Energy Policy in the Second Obama Administration
President Obama has described his administration’s energy policy as “all of the above.” His opponents have called it “picking winners and losers.” In practice, it has been driven by two significant changes in the nation’s energy landscape: a boom in private domestic oil and natural gas production, and concerted federal promotion of renewable energy development. A future article will address renewable energy issues. This article focuses on oil and gas production. As discussed below, the second Obama administration will redefine how oil and gas drilling practices are regulated under federal environmental laws; abundant oil and gas production will lead to new infrastructure and facilities proposals as industry seeks new markets; and throughout it all, the nation will continue to grapple with the tension between reducing greenhouse gas emissions and increasing oil and gas production to promote economic growth and energy independence.
Expect More Federal Regulation of Oil and Gas Production
The United States is currently experiencing a boom in domestic oil and gas production. Technical advances in deep horizontal drilling combined with existing hydraulic fracturing technologies have opened up “unconventional” oil and gas deposits to economic development. With these advancements have come calls to increase federal regulatory control over the oil and gas industry – activities that are currently regulated primarily by the states. Today’s debate over “fracking” is, in many respects, a debate over the proper balance between state and federal regulation over the oil and gas industry.
President Obama has enjoyed the political benefits that increased energy independence, low energy prices, and domestic industrial expansion bring. But his administration has also had to deal with a rising insurgency from within the party ranks, as environmental interests have demanded greater federal regulation of the oil and gas industry. In large part, the Obama administration has handled the rising tensions by conducting studies and proposing, but generally not finalizing, new federal regulations. Now that the election is over, however, it appears likely that the administration will move forward on some or all of its proposed initiatives for stricter federal regulation of oil and gas drilling.
One such initiative is BLM’s May 2012 proposal to regulate hydraulic fracturing on federal lands. BLM’s proposal is modeled after, and largely duplicates, state-level regulations requiring disclosure of the chemicals used in hydraulic fracturing, as well as tougher standards for well integrity to prevent leaks and blowouts, and additional requirements for handling and disposing of the hydraulic fracturing fluid once it is pumped back out of the well. While the proposed rules have been criticized for adding an additional regulatory layer for industry to manage, if adopted they may very well have the opposite effect, as uniform federal requirements may act to influence the varying and duplicative standards already proliferating at the state level.
New regulations are also likely from EPA, although it remains to be seen which of its many proposals the agency will eventually finalize. In late 2011, EPA began pushing forward on a number of different fronts to regulate oil and gas drilling to a greater extent. Some of these efforts – like the agency’s attempts to use its enforcement authority under the Safe Drinking Water Act to force investigations of alleged groundwater pollution, and to aggregate disparate wells for Clean Air Act Title V permitting purposes – fell to court challenges. Others, however, were tabled in the run up to the election. In October 2011, EPA began developing new effluent limitations for coalbed methane extraction and shale gas production under the Clean Water Act, with proposed regulations slated for 2013 and 2014. In November 2011, EPA granted a petition requesting disclosure of hydraulic fracturing fluid chemicals under the Toxic Substances Control Act, and then went silent on the matter. In May 2012, EPA issued draft guidance indicating that it would require Safe Drinking Water Act Underground Injection Control permits for any hydraulic fracturing activities using diesel, and again has been largely silent since. Now that the election is over, EPA may move forward with some or all of these efforts.
Finally, perhaps the most significant federal initiative in the long term will be the timely completion of EPA’s comprehensive study on the potential impacts of hydraulic fracturing on drinking water resources. Congress ordered the study in 2009. EPA’s study plan was released in early 2011, and EPA has continued to move forward quietly over the last two years. EPA is now gearing up for the release of its first major progress report, currently slated for December 17, 2012. This will be followed by rounds of stakeholder input planned for February 2013. EPA expects to complete the study and publish it for comment and peer review in 2014. To the extent that both environmental and industry interests have pointed to the ongoing study to argue for a “wait and see” policy – whether waiting to drill or waiting to regulate – that argument will be taken off the table in two years, and the results of the study are sure to influence state and federal regulatory policy going forward.
Taken together, President Obama’s reelection means that the next several years will see movement on no less than six federal initiatives to evaluate and extend existing environmental regulation of oil and gas drilling practices. This represents a significant potential shift away from the traditionally local and state regulation that has existed for decades.
The Consequences of Supply: Infrastructure and Exports
The oil and gas boom has been having, and will continue to have, another significant and obvious effect: the nation will have much more oil and gas to move, process, use, and sell, than it has in the past. This necessarily will mean that the next four years will bring numerous efforts to expand the nation’s existing pipeline network and refinery capacity. These activities are already beginning, and can be expected to increase. As that happens, proponents and opponents will meet before state and federal agencies to fight over permitting requirements and the adequacy of environmental reviews and mitigation, inevitably leading to lawsuits. In the arid west, the potential listing of the sage grouse under the Endangered Species Act in 2015 will continue to loom large over infrastructure proposals.
Energy prices are expected to remain low for years to come, due in large part to abundant domestic natural gas supplies. This has led to a revival of energy-intensive industrial projects. The glut of low-priced domestic natural gas is also spurring interest in liquefied natural gas (LNG) exports. Indeed, the United States is forecasted to become a net energy exporter for the first time in decades. During his second term, President Obama will begin to clarify the nation’s changing role on the world energy markets – including defining the extent to which domestic natural gas is exported.
Exporting domestically-produced energy is not without controversy. On one hand, proponents of export projects cite to the positive economic benefits, including increased employment associated with constructing and operating liquefaction and export facilities, as well as positive impacts on the balance of trade. Opponents, however, argue that widespread exports will increase domestic natural gas prices, encourage more hydraulic fracturing, and limit the availability of natural gas that could otherwise be used for feedstocks in the manufacturing and chemical sectors.
