that opinion and issued a new one, generally siding with and relying on opinions from the courts that concluded otherwise. Nevertheless, in August 2020, a court vacated this Trump opinion, a decision the government currently is appealing. In the meantime, the FWS finalized a rule in early January 2021 clarifying its regulations and applying the prohibition on take only to intentional conduct. The new rule goes into effect on February 8, 2021.

The Biden administration is likely to explore ways to go through the rulemaking process to withdraw it and finalize a new rule or may potentially use the CRA to overturn the rule. Whatever course this rulemaking takes, the Biden administration is also likely to then put in place solicitor’s opinion similar or identical to the Obama administration opinion applying the MBTA to incidental take. However, even with such a solicitor opinion and a formal abandonment of the Trump Rule on “take” enforcement being limited to deliberate take, that change would not alter judicial precedent in those circuits that have limited the MBTA’s prohibition to intentional acts, including the Fifth, Eighth, and Ninth Circuits. Ultimately, resolution of the proper reach of the MBTA is likely to require involvement of the U.S. Supreme Court.

Permit challenges

Opponents of upstream development also have access to the courts to impede projects. For example, they can challenge the BLM’s decision to grant a lease or a right-of-way on procedural grounds, by bringing a claim under the Administrative Procedure Act claiming that the agency did not adequately study the environmental consequences of its action under NEPA, or did not properly obtain protections under ESA. Additionally, some environmental laws allow private citizens to file court cases asserting a developer’s violation of environmental laws, such as the discharge of air or water pollution, or the taking of an endangered species. In either instance, these cases can halt projects for months or years, and can result in significant additional costs.

These suits have become increasingly popular in the environmental community, and the legal challenges are becoming increasingly sophisticated. Because the group is often challenging the adequacy of the federal permit (and the Agency’s “record” supporting its decision), there are a number of things an agency can do to make it easier or harder to ultimately defend a permit in court. In addition to the particular analysis included in the issuance of, or as conditions of, a specific permit, the Biden administration could make permits more susceptible to challenge by issuing government-wide guidance on the necessity or appropriateness of including certain elements — such as particular types of cost-benefit analyses — that environmental litigants have long argued should be included. In these cases the groups technically sue the government, rather than the party holding the permit. This means that the federal government plays the primary role in defending the permit in court. While there is some limited risk, it is very unlikely (except perhaps in a handful of particularly high-profile cases) that the Biden administration will cease to defend these permits in court challenges from these groups.

Recently Finalized Regulations and the Congressional Review Act (CRA)

In conjunction with administrative actions taken by the Biden administration, the new Congress may use the streamlined legislative procedures available under the Congressional Review Act (“CRA”) to disapprove a range of Trump administration “midnight” regulations that near the end of the term. The CRA provides a streamlined procedure for Congress to enact legislation to disapprove (i.e., veto) rules issued by federal agencies. That procedure is available only for a limited time after a rule is published and formally notified to Congress — i.e., 60 legislative days (a period which is often much longer than 60 calendar days). In practice, the CRA mechanism should be available for rules published and notified to Congress after approximately June 2020. A CRA resolution is not subject to Senate filibuster, meaning that only simple majorities of the House and Senate — and signature by the President — are required to enact legislation to overturn a rule. A CRA resolution of disapproval not only invalidates a rule, but bars the agency from issuing another rule in “substantially the same form” in the future, absent specific statutory authorization. Historically, the CRA was rarely used until the beginning of the Trump administration. In practice, the CRA is most relevant when a new Presidential administration changes political party, and the same party controls both houses of Congress. The conditions are now ripe for a Democratic Congress and President to disapprove rules finalized near the end of the Trump administration.

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