Oil and Gas Investor Policy Outcomes: Energy and the Election

[Editor's note: This story appears in the October 2020 issue of Oil and Gas Investor magazine. A version of the story previously appeared online. Subscribe to the magazine here.]

Oil and gas executives can expect increased pressure on environmental, social and governance (ESG) issues fol­lowing the November elections, experts forecast.

That means demands to reduce flaring, carbon footprint and overall environmental impact. Fossil fuel companies also will be under a microscope to demonstrate there is a public good as­sociated with what they do.

That’s not just the forecast of the impact on the industry if former Vice President Joe Biden is elected presi­dent. That’s also the forecast if Pres­ident Donald Trump wins reelection.

“All that’s going to happen re­gardless of who’s elected because that’s coming from the investment community. That’s not coming from politics,” Ken Med­lock, senior director of the Center for Energy Studies at Rice University’s Baker Institute for Public Policy, said. “In many ways that’s more powerful than who’s elected because that’s how you get money.”

Scenario 1: A Biden victory

While investor pressure will continue on a steady course, public policy could move in a drastically different direction if Biden wins. A year before the election, oil and gas execu­tives were sounding the alarm about the threat to the industry from an administration led by Sen. Elizabeth Warren (D-Mass.). When Sen. Bernie Sanders (D-Vt.) became the favorite for the nomination, that also rattled energy indus­try cages. Warren and Sanders are staunch pro­ponents of the Green New Deal and opponents of fossil fuels.

Biden, though, has made a career of being a moderate. Should the oil and gas industry be concerned if he wins?

“I would say, initially, yes,” Medlock said. “I think as time passes and you see some of the anti-establishment proposals coming forward, I think there’s more reason for pause. That said, there’s a history with a lot of these companies and Biden—the history being the Obama ad­ministration—and the relationships were not always negative. There might be a little more comfort because they know who he is.”

Biden’s climate change plan begins with a promise of a series of executive orders to put the U.S. on the road to net-zero emissions by 2050. The orders would impose aggres­sive methane pollution limits, purchasing ze­ro-emissions vehicles for government use, rigorous new fuel economy standards and per­manent protection of the Arctic National Wild­life Refuge, among other steps.

His plan also includes proposed legislation to create enforcement mechanisms, massive investment in clean energy and climate change research and innovation, and rapid deployment of clean energy across the economy. And in a challenge to natural gas development: a 100% reliance on noncarbon feedstock for power generation by 2035.

For oil and gas executives not yet unnerved, “The Biden Administration will take action against fossil fuel companies and other pollut­ers who put profit over people,” the plan reads on the campaign’s website.

The policy promises that “Vice President Biden has committed that [the Biden for Pres­ident campaign] will not accept contributions from oil, gas and coal corporations or execu­tives.”

While it is expressed in unyielding tones, Medlock questions whether it reflects a total commitment.

“The one thing that I wonder about is how much of this is real and how much of this is to energize the base, get out the vote,” he said. “I think that remains to be seen. Certainly, a lot of that language has been worked into the platform, but you can look historically at plat­forms, it doesn’t always translate into policy when the person’s elected.”

Lean to the Left

But Kathleen Sgamma, president of the West­ern Energy Alliance, takes Biden at his word.

“It’s clear that he’s moving more to the left, and I think he’s moved so far to the left that he’ll have trouble coming back,” Sgamma said. “He’s made a lot of promises to people— net-zero promises and such—that I have a hard time seeing him come back from that.”

She acknowledged that Biden is at heart more moderate than Sanders and Rep. Al­exandria Ocasio-Cortez (D-N.Y.), co-author of the Green New Deal. But commitment to that ambitious program requires rapid devel­opment of an abundant and affordable energy source to replace oil and natural gas, first by 2035 for electricity generation, and then for zero emissions by 2050. She calls that kind of an effort unrealistic.

“Lucky for Biden, he would be well out of office before then so he doesn’t have to ac­tually deal with the consequences,” Sgamma said.

The Biden plan relies on step-change adoption of renewable sourc­es of energy. Development of renew­ables has proceeded rapidly but not to the point of shoving fossil fuels to the sidelines. The U.S. Energy Information Administration (EIA) projects electrical generation from renewable sources such as solar and wind to exceed that from coal and nuclear by 2021. It will not surpass natural gas until 2045. The EIA projects the share of renewables in the U.S. power generation mix to double to 38% in 2050 from 19% in 2019.

“Even though there’s been a large percentage growth in the wind and renewables space, solar, etc., if you look at the power generation of those sources vs. traditional thermal power, there’s a huge gap,” Cliff Vrielink, co-managing partner of Sidley Austin’s Houston office and global leader of the law firm’s energy and infrastructure prac­tice, told HartEnergy.com. “So, the implementa­tion of those goals would be pretty dramatic.”

