04.13.2017

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Updates

President Donald Trump’s recently signed Executive Order on Promoting Energy Independence and Economic Growth (the Order) includes significant revisions to the regulatory landscape both (1) directly in the case of oil and natural gas extraction on federal lands and (2) directly and indirectly in the case of coal mining. From an oil and natural gas perspective, the Order loosens what the industry considered burdensome regulations on hydraulic fracturing—or “fracking”—on federal lands. With an eye toward reviving the U.S. coal industry, the Order aims to scale back regulations that the industry deemed harmful to the marketplace in order to promote job growth. As discussed below, however, it is not immediately clear whether the effects will be significant over the course of the next several years.

Oil and Natural Gas Extraction

As discussed in a March 2015 update, the U.S. Department of the Interior’s (DOI) Bureau of Land Management (the BLM) issued regulations setting standards for fracking on federal lands. The standards focus on (1) requiring disclosure of chemicals used in the fracking process; (2) establishing baselines for wellbore integrity; and (3) establishing requirements for the disposal of chemicals and wastewater. The BLM estimated in its rule release that compliance with these rules would cost approximately $11,400 per well drilled, for an aggregate industry cost of $32 million per year. The Order directs the BLM to revisit these rules and to issue new, more producer-friendly rules. 

The amount of oil and gas exploration and production taking place on federal lands—and thus directly affected by the rules—is relatively small as compared to such activity occurring on non-federal lands. States have begun to use the Obama-era BLM rules as a template for their own standards, which could in turn cover a much more significant portion of the overall exploration in the United States. It is entirely possible that the Order will serve to polarize exploration and production regulation among the states: those states that are currently governed by producer-friendly administrations and legislatures will likely use the Order and the rules promulgated in response to the Order as a guideline to maintain reduced regulation for oil and gas exploration. Meanwhile, states that are governed by administrations and legislatures that traditionally take a more skeptical view of oil and gas exploration may respond to the Order by implementing their own rules that mirror those in the Obama-era order. It remains to be seen whether—and to what extent—that polarization will take place.

On a net basis, however, the rollback of the Obama-era rules will almost certainly be seen as a “win” by the oil and gas exploration industry. The revised rules, even if largely symbolic for most producers, will contribute to lowering the extraction cost of oil and make U.S. shale oil more cost-competitive with its Middle Eastern competitors. Further, the natural gas industry will avoid what—when combined with the persistent and historically low price of natural gas—was seen as yet another body blow to an already beleaguered sector.

Coal Mining

The Order also significantly alters the regulatory landscape for coal mining, both directly and indirectly. With a direct effect, the Order, along with accompanying Secretarial Orders from the DOI (1) rolls back rules issued under the Obama administration that imposed a moratorium on new coal leases on federal lands and (2) implements review of DOI agency actions regarding energy independence, including “reexamination of the mitigation and climate change policies and guidance across the DOI in order to better balance conservation strategies and policies with the equally legitimate need of creating jobs for hardworking American families.”

Indirectly, and most dramatically, the Order rolls back reduction targets for CO2 emissions that would have required states to hit a target of 32% below 2005 levels by 2030. However, the full impact of the rollback of CO2 targets may not be understood for several years. 

The Obama administration and its supporters have argued that coal-fired power plants were an outdated mode of energy production that was being forced out of the market by natural competition from cleaner and ultimately more efficient solar, wind and natural gas power sources. Under this analysis, the Clean Power Plan and CO2 targets were merely hastening the demise of an already doomed industry. Notably, in 2016, there were no planned additions of coal-fired power plants. Meanwhile, over 25 gigawatts of power were added to the overall U.S. electric grid. Many of the supporters of the Clean Power Plan now argue that the same market forces will ultimately doom the coal industry going forward, regardless of whether the Clean Power Plan is in effect.

Supporters of the Order argue that the Clean Power Plan artificially hobbled and discouraged investment in “clean coal” technology, since the incremental steps required to achieve reduced CO2 emissions efficiently would not necessarily be able to meet the Clean Power Plan benchmarks. Supporters would argue that the Order will allow market forces to dictate the fate of coal-fired energy production. If coal-fired energy production can become cost-competitive, then the United States could see a significant resurgence in the coal mining industry.

Ultimately, it is likely that the effects of the Order will land somewhere between the two positions. The Clean Power Plan spurred investment in solar, wind and natural gas production technology, thus driving down costs, while starving research into clean coal technologies. As a result, coal-fired power plants face a significantly more challenging competitive environment than they would have had the Clean Power Plan never been adopted. Further, the specter of the re-implementation of the Clean Power Plan by a subsequent administration will likely give pause to electricity generators seeking to make capital investments in coal-fired production. On the other hand, coal in many parts of the country remains a leading viable alternative for significant centralized energy production, and, as a result, the Order will likely spur research and development into clean coal and efficiency improvements.

© 2017 Perkins Coie LLP