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Energy Policy in the Second Obama Administration

November 27, 2012

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.[1] 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.[2] 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,[3] 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.[4] 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.[5] 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.[6] 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.[7] 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.[8] 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.[9] EPA’s study plan was released in early 2011,[10] 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.[11] 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.[12] 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.[13] 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.[14]

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.[15] 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).[16] 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.[17] 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.[18] 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).[19] 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.[20]

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.[21] 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.[22] Opponents’ concerns include the climate change impacts from expanded U.S. imports of fuel derived from Canadian oil sands.[23]

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.[24] A final determination by on whether the pipeline project is in the “national interest” is expected in the first quarter of 2013.[25] While the outcome remains far from certain, President Obama’s support for the southern phase of the project,[26] and his recent statements that he would not “ignore jobs and growth simply to address climate change,”[27] have given confidence to industry that the project’s approval is only a matter of time.[28] 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.”[29]

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.[30] Each of these proposals faces local and national opposition, largely from parties that oppose the export of GHG emissions.

Conclusion

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.

For more information, please contact any member of Marten Law’s Energy practice.

[1] See Fractured: the Road to the New EPA “Fracking” Study, Marten Law Environmental News (Sept. 17, 2010); Hydraulic Fracturing in California: Oil Boom on the Horizon; Groups Seek Statewide Injunction Pending Review; State Considering Regulation, Marten Law Environmental News (Nov. 19, 2012).

[2] Oil and gas operations are largely exempt from EPCRA reporting requirements; wastes generated during oil and gas production are not treated as hazardous wastes under RCRA; releases of crude oil are not subject to CERCLA; hydraulic fracturing is largely exempt from the Safe Drinking Water Act; and (until very recently) oil and gas drilling were not subject to significant regulation under the Clean Air Act. Id.; see also Hydraulic Fracturing: Legislative and Regulatory Trends, Marten Law Environmental News (Oct. 4, 2011); EPA to Regulate Air Emissions from Hydraulic Fracturing as Industry Comes Under Scrutiny, Marten Law Environmental News (May 29, 2012).

[3] The exception has been the new regulations under the Clean Air Act. See prior footnote.

[4] Oil and Gas; Well Stimulation, Including Hydraulic Fracturing, on Federal and Indian Lands, 77 Fed. Reg. 27,691 (May 11, 2012). See also Hydraulic Fracturing: Legislative and Regulatory Trends, Marten Law Environmental News (Oct. 4, 2011).

[5] The U.S. Supreme Court’s decision in Sackett v. EPA resulted in EPA’s withdrawal of its enforcement lawsuits, which suffered from the same problems raised in the Sackett case. See Unanimous Supreme Court Tells EPA Its Orders Can Be Appealed, Marten Law Environmental News (Mar. 23, 2012). Regarding emissions aggregation, see Sixth Circuit Rejects EPA’s Aggregation of Air Emissions, Easing Permit Burden for Oil and Gas Industry, Marten Law Environmental News (Aug. 23, 2012)

[6] See http://water.epa.gov/scitech/wastetech/guide/cbm_index.cfm

[7] See E. Waeckerlin, Federal regulation of fracking has arrived – EPA grants Earthjustice’s TSCA petition, Lexology (Nov. 28, 2011)

[8] See http://water.epa.gov/type/groundwater/uic/class2/hydraulicfracturing/hydraulic-fracturing.cfm.

[9] See Fractured: the Road to the New EPA “Fracking” Study, Marten Law Environmental News (Sept. 17, 2010).

[10] See EPA Draft Plan to Study Potential Drinking Water Impacts of Hydraulic Fracturing Intensifies National Debate on Natural Gas Drilling, Marten Law Environmental News (Feb. 25, 2011).

[11] See http://www.epa.gov/hfstudy/.

[12] In recent years, FERC has approved dozens of interstate natural gas pipelines, and more proposed projects await regulatory approval. FERC, Approved Projects 2009-Present. Regarding refineries, see B. Olson, Hedge Funds Investing in Refineries Spurred by Fracking, Bloomberg News (Feb. 2, 2012).

[13] These lawsuits have already begun. E.g., Hydraulic Fracturing Cumulative Impacts Must Be Considered in NEPA Review of Gas Pipeline, Project Opponents Maintain, Marten Law Environmental News (Sept. 24, 2012).

[14] See J. Ferrell, Potential Sage Grouse Listing Continues to Shape Western Energy Development, Marten Law Environmental News (Jan. 17, 2012).