The Federal Energy Regulatory Commission (FERC) oversees the design, construction, and operation of LNG facilities, including compliance with the environmental review provisions of the National Environmental Policy Act (NEPA). The Department of Energy Office of Fossil Energy (DOE-FE) regulates the import and export of LNG. In the past year, over thirty companies have asked the Department of Energy for authorization to export LNG. In addition, project sponsors are seeking approval from FERC to construct eight export terminals with the capacity to export roughly 13 billion cubic feet per day (Bcf/d) of LNG. Those projects are primarily located along the Gulf Coast, but include two projects in the Pacific Northwest and one in the Mid-Atlantic. Project sponsors have identified six additional potential export sites in the United States, as well as a number of sites in Canada.
The level of DOE-FE scrutiny afforded to LNG export projects depends, in large part, on whether the project will export LNG to countries with which the United States has a fair trade agreement (FTA). To date, DOE-FE has approved exports to non-FTA countries from only one facility – ExxonMobil’s Sabine Pass LNG terminal in Texas. In its approval order, DOE-FE reserved the right to revisit the permit if cumulative levels of approved exports prove contrary to the public interest. To that end, DOE-FE has stayed its consideration of other pending LNG export licenses while it analyzes the economic impact of LNG exports, including the extent to which such exports would increase domestic natural gas prices, create domestic jobs, or offset trade imbalances. DOE-FE has twice delayed issuing its economic study, but recently indicated that the report will be published by year’s end.
LNG export policies are also coming under heightened congressional scrutiny, and will continue to do so during President Obama’s second term. At least two bills were introduced in 2012 that would significantly restrict LNG exports. One bill would have required natural gas extracted from federal lands to be sold only to customers in the United States. A second bill would have prohibited FERC from licensing LNG export terminals. Senator Wyden (D. Or.), the likely incoming chair of the Senate Energy and Natural Resources Committee, has asked Energy Secretary Chu to describe the factors DOE-FE will consider as it considers the backlog of LNG export applications.
In addition to political pressure, litigation surrounding proposed LNG export terminals is likely to increase. The NEPA review process, as well as local land-use decisions, will provide fertile ground for project opponents to challenge energy export projects. Other lesser-known regulatory hurdles will also trigger litigation – for example, environmental NGOs recently challenged a U.S. Coast Guard determination concerning the safety and security of bulk LNG shipping on the Columbia River.
As these developments demonstrate, ongoing increases in domestic oil and natural gas production stand to have profound impacts on the nation’s energy landscape. The second Obama administration stands to shape the trajectory of that change for years to come.
The Elephant in the Room: Climate Change
Finally, as domestic oil and gas production and infrastructure expand, the Obama administration will likely need to clarify how increased fossil fuel production can be squared with the Administration’s professed interest in taking action on climate change. While the issue was largely set aside during President Obama’s first term, it arose late in the election cycle in the wake of the devastation wrought by Hurricane Sandy. The question naturally arises: what does the oil and gas boom mean for the nation’s climate policy, and vice versa?
The tension between climate change policy and energy production is demonstrated by the debate over the Keystone XL Pipeline. As originally proposed, the pipeline would carry 830,000 barrels per day of crude oil produced in the Canadian oil sands to refineries along the U.S. gulf coast. Proponents of the project argue that it will create thousands of construction jobs, stimulate the economy, and provide a reliable source of oil from a nearby, stable, and friendly country. Opponents’ concerns include the climate change impacts from expanded U.S. imports of fuel derived from Canadian oil sands.
Currently, the pipeline’s proponent is seeking a Presidential Permit for the northern segment of the project, stretching from the oil sands of Alberta, Canada to Cushing, Oklahoma, and the Department of State is completing a Supplemental Final EIS for the project, which should include some consideration of climate impacts. A final determination by on whether the pipeline project is in the “national interest” is expected in the first quarter of 2013. While the outcome remains far from certain, President Obama’s support for the southern phase of the project, and his recent statements that he would not “ignore jobs and growth simply to address climate change,” have given confidence to industry that the project’s approval is only a matter of time. As Canada’s Natural Resources Minister Joe Oliver stated after President Obama’s reelection, “We believe that the Keystone XL will be approved by the Americans because it is clearly in the U.S. national interest in terms of national security, jobs (and) economic growth.”
Another test of the administration’s position on climate is likely to come soon, as federal agencies are asked to issue permits for aspects of proposed coal export facilities. The Obama administration is not widely known as a friend of coal, and U.S. coal demand is dropping. This has lead coal producers to look to export U.S.-produced coal to foreign markets. In 2012, the United States’ exports of both steam and metallurgical coal are expected to exceed 113 million short tons – a level last seen in 1981. The majority of these exports (to both Asia and Europe) are shipped from ports on the East and Gulf Coasts due to the proximity of metallurgical coal deposits concentrated in the eastern United States. In recent years, however, a number of proposals have been advanced to develop coal export facilities in the Pacific Northwest, as those facilities would provide ready access to Asian markets for coal extracted from the Powder River Basin and other western deposits. Each of these proposals faces local and national opposition, largely from parties that oppose the export of GHG emissions.
The first Obama administration saw many proposals, but few final actions on new federal regulation of oil and gas production. That pattern appears likely to change in the President’s second administration. The boom in oil and gas production is creating a counter-boom in litigation aimed at stopping or limiting development, and both industry and environmentalists are pressing their case as to the role the federal government should play in an era of greater energy abundance.
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