Alexander K. Obrecht 2017-12-07 15:54:50
The greater energy industry—referring to all methods of fueling transportation, electricity production, and manufacturing—faces an undeniable and necessary fact: Regulation. Often the greater energy industry faces regulation at the local, state, federal, and even international levels. And each level varies widely in its reception to different sections of the industry—e.g., renewables, fossil, nuclear, etc.— varying by resources, politics, and myriad other factors. In the last few years, however, arguably no energy industry segment has faced greater variation in the relevant regulations than oil and gas at the federal level. Although the technology underlying much of the oil and gas industry has evolved throughout the last 15 years, it seems difficult to deny that another undercurrent has driven the recent regulatory initiatives: Politics. Throughout the second term of the previous presidential administration—the last two years of which happened to largely overlap with one of the most precipitous declines in oil prices in recent memory— many in oil and gas felt they were being kicked while they were down. And now, with a largely unpredicted political-party transition in the White House, many in oil and gas applaud the energy-friendly policy initiates promised by the new administration. But the primary overlooked problem with the dramatic swing from pro-regulatory push to anti-regulatory rollback is that oil and gas—and the greater energy industry— loses certainty in the operational environment in which it does business. That lack of regulatory certainty affects how, where, and whether individual companies deploy capital. Over the last six years, that regulatory uncertainty for oil and gas at the federal level has played a part in pushing development off federal minerals. Regardless of politics, regulators and the greater energy industry should seek out long-term solutions to create certain, effective, and efficient regulatory schemes. The ideal should be to create a regulatory apparatus insulated from the political whims that subject the greater energy industry to disruptive proregulatory pushes and anti-regulatory rollbacks that ultimately undermine certainty and negatively impact the development of our Nation’s resources. To put regulatory uncertainty into perspective, it is helpful to examine the magnitude of the most recent presidential administrations’ regulatory activity. During the Clinton Administration’s second term, federal agencies published 232 “major” final rules—generally meaning rules with an annual effect on the economy of over one-hundred million dollars. The second term of the Bush Administration oversaw 218. And the second term of the Obama Administration ushered in 307. While these numbers provide reference data points across both Republican and Democrat administrations, more developed statistical analysis is lacking because the concept and tracking of “major” federal rules only began in 1996. Through the last term of the previous presidential administration, oil and gas faced a wave of regulatory initiatives. The previous presidential administration undertook regulatory and enforcement initiatives related to: (1) hydraulic fracturing; (2) civil penalty assessments for royalty payments and reporting; (3) rights-of-way on Indian lands; (4) valuation of oil, gas, and coal royalties; (5) lease terms; (6) Onshore Orders 3 through 5; and (7) venting and flaring, among a host of others. Those initiatives spawned numerous rules, guidance, and policy changes. But as the new administration took office, dismantling the previous administration’s regulatory initiatives became a top priority. On March 28, 2017, President Trump issued Executive Order 13,783, directing federal agencies to enact policies “to promote clean and safe development of our Nation’s vast energy resources” and to avoid “burdens that unnecessarily encumber energy production, constrain economic growth, and prevent job creation.” The Executive Order expressly directs federal agencies to, “as soon as practicable,” take the appropriate action to suspend, revise, or rescind a number of the previous administration’s rules, policies, and initiatives. Despite the strong proclamation, the directive has not gone as planned. The anti-regulatory rollback kicked off by the Trump Administration has likely increased uncertainty for oil and gas development. The federal initiative related to hydraulic fracturing provides an example. The Bureau of Land Management (“BLM”) published its hydraulic fracturing rule in March 2015 (“2015 Rule”). States, industry, and the Southern Ute Indian Tribe immediately challenged the 2015 Rule, and several political advocacy groups intervened in defense. On September 30, 2015, the Unit ed States District Court for the District of Wyoming preliminarily enjoined the 2015 