Washington Watch: New Regulations to Spur Activity

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EPA, BLM Rules Add Compliance Challenges to Pipeline Industry

Big news from Washington, D.C., includes the Obama administration’s unveiling new regulations to protect the environment and the ensuing public reaction. These regulations, if allowed to take effect, would significantly impact the oil and natural gas pipeline industry.

As explained more fully below, the Environmental Protection Agency’s (EPA) Clean Power Plan would spur the construction of new natural gas pipelines required to meet the demand of gas-fired electric generation facilities. By contrast, EPA’s Clean Water Rule would bring more waterways and marshes under the jurisdiction of the Clean Water Act and thereby impose additional compliance requirements on pipeline construction.
Similarly, the federal Bureau of Land Management’s (BLM) regulations on hydraulic fracturing in the production of oil and gas on federal and Native American lands would likely reduce production and pipeline construction. The efficacy and legality of all these regulations are currently being examined by
various courts.

New EPA Rules

On Aug. 3, the EPA issued the Clean Power Plan, which provides each state with a goal for reducing existing power plant emissions of carbon dioxide. The EPA gave each state three “building blocks” to reach its goal: 1) Improve heat rate of existing coal-fired power plants, 2) substitute combined cycle gas generation for coal plants and 3) substitute renewable generation for coal-fired plants. Each state must decide how to meet its own goal, then submit an implementation plan by Sept. 16, 2016 (unless it receives an extension), to begin reducing carbon dioxide emissions by 2022 and keep reducing until and through 2030. If a state does not submit a plan, the EPA will impose one (basically a cap-and-trade program). By 2030, the EPA projects that power plant emissions of carbon dioxide should be 32 percent lower than in 2005.

Under the Clean Power Plan, reduced coal generation will be made up by increasing generation levels from gas-fired generators, which will require more gas transported to existing facilities, and building more wind or solar generation facilities. But the wind doesn’t always blow, and the sun doesn’t always shine. As a result, more natural gas-fired generation facilities will be needed to “firm” up the renewable resources. That means natural gas pipelines will need to be extended and expanded to meet anticipated needs.

Opponents of the Clean Power Plan claim that the plan cannot work — that the required electric transmission and natural gas pipeline facilities cannot be sited and built by 2030. Even if they could, increasing dependence on intermittent, renewable fuels will hurt the “reliability” of the electric grid. Eventually, 26 states and a number of interested parties filed appeals and requests for stays with the D.C. Circuit Court of Appeals. Given the complexity of the issues, the court won’t likely rule on the motions to “stay” or temporarily suspend the rule’s effectiveness until January 2016 at the earliest. The court is unlikely to issue a final decision before the states must submit their implementation plans in September 2016. Bottom line, unless the D.C. Circuit grants the stay requests, the future of the Clean Power Plan might hinge on the outcome of next year’s presidential election, with a Democrat likely maintaining the status quo and Republican likely upending the rule.

There have been some significant developments on the EPA’s Clean Water Rule, which was issued in early summer. There the EPA “clarified” the scope of the term “waters of the United States” under the Clean Water Act (CWA). Pipeline construction projects must necessarily comply with programs that rely on the definitions of the “waters of United States” — such as the CWA Section 402 National Pollutant Discharge Elimination System permit program, the Section 404 permit program for discharge of dredged or fill material and the Section 311 oil spill prevention and response programs. Opponents claim that the clarified scope would significantly enlarge the EPA’s jurisdictional reach, bringing more waterways and wetlands under federal protection and in turn making compliance difficult and costly.

A group of states sought to block the rule, claiming it intrudes on states’ rights. Just before the rule was to take effect in late August, a federal judge in North Dakota agreed: “Once the rule takes effect, the states will lose their sovereignty over intrastate waters that will then be subject to the scope of the Clean Water Act.” But the judge only stayed the effectiveness of the rule for the 13 states that challenged the rule. Later more states jumped into the fight. And in October, the Sixth Circuit Court of Appeals began to consider whether multiple challenges to the rule should be consolidated in one court. Pending that decision, the Sixth Circuit blocked nationwide implementation of the rule, after finding that the challengers had demonstrated “a substantial possibility of success” in litigation. The consolidation ruling is still pending.

In the meantime, on Nov. 10, a North Dakota federal judge denied the Justice Department’s attempt to further delay the litigation and directed the EPA to develop a timeline to submit the Clean Water Rule’s administrative record to the court for judicial review. In sum, because of court action, the Clean Water Rule has not yet and may never take effect.

Fracking and the BLM

Last spring the BLM issued regulations applying to fracking on federal and Native American lands (the Fracking Rule). Fracking is the pumping of sand, water and chemicals to free natural gas and oil within subterranean rock. More than 100,000 wells on federal and Native American land produce approximately 11 percent of the country’s natural gas production and five percent of its oil. Almost all of these wells rely on fracking.

The administration hoped that the regulations, which ostensibly seek to prevent contaminate water supplies on federal and Native American land, would encourage the states to adopt similar laws, thereby expanding the scope and breadth of the limitations. Ironically, the Fracking Rule would undercut the Clean Power Plan, which relies on increased natural gas production from fracking. Scheduled to take effect on June 24, the Fracking Rule focused on three parts of oil and gas development that are each subject to comprehensive federal and state regulation — wellbore construction, chemical disclosures and water management. Opponents claim that the regulations are beyond the power of the BLM, in particular because Congress removed the EPA’s jurisdiction over non-diesel fracking.

Put another way, the BLM was trying to do something the EPA, the chief environmental regulator, cannot do. Opponents also argue that states already regulate fracking, and they maintain — the BLM agrees — that compliance would impose additional costs on producers, which are already suffering from low oil prices. Finally, opponents contend that compliance would require producers to release trade secrets — proprietary fracking operating and design information, which BLM intends to release to the public. In response to lawsuits, a federal judge in Wyoming, postponed the effectiveness of the regulations and then on Sept. 30 issued a preliminary injunction preventing the BLM from enforcing the regulations. In so doing, the judge found that BLM had no legal authority to issue the Fracking Rule and that, absent the injunction, the rule would “irreparably harm” states and Native American tribes (by denying their sovereign rights) and producers.

S WeilerThe legal battle will rage on, but for now the Fracking Rule is not in effect.

Washington Watch is a bimonthly report on the oil and gas pipeline regulatory landscape by Steve Weiler, a partner in the Washington, D.C., office of Stinson Leonard Street LLP. Weiler has more than 25 years of experience in a broad range of administrative, judicial, and transactional matters, involving the natural gas and oil pipeline industries. Contact him at steve.weiler@stinsonleonard.com.

 

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