Energy and Environment on Election Night

By Scott Segal

Environmental issues featured more prominently in the lead-up to the 2014 midterm elections than they did in 2012. Most notably, billionaire Tom Steyer spent $70 million of his own money on races across the country, mostly for naught. Democrat Gary Peters gained a Senate seat in Michigan, but Steyer’s backing was not the difference maker. The League of Conservation Voters, the NRDC Action Fund, the Environmental Defense Action Fund, and the Sierra Club also spent tens of millions of dollars, with little measurable impact on outcomes.

At the same time, President Obama’s environmental regulations had a significant impact on several important races, to the detriment of Democratic candidates. In West Virginia, Republican Shelley Moore Capito cruised to an easy victory over Democrat Natalie Tennant. Capito is West Virginia’s first Republican Senator in 48 years. In Kentucky, Democratic challenger Alison Lundergan Grimes fared exceptionally poorly in coal country. In 1992, Bill Clinton won 75% of the vote in Kentucky’s Knott County. This year, Grimes won 38% of the votes cast there, despite most of the County’s voters being registered Democrats. In Louisiana, Senator Mary Landrieu used her position as Chair of the Senate Energy & Natural Resources Committee as a talking point with voters. While Landrieu’s fate will not be determined until the run-off election on December 6^th, the results in the open primary suggest her position may be insufficient to sway the State’s electorate in any meaningful fashion.

Finally, energy issues received a significant amount of airtime in debates on the Senate campaign trail. The Colorado race was a case-in-point: In March, candidates Rep. Cory Gardner (R-CO) and Sen. Mark Udall (D-CO) both introduced legislation to expedite the LNG export permitting process and allow LNG to be shipped to Ukraine, Japan, and allies in western Europe who are reliant on Russian natural gas. In August, Governor John Hickenlooper (D-CO) and Representative Jared Polis (D-CO) brokered a deal to remove two anti-fracking initiatives from the ballot, in an effort to help Udall who had been under attack for not opposing the initiatives quickly enough.

What Comes Next
The President, Speaker of the House John Boehner (R-OH), and soon-to-be Senator Majority Leader Mitch McConnell (R-KY) have all expressed interest in tackling energy issues in the 114^th Congress. Senator Lisa Murkowski (R-AK) will be Chair of the Senate Energy & Natural Resources Committee and Senator Jim Inhofe (R-OK) will be Chair of the Senate Environment & Public Works Committee. Both Committees will undoubtedly step up their oversight of the Environmental Protection Agency (EPA), with a particular focus on the President’s "Clean Power Plan." Senator Murkowski is a strong advocate of oil and natural gas development on federal lands, and opposed to continued subsidies for renewable energy. If Mary Landrieu prevails in December, she and Murkowski will continue their strong working relationship. If Landrieu loses, however, the position of Ranking Member will fall to Senator Maria Cantwell (D-WA), whose state has no oil and gas production and plans to soon close its only coal-fired power plant. Senator Cantwell is a strong supporter of market manipulation rules in the energy sector. While Cantwell is also a more staunch supporter of environmental regulation than Landrieu, she and Murkowski also have a history of working together to facilitate the Committee’s work.

What sort of legislative activity should we anticipate? In the new session in 2015, a bill to finalize the approval of the Keystone XL pipeline is a virtual certainty, whether as a separate legislative item or an attachment to must-pass legislation. It remains to be seen what legislative amendments and/or riders will be advanced to curtail the scope and speed of the Clean Power Plan, but it is likely one or more of these provisions will reach the floor of both chambers. Points of focus for States and Republican legislators include: the interim targets for emissions reductions states must meet by 2020, the impact the Clean Power Plan is likely to have on electrical reliability, and the enforceability of the Clean Power Plan in light of widespread opposition from numerous governors.

Because the success or failure of the Clean Power Plan is highly dependent on the States, the outcomes in a number of gubernatorial races will also be felt in the coming years. Governors mansions fell to Republicans in Democratic strongholds like Illinois, Maryland, and Massachusetts. Gas-rich Pennsylvania flipped the other way. But the net effect probably amplifies the chorus of opposition to implementation of the Clean Power Plan and other EPA rules.

Finally, we anticipate the volume obligations and the credits program under the Federal Renewable Fuel Standard, the ethanol mandate, to be subject to greater scrutiny and perhaps legislative reform in the new Congress. Further oversight is likely on ozone, regional haze, coal ash, and the waters of the United States as well.