And possibly risky.

“Coming back to the 2035 goal, I think the implementation of a lot of these climate goals can have real-world consequences,” Vriel­ink said. “Those consequences can simply be higher power prices, higher transportation costs, higher fuel prices, higher heating prices. You look at folks in Boston in Massachusetts. They have heating costs that are multiples of what they would be if they were to have more access to gas on the Eastern Seaboard. I think that is the limiter on one of these acceleration pushes: how it impacts people’s wallets.”

Scenario 2: Trump wins re-election

Even in a year marked by profound uncer­tainty, few would doubt this: In a second term, the Trump administration will continue its ef­forts to deregulate.

“A second Trump administration means that we move forward with reasonable oil and gas development in the United States and realize the strategic value of our energy supply,” Sgamma said.

But then what will happen? In all likelihood, there will be increased opposition to those efforts.

“I think the resistance will grow dramatically if he is elected and con­tinues to push along that line,” Med­lock said. “I’m not sure that even if he tried he would be all that successful.”

Resistance to the Trump agenda, Vrielink believes, will not be di­minished much by the president’s reelection because environmental groups have already scored victories in the courts and have seen their strategy of prolonging litigation bear fruit.

“So, I think it’s really more a question of, do their efforts accelerate or not?” he said. “For the oil and gas business, there are not going to be a lot of people in Washington pushing hard to advocate for that industry.”

There are limits to presidential power, as evidenced by this summer’s setbacks experi­enced by the Dakota Access Pipeline and the Atlantic Coast Pipeline on the pro-oil and gas Trump administration’s watch. Most obvious are the other co-equal branches of the feder­al government—legislative and judiciary. But there are other forces at play, as well.

The Atlantic Coast project scored a victory in the U.S. Supreme Court in June, but Do­minion Energy and Duke Energy pulled the plug in July, citing costs that were expected to climb from $5 billion to $8 billion. The EIA projects natural gas prices to remain flat for the next decade, so clearly market forces play an important role in the success of oil and gas development, Kevin Garber, shareholder in the Babst Calland law firm, said. The Moun­tain Valley Pipeline project is another that has been slowed by ongoing litigation as the judi­ciary deals with statutes enacted by Congress decades ago, Garber said.

“Perhaps we are focusing too much on a sin­gle office being able to determine the course of things, but the office is clearly important in setting a policy and directing the agencies,” he said.

Not to mention the power to nom­inate judges for the federal bench, Sgamma said.

“In the case of the Dakota Access Pipeline, that case is ripe for appeal, and I would assume that will be suc­cessful on appeal,” she said. “That’s why the president is so important, because who picks the judge is important.”

But even a president must engage with an entrenched system.

“One of the things that the Trump adminis­tration has really encountered with trying to roll back regulations is there are certain things you can’t get around,” Jean Mosites, share­holder with Babst Calland, said. “You have to do things in a certain process, step by step. So, that kind of framework for what agencies do still is going to be something that any admin­istration has to deal with. If you’re going to change rules, whether you’re this administra­tion or another one: How do you do it? It takes a long time.”

Polarization frustration

If Democrats are able to take control of the White House and both houses of Congress, Medlock sees a significant push in support of green agendas.

“What’s usually first pushed out of commit­tee is aspirational, and then it gets watered down a little bit because there’s a rationaliza­tion that has to occur, even within a party,” he said. “What that looks like in that particular circumstance is tough to say because if the Senate swings, that generally means you’re going to have some energy-producing states that have Democrats as senators, and they’re going to be cautious.”

If, however, Biden were to win with the Democrats maintaining their majority in the House and Republicans still controlling the Senate, “We might be setting ourselves up for a bunch of gridlock. In which case, ev­ery company in every industry is going to be very actively lobbying for various positions to make sure their voices are heard.”

Sgamma sees that gridlock in a positive light.

“Let’s say the Senate flipped Democrat,” she said. “It’s still going to be so closely di­vided that it will still be gridlocked, as it is now with Republicans in control. Even when Republicans had the House and the Senate and the presidency, there was just too slim of a margin in the Senate. It remains a moder­ating force just like when the Obama admin­istration couldn’t get cap and trade [in 2010] even though it had the House and the Senate. The Senate just is a moderating force on that kind of radical proposal.”

But if gridlock is required to counter ex­treme positions, that could be a symptom of an inability to meet in the middle. Vrielink would prefer that both parties consider long-term economic consequences for the country and the people.

“Unfortunately, in our political discussions nowadays, there is not much balancing and weighing of the pros and cons anymore,” he said. “That, to me, has led to increased polar­ization. Historically, there’s always a pro and a con, and there’s always a balancing act. That needs to take place. There’s a lot that can be done, but there are tradeoffs. We, as a country, need to be honest about those tradeoffs and thoughtful about them.”