Now three-quarters of the way through his first year in office, President Joe Biden has begun implementing his regulatory agenda through his executive agencies. These actions are beginning to illustrate the high-level goals previously announced by the president, including ones that impact the oil and gas industry, such as actions on climate change, clean energy and environmental justice. 

The president continues to use executive actions to advance his regulatory agenda, issuing executive orders related to greenhouse gas reductions. Congress and the courts, too, are proving to be a battleground, with Congress passing a Congressional Review Act (CRA) resolution disapproving the Environmental Protection Agency’s (EPA) methane emissions rollback advanced under President Donald Trump, and a decision from the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) that will require the Federal Energy Regulatory Commission (FERC) to reassess its analysis of climate and environmental justice impacts from LNG plants.

This article details a number of  the more impactful energy-relevant developments since May 2021.

Presidential actions

On April 22, the president announced a national goal to achieve, by 2030, a 50-52% reduction in greenhouse gas (GHG) emissions from 2005 levels. How the administration intends to achieve this goal will have ramifications for the oil and gas industry.

The proposed policies include achieving 100% carbon emission-free electricity by 2035 through “multiple cost-effective pathways,” to include “deploying carbon pollution-free electricity generating resources, transmission, and energy storage and leveraging the carbon pollution-free energy potential of power plants retrofitted with carbon capture and existing nuclear.”  Also on the list of anticipated policies is the reduction of carbon emissions from the transportation sector by reducing tailpipe emissions, increasing fuel efficiency, funding charging infrastructure and spurring research into very low carbon renewable fuels. 

The administration already has taken several steps toward advancing the transportation policies. On Aug. 5, President Biden signed an executive order to promote zero-emission vehicles and to direct EPA and the Department of Transportation (DOT) to establish new GHG emissions standards for vehicles and new fuel economy standards, respectively. EPA also released a proposed rule to revise and strengthen the GHG emissions standards for light-duty vehicles for model years (MYs) 2023 through 2026 and announced its “Clean Trucks Plan,” under which it will propose new emissions standards for trucks and heavy-duty engines and vehicles. Later this year, the National Climate Task Force will issue a national climate strategy based on the development of the 2030 GHG emissions target.  

Second, on June 30, Biden signed S.J. Res. 14, a Congressional Review Act (CRA) resolution disapproving EPA’s September 2020 methane emissions rollback. During the prior administration, EPA published final amendments to the New Source Performance Standards (NSPS) for Subpart OOOO/OOOOa to render the NSPS inapplicable to oil and natural gas transmission and storage emissions sources. The rule also rescinded the methane-specific requirements of Subpart OOOO/OOOOa for oil and natural gas production and processing sources. The action constituted a rollback of the Obama Administration’s Subpart OOOO/OOOOa rule.

The June CRA resolution effectively revokes the rollback. Importantly, the CRA prohibits EPA from enacting “substantially the same” rule in the future unless Congress directs the agency to do so. What constitutes “substantially the same” is unclear, as the phrase is not defined in the CRA. If a future EPA were to attempt to rescind the methane requirements again, the agency’s interpretation of “substantially the same” likely would be challenged in litigation.

Tax

Earlier this year, Biden introduced the “American Jobs Plan” and “American Families Plan,” which contain significant tax proposals relevant to the energy industry. On May 28, the Department of the Treasury released its General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, also known as the “Greenbook.” The Greenbook provides additional details on the proposals to increase taxes on fossil fuel activities and incentivize clean energy.

The House of Representatives recently passed a $3.5 trillion budget resolution. Several of the provisions described below, as well as other options (including potential carbon taxes) are currently under consideration, and it remains to be seen what tax provisions will be included in any final legislation.

Increased Taxes on Fossil Fuels

The increases to taxes on fossil fuel activities outlined in the Greenbook include the following:

Repeal fossil fuel “tax preferences,” including the MLP tax regime. The Greenbook proposes to repeal 13 existing “tax preferences” for the fossil fuels industry. The repeal is projected to raise $35 billion of tax revenue through fiscal year 2031. Six of those proposals (all effective for tax years beginning after 2021) would account for over 80% of that projected revenue:

  • repeal of the deduction for intangible drilling costs;
  • repeal of percentage depletion for oil and gas wells;
  • repeal of the 15% credit for eligible costs attributable to enhanced oil recovery projects;
  • repeal of the deduction for tertiary injectants used as part of a tertiary recovery method that increases the recovery of crude oil;
  • increase of the two-year amortization period for geological and geophysical expenditures of independent producers to seven years; and
  • repeal of percentage depletion for hard mineral fossil fuels.

The Greenbook also proposes to eliminate the passthrough tax regime for MLPs/PTPs with qualifying income and gain from activities relating to fossil fuels, effective for tax years beginning after 2026. That proposal is projected to raise approximately $1 billion over five years (2027 through 2031).