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Restrictions on Exports of Crude Oil

By Josh Zive

Since 1975, the U.S. has required a license from the Department of Commerce for any exports of crude oil from the United States. The licenses, now issued by the Department of Commerce’s Bureau of Industry and Security (BIS), are subject to specific restrictions and limited exceptions. In function, the licensing mandate has operated as a de facto ban on most crude oil export from the U.S. However, this year’s midterm elections are coming at a time when the U.S. is experiencing an energy production renaissance, and the change in control of the Senate could result in crude export issues assuming a more prominent role in energy policy debates in the coming years. These issues include:

• The domestic energy renaissance has changed the nature of the crude oil export debate. Current U.S. crude oil export policy was motivated by the shortages and price shocks resulting from the 1973 OAPEC (Organization of Arab Petroleum Exporting Countries) oil embargo, and consistently declining domestic oil production from 1970 to 2008 made the "short supply" controls relatively noncontroversial.  However, since 2008 U.S. oil production has experienced a renaissance, and now the U.S. has reached a 45-year high in domestic oil production.  This growth in production has resulted in lower domestic crude prices, with producers now seeking to expand opportunities to export U.S. crude and other petroleum products.  In recent months, officials in the Obama Administration have indicated a willingness to consider changes to crude oil export regulations, and Senator Lisa Murkowski (R-AK), the Chairwoman-elect of the Senate Energy and Natural Committee, has been a vocal advocate for sweeping changes to crude oil export restrictions.

• Changes to export policies are controversial and complicated. Although the growth in domestic oil production has changed the debate over crude oil export restrictions, it has not resolved many of the complicated political and policy issues involved in that debate. Domestic oil refiners and elected officials concerned about U.S. gasoline prices have defended existing restrictions as being in the best interest of U.S. consumers and national security and have criticized policies that have been perceived as loosening the restrictions.  For example, in June of this year BIS issued rulings to two companies classifying their condensate (a very light petroleum product) as a product not subject to licensing mandates.  In response, Senators Ed Markey (D-MA) and Robert Menendez (D-NJ) wrote a scathing letter to BIS claiming that the agency had circumvented the statutory ban on crude exports. As a result, well-funded industry coalitions have formed on both sides of the crude oil export debate.
• Midterm results promise more debate and study, but large policy changes are unlikely in the short-term. With Republicans assuming control of the Senate, Senator Murkowski will hold the gavel at the Senate Energy and Resources Committee, where she has been the leader of the legislative effort to overhaul crude oil export policy.   As a result, in the coming months more hearings, studies, and analyses of export policies can be expected.  Also, it is likely that numerous legislative vehicles will be discussed and debated.  Proposals will range from small changes focused on products such as condensates, to more sweeping changes that include reforms to export policies and efforts to address other topics such as Jones Act shipping requirements. However, because of the difficult commercial and political issues involved in the energy export debates, it is unlikely that the President and the Congress will agree on any large policy options. In the short term, legislative movement will likely be slow and incremental, with a real focus on building the analytical foundation necessary to evaluate policy options.

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Shale Oil and Gas Production

By Salo Zelermyer 

For the first two years of the second Obama presidential term, the White House has broadly supported continued shale development even as a portion of the Democratic base continues to oppose hydraulic fracturing.  During the 2014 midterm cycle, Democrat and Republican candidates in key races largely competed with each other over who would be best positioned in Congress to continue promoting (insert one of the following: "energy jobs," "energy independence," "energy security").

Historically, the issue of domestic energy production is comfortable territory for Republican candidates. In key energy states such as Kentucky, Louisiana, Alaska, West Virginia, and Colorado, Democratic candidates in 2014 largely struggled to convince voters that a Democrat-led Senate was the best choice to continue expansion of shale production in the United States.

With a Republican House and Senate and two years remaining for the Obama presidency, there are several key items to watch relating to shale oil and gas development:

Oversight and Use of Appropriations Process to Blunt Regulations on Shale Production
Perhaps the greatest change anticipated on Capitol Hill from the Republican Senate victory will be a return to a "regular order" appropriations process.  While Republican attempts to use appropriations bills to block environmental regulations the past few years have largely failed, having a majority in both chambers likely means these efforts will be reenergized as the Administration attempts to push out its remaining regulatory agenda.  In the shale space, likely targets of Republican appropriations riders include:

• The Bureau of Land Management’s final regulations on hydraulic fracturing on federal and tribal lands;
• The Fish and Wildlife Service’s listings of species in areas of shale production;
• The EPA rules on methane emissions, chemical disclosure, and so-called "Waters of the U.S."—a proposed expansion of Clean Water Act authority over intermittent bodies of water.

Ultimately, even with majorities in both chambers, Republicans will not get all of these riders in a final budget agreement.  But with increased leverage and a weakened President, the process could force the White House to accept some limits on proposed regulations.   

