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Energy Regulatory Developments to Watch

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At least three energy regulatory developments across the country in 2020 deserve particular notice: consideration of oil prorationing in the first part of the year, increasing pressure to reduce the flaring of natural gas, and continued challenges to the construction and routing of new pipeline infrastructure.

As oil prices plummeted in late February and early March, prompted by the combined effects of COVID-19 and the Russian-OPEC price war, regulators in a number of oil producing states began debating whether to limit the production of oil within their borders. The discussions at the Texas Railroad Commission (the “TRRC”) drew the most national attention.  Speakers at a 10-1/2 hour, marathon hearing included (i) companies engaged in the oil and gas industry, (ii) industry organizations, (iii) environmental advocates, (iv) researchers, and (v) concerned public citizens, representing a wide range of views.   The TRRC took comments from about 50 speakers and closed the proceeding without further discussion.  Later, at a TRRC open meeting on May 5, the TRRC passed a number of measures waiving certain fees and rules to provide relief to oil and gas producers, but voted 2-1 against moving forward with any prorationing.

Texas was not alone, however. In North Dakota, the issue of oil prorationing was debated at a May 20th meeting of the North Dakota Industrial Commission (the “NDIC”) that pitted Continental Resources (in favor) against the North Dakota Petroleum Council (opposed). In the end, the NDIC did not act on requests for prorationing. Similarly, the Oklahoma Corporation Commission (the “OCC”) held hearings on May 11th to consider prorationing, but took no action. Like Texas, both North Dakota and Oklahoma ultimately opted for easing other regulatory burdens on producers and giving producers temporarily expanded authority to voluntarily shut in their wells to avoid the “waste” of producing non-economic oil.

A second issue that had been simmering and was brought to the fore during prorationing discussions is the flaring of natural gas. Oil production is usually accompanied by some level of associated gas production. The gas is often the drive mechanism that pressures the reservoir and pushes the gas to the surface. Shutting down gas production means having to also shut down oil production. Producers have for years been permitted to burn off, “flare,” their natural gas production for a variety of reasons: lack of gas pipeline connections, safe disposition of the gas during interruptions in pipeline transportation, or gas prices that don’t support the cost of treating and shipping the gas to market. However, the level of flaring has increased dramatically in response to the horizontal drilling boom and low gas prices.

Flaring for economic reasons has come under increasing scrutiny. Midstream companies that have invested in building pipeline infrastructure bristle at the idea that producers can avoid shipping on their pipelines by simply burning their gas in the field. Environmental groups have found an increasingly sympathetic audience for their argument that flaring contributes to climate change. Producers, however, continue to have genuine operational and economic issues that are best addressed by flaring, which they maintain can be done safely and with manageable environmental impacts. The highly publicized, very public debates over prorationing in 2020 provided a forum for opponents of flaring; and some regulators appear to have seized on increased scrutiny of flaring—particularly flaring for primarily economic and non-safety and non-operational reasons—as an issue. Alaska and Colorado have largely banned routine flaring, and regulators in Texas and North Dakota have proposed new rules and made public statements indicating that they intend to review more closely applications by producers to flare gas in large quantities or over extended time periods.

Finally, oil and gas pipelines continue to face serious challenges to their construction and routing. In April, a federal judge in Montana vacated Keystone XL’s Nationwide Permit (“NWP”) 12, an expedited permit relied upon by many pipeline and other energy infrastructure projects. The initial ruling used sweeping language that seemed to invalidate all NWP 12 permits, but the judge later narrowed his ruling to focus on pipeline construction projects. In July, the U.S. Supreme Court stayed the Montana order as to all pipelines except the Keystone XL pipeline, pending a ruling on an appeal of the Montana order before the Ninth Circuit. While that appeal was pending, the new Biden Administration revoked the project’s Presidential Permit. In mid-March, a coalition of states led by Texas filed a federal lawsuit challenging President Biden’s decision to revoke President Trump’s approval of the Keystone XL pipeline.

Observers are watching to see what, if anything, the Biden Administration will do regarding other pipelines. Both the U. S. District Court for DC and the DC Circuit Court have held one of the Dakota Access pipeline’s key easements from the U.S. Army Corp of Engineers to be invalid, but the Circuit Court overturned the District Court’s order that the pipeline be shut down and drained of oil. The Mountain Valley natural gas pipeline has been unsuccessful in obtaining the necessary regulatory clearances for portions of its route, and the Permian Highway Pipeline continues to face legal challenges in Texas even though, like the Dakota Access pipeline, it is completed and operational. Despite eventually obtaining clearance to cross the Appalachian Trail, the increased cost of regulatory hurdles led to cancellation in June of the Atlantic Coast Pipeline. Whether and how new pipeline infrastructure can overcome regulatory and legal challenges under a new administration will be a key question for the energy industry in 2021.

 

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