Rule. And on June 21, 2016, the court permanently enjoined the 2015 Rule. During the BLM’s and political advocacy groups’ appeal, the Trump Administration took office and began issuing policy directives. On the eve of oral argument, likely wary of wasting judicial resources while the new administration was reviewing options to rescind the 2015 Rule, the United States Court of Appeals for the Tenth Circuit ordered the BLM to confirm its position on appeal—i.e., would the Trump Administration still defend the 2015 Rule? Confirming the Tenth Circuit’s premonition, the BLM reversed course and requested a continuance of oral argument because the agency was developing a notice of proposed rulemaking to rescind the 2015 Rule (“Rescission Rulemaking”). To accommodate the BLM’s upcoming Rescission Rulemaking, the BLM asked the Tenth Circuit to hold the appeal in abeyance. The Tenth Circuit ordered additional briefing on whether the appeal should be held in abeyance during the Rescission Rulemaking and any additional reasons why the court should not hear the appeal. As the supplemental briefing trickled in, the BLM had still not published the proposed Rescission Rulemaking. Potentially frustrated with the BLM’s delay, the Tenth Circuit ordered oral argument on both the merits of the 2015 Rule and the proposed abeyance. On July 25, 2017, two days before the argument date, the BLM published the Rescission Rulemaking. After oral argument, an undivided panel of the Tenth Circuit agreed that the Rescission Rulemaking rendered the appeal prudentially unripe, but the court split two-to-one on the appropriate remedy. Because the appeal was prudentially unripe, the majority dismissed the appeal, vacated the district court’s judgment, and remanded the case for the district court to dismiss the underlying action. But the majority declined to tie the timing of the vacatur to the completion of the BLM’s Rescission Rulemaking. In effect, once the majority’s judgment becomes effective, the district court’s permanent injunction of the 2015 Rule will be vacated, and the 2015 Rule could go into effect until BLM completes the Rescission Rulemaking. The dissent split from the majority on the timing of vacatur. The dissent would have remanded the case to the district court to craft the appropriate remedy while BLM completed the Rescission Rulemaking. In particular, the dissent would have ordered an evidentiary hearing to consider the environmental risk and potential harm to the states and industry if the permanent injunction was vacated before BLM rescinded the 2015 Rule. Absent modification on rehearing of the majority’s vacatur—and assuming the Rescission Rulemaking is not yet complete— the 2015 Rule could go into effect once the Tenth Circuit’s mandate issues. The total of the BLM’s original rulemaking process, the litigation, and the BLM’s Rescission Rulemaking is this: The 2015 Rule was thrown out by the only court to have substantively reviewed it, and the BLM has committed to rescinding the 2015 Rule, but the 2015 Rule may well go into effect pending the completion of the Rescission Rulemaking. Such a result may compel BLM to temporarily enforce the 2015 Rule while it completes the Rescission Rulemaking. If BLM does not, it could be subject to legal challenges to compel enforcement. Additionally, industry will be forced to temporarily comply with the 2015 Rule or face legal liability from regulators or third parties for failing to do so. The result of the 2015 Rule highlights the regulatory uncertainty that follows pendulum swings from pro-regulatory pushes to regulatory rollbacks. The 2015 Rule provides just one example—more are readily available, such as the venting and flaring and royalty valuation rules—but the underlying conclusion remains the same: Subjecting oil and gas—and the greater energy industry—to the vagaries of four-to-eight year political vacillations damages regulatory certainty and, ultimately, the production of our Nation’s resources. The best hope to stop this cycle is for regulators and the greater energy industry to develop long-term solutions to create certain, effective, and efficient regulatory schemes that are insulated from political whims. Alex Obrecht is an energy and regulatory attorney in the Denver, Colorado office of Baker & Hostetler LLP. He concentrates his practice on natural resources and energy regulation and litigation with a focus on private and federal royalties, federal oil and gas, energy transportation, and other oil and gas disputes. Alex received his J.D. from the University of Wyoming College of Law in 2013 and his B.A. from Harvard College in 2008. After graduation from law school, he co-founded the Salt Creek Energy Excellence Scholarship for students at the University of Wyoming College of Law who are interested in energy law.
Published by Wyoming State Bar . View All Articles.