Regulation of Methane Emissions from Shale Production
While the Obama Administration has gone to great lengths to disclaim any intent to administratively curtail U.S. shale production, President Obama has also tried to win back some critics of hydraulic fracturing by calling for an increased focus on methane emissions from onshore oil and gas production.  The issue of methane emissions has been hotly contested with some environmental groups trumpeting data on fugitive methane emissions to call into question the ultimate carbon savings gleaned from replacing coal with shale gas.  While leading analysts and even government officials have called these assertions sharply into question, as part of his Climate Action Plan to reduce U.S. greenhouse gas emissions, President Obama called on EPA to evaluate the need for further regulation on methane emissions in the energy sector.  Accordingly, in a likely attempt to maintain the benefits of shale production for his economic legacy while also protecting his climate legacy, we can expect EPA to closely examine direct regulation of methane emissions.  With a Republican Congress looking on, expect this issue to draw oversight attention and possible action in the appropriations process.          

Debate Over LNG Export Policy
For domestic shale gas producers, U.S. policy on natural gas exports is a market issue that can make U.S. production more economically feasible.  For many Members of Congress, increased U.S. gas exports is a geopolitical issue that can blunt the energy pressure placed on our European allies by Russia.  In the last session, as the Russia-Ukraine crisis unfolded, congressional frustration with DOE’s slow approval process led Congress to step into the debate and introduce legislation that would fast-track approvals.  These bipartisan efforts were tabled in the Senate by Democratic leadership. With a new Republican majority in the Senate, we can expect more attention on previously-proposed House and Senate bills that would extend preferential treatment to applications to export natural gas to NATO allies and Japan. 

DOE’s recent revisions to its export approval process and a "pause" in the Ukraine crisis diverted attention from these bills in the last session.  However, most observers continue to believe Russian President Vladimir Putin will continue to press his interests in Ukraine and other Eastern European countries in the months ahead.  If Europe experiences another cold Winter and Russia begins to use natural gas supplies to pressure our allies, could a new Republican majority in the Senate gather enough moderate Democrat votes to get a bill to President Obama’s desk? Perhaps and, if so, would President Obama veto such a bill even though it is heavily sought by our foreign allies and he has publicly touted the potential benefits of exports?

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LNG Export Policy

By Eric Washburn and Salo Zelermyer 

Since granting the first authorization to export natural gas to non-free-trade-agreement (FTA) countries over two years ago, the issue of natural gas exports has been one of the dominant policy debates on Capitol Hill.  This debate has encompassed numerous analyses, several hearings in both the House and Senate, and, at times, has been a leading diplomatic issue between the United States and our allies abroad. 

During the 2014 election cycle, to the extent the gas export issue garnered attention, it was largely an issue of agreement among both Republican and Democrat candidates who were united in wanting to see the Obama Administration take swifter and more decisive action to approve gas exports.  The majority of candidates in both parties saw increased gas exports as leading to lower global greenhouse gas emissions, greater U.S. jobs, and enhanced geopolitical leverage in a suddenly chaotic world.  Dissenting voices in Congress on LNG exports – primarily liberal Democrats like Senators Ed Markey (D-MA) and Robert Menendez (D-NJ) – will find themselves with fewer allies in the next Congress.

With such widespread agreement that the U.S. should export more LNG, the new Republican majority in the Senate may make it possible for Congress to take action to more rapidly achieve that objective, taking advantage of Democratic rhetoric on the subject and the slow pace of export approvals.  President Obama and many of his top aides and Cabinet officials have extolled the virtues of increased gas exports and, even in a Democrat-led Senate, a number of Democrats sponsored or cosponsored legislation to speed up permits.  However, despite the public statements from the Executive Branch, as of October 21, 2014, the U.S. Department of Energy (DOE) has issued only three final authorizations to export natural gas, totaling just under 4 Bcf/d of natural gas.  Nearly 40 applications to export natural gas to non-FTA countries remain pending before DOE, totaling just over 34 Bcf/d.  And despite the sentiments of centrist Democrats on Capitol Hill, legislation to expedite gas exports was never brought to the floor by Majority Leader Senator Harry Reid (D-NV).   

DOE’s recent revisions to its export approval process and a deadlock in the Ukraine crisis diverted attention from these bills in the last session.  However, most observers continue to believe Russian President Vladimir Putin will continue to press his interests in Ukraine and other Eastern European countries in the months ahead.  With a new Republican majority in the Senate, we can expect previously-proposed House and Senate bills that would extend preferential treatment to applications to export natural gas to NATO allies and Japan to once again receive Committee attention.  If Europe experiences another cold winter and Russia begins to use natural gas supplies to pressure our allies, could a new Republican majority in the Senate gather enough moderate Democrat votes to get a bill to President Obama’s desk?  Perhaps, and if so, it would be difficult for President Obama to veto a bill that is so heavily sought by our foreign allies.