[15] The U.S. Energy Information Administration (EIA) recently forecast that between 2010 and 2035, the United States will transition from being a net importer to a net exporter of LNG. EIA, Natural Gas from Executive Summary (June 25, 2012) (available at http://www.eia.gov/forecasts/aeo/source_natural_gas_all.cfm#natgas). While the glut of natural gas resulting from unconventional drilling techniques has fueled the discussion of exports, similar discussions are not being had with respect to unconventional oil, for the simple fact that crude oil exports are prohibited under federal law, except under very narrow circumstances. 42 U.S.C. § 6212. Similar restrictions, however, are not in place with respect to refined products. In 2011, the United States exported 439,000 barrels per day of gasoline and other refined products, and became a net exporter for the first time since 1949. U.S. exports are expected to increase by as much as 2.6 million barrels per day of oil products.

[16] E.g., 15 U.S.C. § 717b(e)(a) (FERC “shall have the exclusive authority to approve or deny an application for the siting, construction, expansion, or operation of an LNG terminal.”).

[17] Dep’t of Energy, 2012 – LNG Import/Export Authorization Applications (available at http://www.fossil.energy.gov/programs/gasregulation/authorizations/2012_Long_Term_Applications.html).

[18] http://ferc.gov/industries/gas/indus-act/lng/LNG-proposed-potential.pdf.

[19] Section 3 of the Natural Gas Act (NGA) established a rebuttable presumption favoring natural gas exports. Under that provision, DOE-FE must authorize natural gas exports unless it finds that such “proposed exportation … will not be consistent with the public interest.” 15 U.S.C. § 717b(a). Section 3(c) further provides that proposed natural gas exports to countries with an FTA requiring national treatment for trade in natural gas are “deemed to be consistent with the public interest, and applications for such … exportation shall be granted without modification of delay.” 15 U.S.C. § 717b(c). Facilities that propose to export natural gas to countries without FTAs must submit an application to DOE-FT, which conducts a “public interest” review. Countries without FTAs, including Japan, are some of the largest importers of natural gas.

[20] Columbia Riverkeepers v. U.S. Coast Guard, (9th Cir. No. 12-73358).

[21] See M. Bloomberg, A Vote for a President Who Will Lead on Climate Change, Bloomberg View (Nov. 1., 2012).

[22] J. Ramseur, Cong. Research Serv., R42611, Oil Sands and the Keystone XL Pipeline: Background and Selected Environmental Issues 12 (2012). The original project application and associated documents are available at the U.S. Department of State Keystone XL project website.

[23] According to a Congressional Research Service survey of various scientific studies, “Canadian oil sands crudes are, on average, somewhat more GHG emission intensive than the crudes they would displace in the U.S. refineries.” Oil Sands and the Keystone XL Pipeline: Background and Selected Environmental Issues 24. On a well-to-tank basis, oil sands crudes exceed the average emissions for U.S. transportation fuels by 72%-111%. Id. However, on a complete lifecycle, well-to-wheel basis, considering extraction, transportation, upgrading and/or refining, distribution of refined product (e.g., gasoline, diesel, jet fuel), and combustion of the fuel, oils sands crudes are only 14-20% more carbon-intensive than the average transportation fuel currently used in the United States. Id. at 24-25. This is because the majority of carbon emissions comes during the combustion phase, not from production. Id. at 25. Notably, BLM has decided to limit the federal lands initially available for research and development of U.S. oil shale and tar sands. See BLM, 2012 Oil Shale and Tar Sands Final Programmatic Environmental Impact Statement (available at this link). Oil shale – not to be confused with oil extracted from shale, such as that produced in North Dakota’s Bakken and California’s Monterey shales – is rock containing organic material (kerogen) that was never subjected to enough geologic pressure to become oil. Tar sands contain bitumen, a related substance. Both can be processed into oil.

[24] U.S. Dep’t of State, New Keystone XL Pipeline Application. The Final EIS prepared for the original Keystone XL pipeline project stated that “[t]he proposed Project is not likely to impact the amount of crude oil produced from the oil sands,” but provided an estimate “for illustrative purposes … estimate[ing] that incremental lifecycle U.S. greenhouse gas emissions from displacing reference crude oils with Canadian oil sands crude oils imported through the proposed Project would be between 3 and 21 million metric tons of carbon dioxide emissions annually.” ES-15.

[25] N. Juliano, Lawmakers Press Obama for Pipeline Approval, Greenwire (Nov. 16, 2012) (subscription required).

[26] J. Calmes, In Oklahoma, Obama Declares Pipeline Support, N.Y. Times (Mar. 22, 2012).

[27] Transcript of Pres. Obama’s News Conference, N.Y. Times (Nov. 14, 2012).

[28] C. Rehn, Decision on Keystone XL Oil Pipeline Looming, Energy Global (Nov. 14, 2012).

[29] D. Ljunggren, Canada Confident U.S. Will Approve Major Oil Pipeline to Gulf, Reuters (Nov. 7, 2012).

[30] Millennium Bulk Terminals (Longview, Washington); Gateway Pacific Terminal (Cherry Point, Washington); Morrow Pacific Project (Port Morrow, Oregon); Coos Bay Terminal (Coos Bay, Oregon); Port of St. Helens (St. Helens, Oregon).

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