Reinstate, expand and double the rate of Superfund excise taxes. The Greenbook proposes to reinstate the Superfund excise taxes that expired in 1996 at double their prior rates. The Superfund was financed in part by an excise tax of 9.7 cents per barrel (bbl) of crude oil that applied from 1987 through 1995 (the expired statute can be viewed here and here). It was collected from refiners, importers, users, and exporters in the same manner as the current Oil Spill Liability Trust Fund excise tax. The Greenbook proposal to double the historic rate would mean that, if enacted, the new excise tax rate would be 19.4 cents/bbl. The scope of the excise taxes would be expanded beyond conventional crude oil and its products to encompass other crudes such as those produced from sources such as bituminous deposits and kerogen-rich rock.

From 1987 through 1995, an excise tax also applied to the sale by the manufacturer, producer or importer of 42 specified chemicals (the expired statute can be viewed here and here).  The tax rate ranged from 22 cents to $4.87 per ton.  A similar tax applied to the importation of other chemicals sold or used by an importer, to the extent the 42 specified chemicals constituted more than 50% of the weight or value of the chemical, including 50 chemicals specifically identified in the statute as satisfying this requirement (the expired statute can be viewed here and here).

The Greenbook proposes to reinstate these taxes also at double their historic rates. Notably, the Senate’s $1 trillion infrastructure bill that was passed on Aug. 10 would independently reinstate these Superfund excise taxes on chemicals beginning July 2022 at double their historic rates. In the case of the tax applied to importation, the Senate bill would apply only to the extent the 42 specified chemicals constituted more than 20% of the weight or value of the chemical, including 50 chemicals specifically identified in the statute as satisfying this requirement. 

The reinstated and expanded taxes under the Greenbook would apply to taxable periods beginning after Dec. 31, 2021, and would expire after 2031. They are projected to raise revenue of $25.3 billion over ten years.

Modify Oil Spill Liability Trust Fund financing. The Greenbook proposes to expand the scope of the 9.0 cents/bbl excise tax that finances the Oil Spill Liability Trust fund to (1) cover other crudes such as those produced from bituminous deposits and kerogen-rich rock and (2) repeal an administrative interpretation that currently allows a “drawback” of that tax when products subject to the tax are exported. Those provisions are projected to raise revenue of $513 million over 10 years.

Modify Taxation of Foreign Fossil Fuel Income. The Greenbook proposes to repeal the exemption under current law from global intangible low-taxed income (GILTI) for foreign oil and gas extraction income (FOGEI), and to codify the safe harbor for dual capacity taxpayers included in the current Treasury regulations for determining the portion of a levy that is paid for a specific economic benefit (making the safe harbor the sole method for determining the creditable portion of the levy). Those proposals would generally be effective for tax years beginning after 2021 and are projected to raise $86.2 billion over the 10-year period through fiscal year 2031 (98% of which is attributable to the repeal of the FOGEI exemption from GILTI).

Clean Energy Tax Incentives

The clean energy incentives outlined in the Greenbook include the following:

  • An expanded and extended production tax credit (PTC) for wind projects and other qualified facilities;
  • An expanded investment tax credit (ITC) for clean energy generation and storage;
  • A new ITC for electric power transmission property;
  • An additional $10 billion in funding for the Section 48C advanced energy project ITC;
  • A new PTC for production of low-carbon hydrogen starting at $3 per kilogram;
  • Expansion and enhancement of the Section 45Q carbon capture tax credit; and
  • Direct pay option – PTCs, ITCs (including the transmission and Section 45C credits) and Section 45Q credits would be available, at the taxpayer’s option, as a direct payment (with no “haircut”) in lieu of the credit.

The House of Representatives recently passed a $3.5 trillion budget resolution, and it remains to be seen what tax provisions will be included in the final legislation.

U.S. Environmental Protection Agency

EPA recently made two announcements about upcoming regulatory actions of interest to the oil and gas sector.

On April 30, EPA released a memorandum that identifies steps for advancing the agency’s environmental justice goals through its civil regulatory enforcement program. While not specifically targeted at the oil and gas industry, companies should be aware that these initiatives could impact their facilities.

For example, the memo directs the Office of Enforcement and Compliance Assurance (OECA) to increase the number of facility inspections in overburdened communities and to prioritize inspections by evaluating “what types of programmatic inspections address the most serious threats to overburdened communities.” OECA is further directed to resolve environmental noncompliance through remedies with “tangible benefits” for the impacted overburdened communities by, among other things, preventing further pollution due to noncompliance, requiring mitigation of past impacts from pollution, and seeking penalties for violations.