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Offshore Energy: Key Issues in 2015 

By George Felcyn and Eric Washburn

The 2014 election finds the U.S. offshore energy industry grappling with a sharp cyclical downturn due to falling global oil prices and a surge of output from new domestic sources.  Concerns over the depth of the Obama Administration’s commitment to an "all of the above" energy policy have today taken a backseat to more pragmatic questions involving the scope of offshore tracts coming online for development and the ever-evolving extent of the Interior Department’s regulatory reach. 

As Republicans take hold of Congress in 2015, there are a handful of items on our radar to watch:

Congressional Committees.  With the Senate switching hands, Sen. Lisa Murkowski (R-AK) is poised to take the helm of the Energy and Natural Resources Committee.  Murkowski, who generally enjoyed a good working relationship with current Committee Chair Mary Landrieu (D-LA), will continue as a strong proponent for offshore exploration and production, in addition to pushing forward on initiatives involving crude and LNG exports.  On the House side, the retirement of Natural Resources Committee Chairman Doc Hastings (R-WA) opens up the top slot on this key offshore committee to two main contenders:  Rep. Louie Gohmert of Texas and Rep. Rob Bishop of Utah.  Bishop’s close ties to Speaker Boehner likely leave him best positioned to take the helm in 2015, where he will be set to continue his strong focus on issues related to public lands use.  Look for pushback on the administration’s recent enthusiasm for designating new national monuments.

Expanded Offshore Legislative Push. The newly aligned planets of a fully Republican Congress and ever-growing U.S. energy production could tempt lawmakers to make a legislative push into opening up more offshore areas for energy development – areas traditionally governed by the Interior Department’s five-year Outer Continental Shelf (OCS) leasing plans.  Legislation could be enacted to supersede the Interior Department's planning process through stand-alone legislation or through provisions added to the Budget Reconciliation bill, under the rationale that such a provision would expand federal revenue generated by bids and royalties related to offshore development. 

Five-Year Plan / Atlantic Drilling.  Barring legislative intrusion into the Interior Department leasing plan process, the coming 2017-2022 plan will be mostly ironed out under the Obama Administration, even though it will ultimately be blessed by his successor.  According to the U.S. Energy Information Administration, the U.S. OCS contains approximately 90 billion barrels of oil and over 404 trillion cubic feet of natural gas.  Yet many of those resources are located in planning areas either completely or largely prohibited from development, leading to some interesting regional political dynamics.  Look to the newly empowered Sen. Murkowski to pressure Interior Department planners to approve additional E&P in the Alaskan OCS.  Turning to the southeast U.S., a recent study found that development in the Eastern Planning Area could create 100,000 new jobs in Florida alone, likely to be left on the table if the Eastern Gulf remains off limits to drilling.  Meanwhile, with an eye on their own jobs numbers, coastal governors from Virginia’s Terry McAuliffe on down the coast have submitted formal comments in favor of Atlantic drilling.  To the north, comments filed under Maryland Gov. Martin O’Malley reflected his staunch opposition to mid-Atlantic leasing, but his successor, newly elected Gov. Larry Hogan, stated during the campaign that he favored "policies which enable all of Maryland's energy resources to be put to use," a posture that appears to set the stage for support of offshore development.   Finally, if Hillary Clinton manages to succeed Barack Obama, we can expect her long-time friend and fundraiser Gov. McAuliffe to weigh in on the final draft of the 2017-2022 plan in strong favor of Atlantic drilling.

"Risk Management, Financial Assurance and Loss Prevention" ANPR.  Four and a half years after Macondo, Interior Department regulators continue to test the extent of their jurisdictional reach.  First came the decision to issue "Incidents of Non Compliance" orders directly to contractors in addition to their offshore customers (the lessees).  Now the Bureau of Ocean Energy Management (BOEM) has issued an advanced notice of proposed rulemaking (ANPR) on "Risk Management, Financial Assurance and Loss Prevention," which again proposes to cross traditional lines of responsibility.  The ANPR asks whether BOEM should impose obligations on contractors to mitigate the financial risk associated with recovering royalties from offshore drilling projects, potentially extending regulatory reach into an area once reserved squarely for lessees.  A host of legal and policy questions have been raised by this ANPR:  Does BOEM have the statutory authority to impose such obligations on entities other than the lessee?  If so, would contractors be forced to acquire additional insurance or post bonds, and at what cost?  Would companies able to self-insure gain a competitive advantage, putting BOEM in the position of picking winners and losers?  We’ll be watching this rulemaking process closely with an eye toward the potential market uncertainty that could unfold if such an obligation were imposed.

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