As part of this effort, OECA should increase its engagement and communication with communities about facilities and enforcement cases that directly impact them. Finally, OECA should not wait on state or local regulators “where a community’s health may be impacted by noncompliance, and [a] co-regulator is not taking timely or appropriate action.” These measures will advance the administration’s commitment to environmental justice concerns, and will result in increased EPA scrutiny of oil and gas operations in certain communities.

On June 10, 2021, EPA announced that it will reconsider its December 2020 decision to retain the current national ambient air quality standards (NAAQS) for particulate matter (PM). According to EPA’s press release, the agency “is reconsidering the December 2020 decision because available scientific evidence and technical information indicate that the current standards may not be adequate to protect public health and welfare, as required by the Clean Air Act.” If the PM NAAQS are made more stringent, then new and existing facilities could be subject to more stringent permitting requirements in areas that have ambient PM levels above the new standards.

Federal Energy Regulatory Commission

On Aug.3, the D.C. Circuit issued an opinion in Vecinos Para El Bienestar De La Comunidad Costera, et al v. Federal Energy Regulatory Commission (Vecinos), holding that the Federal Energy Regulatory Commission (FERC) erred in its analysis of climate change and environmental justice factors when it authorized the construction and operation of the Texas LNG Brownsville LLC project and the Rio Grande LNG LLC project in Brownsville, Texas. While the D.C. Circuit did not vacate FERC’s authorizations of the projects, it remanded the proceeding back to FERC for further review.

The D.C. Circuit agreed with the petitioners’ assertion that FERC failed to adequately assess the impact of the projects’ GHG emissions as required by the National Environmental Policy Act (NEPA). The D.C. Circuit found that FERC improperly excluded the use of the “social cost of carbon” protocol or “other research methods generally accepted in the scientific community” in its analysis of the projects’ environmental impacts required under 40 C.F.R. 1502.21(c). Accordingly, the D.C. Circuit instructed FERC, on remand, to explain whether it has a statutory obligation to apply the social cost of carbon protocol or another analytical framework under the regulatory requirements of NEPA. 

The D.C. Circuit also found that, given the likely shortcomings in FERC’s analysis of the environmental impacts of the projects, FERC failed to establish that the construction was necessary and in the public interest under Sections 3 and 7 of the Natural Gas Act (NGA). On remand, the D.C. Circuit instructed FERC to provide further analysis and explanation as to whether the projects could have a disproportionate impact on nearby minority and low-income communities.

The D.C. Circuit’s decision in Vecinos is attributable to FERC’s failure to address petitioners’ arguments that 40 C.F.R. § 1502.21(c) requires FERC to apply the “social cost of carbon” protocol or some other generally accepted methodology in evaluating the GHG impacts of natural gas transmission and export facilities. The D.C. Circuit distinguished its holding in Vecinos with contrary findings in other recent LNG proceedings in which the D.C. Circuit held that, in those prior cases, the petitioners “presented no argument concerning 40 C.F.R. § 1502.21(c).”

The Vecinos decision is consistent with a recent D.C. Circuit decision in Sierra Club v. FERC, which addressed challenges to FERC’s approval of several natural gas pipelines, including the Sabal Trail pipeline. There, the court held that under NEPA, Environmental Impact Statements prepared by FERC should include a quantitative estimate of reasonably foreseeable downstream GHG emissions that could result from the use of natural gas transported through proposed pipelines. Like its decision in Vecinos, the D.C. Circuit also instructed FERC to consider whether the inter-agency “social cost of carbon” protocol is useful for evaluating GHG emissions under NEPA.

The D.C. Circuit’s holding in Vecinos could influence FERC’s ongoing review of its pipeline certification policy. Since being appointed as FERC chairman in January 2021, Richard Glick has taken steps to review GHG emissions’ contribution to climate change in FERC’s pipeline approval process. Although the Vecinos decision does not require FERC to uniformly adopt the “social cost of carbon” protocol for evaluating the environmental impacts of projects, it is possible that once the commission shifts to a democratic majority, FERC will require the adoption of the protocol as a standard practice.

Trade

Over the past few months, the United States took actions on international sanctions impacting the energy industry, related to national security and human rights concerns in Russia, Iran, and China.

Russia. On May 19, the United States imposed sanctions on parties involved in the construction of the Nord Stream 2 pipeline that will connect Russian gas reserves to the European Union (EU) internal market. The parties, including Nord Stream 2 AG and the company’s CEO Matthias Warnig, were listed in a report submitted by the Department to Congress pursuant to the Protecting Europe’s Energy Security Act (PEESA). In announcing the sanctions, Secretary of State Antony Blinken stated that the actions “demonstrate the administration’s commitment to energy security in Europe, consistent with the President’s pledge to rebuild relationships with our allies and partners in Europe,” and that “[o]ur opposition to the Nord Stream 2 pipeline is unwavering.”

Nevertheless, the United States and Germany subsequently reached an agreement to allow completion of the pipeline. Pursuant to the agreement, Berlin will respond to any attempt by Russia to use energy as a weapon against Ukraine and other Central and Eastern European countries. Notably, on Aug. 20, after the United States and Germany announced the agreement to allow completion of the pipeline, the Department of State submitted an amended report to Congress pursuant to PEESA, which identified an additional Russian vessel and two additional Russian persons involved in construction of the Nord Stream 2 pipeline. In announcing the additional sanctions, Blinken stated, “Even as the administration continues to oppose the Nord Stream 2 pipeline, including via our sanctions, we continue to work with Germany and other allies and partners to reduce the risks posed by the pipeline to Ukraine and frontline NATO and EU countries and to push back against harmful Russian activities, including in the energy sphere.”

Iran. On June 10, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) lifted sanctions on three former senior National Iranian Oil Co. officials and several companies involved in shipping and trading petrochemical products out of Iran. OFAC described the moves as routine administrative actions, saying the officials were removed from U.S. blacklists because they no longer held positions in the sanctioned entities. “These actions demonstrate our commitment to lifting sanctions in the event of a change in status or behavior by sanctioned persons,” Blinken said in a statement accompanying the notice of the action.

However, officials familiar with talks under way in Vienna on the future of the 2015 multilateral Iran nuclear agreement, the Joint Comprehensive Plan of Action (JCPOA), said that the Biden administration has been looking at how it could inject momentum into the negotiations. The actions came as U.S., Iranian, European and Chinese negotiators in Vienna are preparing to start a sixth round of talks to restore the JCPOA. Discussions were expected to start up again this weekend in Vienna, according to people involved in the negotiations. Nevertheless, State Department spokesperson Ned Price told reporters that the actions have “absolutely no connection” to ongoing negotiations on the nuclear agreement. An OFAC spokesperson also said, “This is not a wider easing of sanctions on the oil sector of Iran.” U.S. and European officials have said significant differences remain between Washington and Tehran over how to restore the JCPOA, including the extent of any potential sanctions relief.

China. The Biden administration rolled out a new set of restrictions on China over allegations of forced labor in the Xinjiang province, including a ban on imports of key materials used in solar energy production. The restrictions put solar energy components in the crosshairs with a ban on silica-based products made by Hoshine Silicon Industry Co. Ltd. (Hoshine) in Xinjiang. The U.S. government has also added Hoshine and four other Xinjiang-based companies to the Department of Commerce’s Entity List, an export blacklist, effectively cutting them off from U.S. suppliers without a government license.

Biden’s ban on solar energy materials follows prior sector-specific bans focused on cotton, tomatoes and other sensitive sectors where Xinjiang has emerged as a manufacturing hub. U.S. Customs and Border Protection (CBP) will administer the ban through a tool known as a withhold release order, in the wake of a bombshell report from Sheffield Hallam University detailing Hoshine’s use of forced labor in its polysilicon production. Homeland Security Secretary Alejandro Mayorkas said on a conference call with reporters that while Xinjiang is a massive producer of solar energy components, the administration will not compromise its forced labor stance for the sake of its climate goals. President Biden’s moves came on the heels of a G7 summit earlier last month when leaders from around the globe pledged to take strong action against forced labor.

Antitrust

For the energy sector, one silver lining of the increasingly aggressive rhetoric from antitrust regulators has been their singular focus on “big tech.” It seemed, for a time, that oil and gas had finally abdicated its long-held position as the industry most likely to be on the receiving end of heightened antitrust scrutiny. Any such hope evaporated when Lina Khan, the new chair of the Federal Trade Commission, sent a letter to the White House, making clear that she has the energy industry squarely within her sites.

The letter, sent on Aug. 25, came in response to a request from Brian Deese, director of the National Economic Council, for the FTC to investigate elevated gas prices. In his Aug. 11 letter, Deese noted, “During this summer driving season, there have been divergences between oil prices and the cost of gasoline at the pump.” He asked the FTC to investigate. Khan’s response went far beyond Deese’s straightforward request, outlining a three-part enforcement plan, tightly focused on the energy industry.

First, Khan stated, she plans to “identify additional legal theories” to challenge retail fuel station mergers “where dominant players are buying up family-run businesses.” Second, Khan indicated she would be “taking steps to deter unlawful mergers in the oil and gas industry.” Third, Khan wrote that she “will be asking our staff to investigate abuses in the franchise market.” She hypothesized that “large national chains” might be forcing their “franchisees to sell gasoline at higher prices, benefitting the chain at the expense of the franchisee’s convenience store

All of this adds up to a notably focused promise to create new hurdles for proposed transactions in the energy industry and to find new reasons to investigate a variety of conduct.  

Baker Botts partners Jeffrey Oliver and Thomas Holmberg, along with Baker Botts associate Joyce Banks, also contributed to this article. 

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