Tag: energy

Energy and Environmental Law Update: Week of 8/25/2014

Mintz Levin Law Firm

Now that summer is drawing to a close, let’s check in on one important bill that lost momentum just as the summer was beginning. Remember the Senate Finance Committee’s tax extenders package (S. 2260), which the committee marked up on a bipartisan basis in mid-May? The one that was poised to pass the Senate but that surprisingly failed to reach cloture after Senate leadership blocked Republican amendments on the bill? At the time, congressional staff and lobbyists—and even Majority Leader Harry Reid (D-NV) —suggested that the extenders package would come up again in the lame duck session after the November election. The House was not expected to vote on an extenders package before then anyway, so the Senate delay would not really impact the timing of final passage of this two-year extension of more than 50 tax provisions.

Well, that was then. Today, almost two months before the mid-term elections, the future of the clean energy provisions in an extenders package—particularly the production tax credit (PTC) and investment tax credit in lieu of the PTC—depends a great deal on which party wins control of the Senate. Republicans are more confident that they can win the necessary six seats to take back the top chamber; and if they do, they will have more leverage in the lame duck about what the contents of an extenders package would be. The $84 billion EXPIRE Act of 2014 not only extends the PTC by two years but also extends key clean energy depreciation benefits and tax credits, including a $1-per-gallon credit for biodiesel and a 50-cent-per-gallon credit for alternative fuels. Senate Democrats strongly support the clean energy provisions. Certain Republicans, such as Chuck Grassley (R-IA), remain staunch supporters of the PTC and biodiesel credits, but many other Republicans are eager to eliminate or scale back the PTC and other clean energy provisions. If Senator Orrin Hatch (R-UT) learns he will be chairman of the Finance Committee next year in a Republican chamber, he has less of an incentive to work with current Chairman Ron Wyden (D-OR) and Democrats during the lame duck session. He can simply hold out and put forward his own extenders bill next year with popular provisions like the research and experimentation (R&D) credit and without clean energy incentives.

The extension of a handful of relatively popular and less controversial business and individual extenders such as the R&D credit and bonus depreciation are more assured. House Republicans, as part of a “tax-reform-lite” effort, have passed several bills making select provisions such as these permanent. For clean energy advocates, they have to cling to the more popular parts of the overall package and make sure their provisions are not trimmed away when Congress eventually takes it up. The business community, which wants many of the non-energy provisions in the EXPIRE Act extended, also must be much more vocal if the bill is to rise to the front of the agenda.

If Democrats do manage to hold onto control of the upper chamber, they very likely will be dealing with a reduced majority, and that too will give Republicans more leverage. With all the competing priorities in a very short legislative period, it will be difficult for the package to be enacted before the end of the year. Another retroactive extension in early 2015 could be possible. Congress has let the PTC lapse several times since 1992 before renewing it again. While it’s hard to avoid feeling a feeling of déjà vu when faced with another “will-they-or-won’t-they” end-of-year extension, this time also seems different. Many legislators thought the previous PTC extension would be the last one, so the stakes are high. Anti-PTC campaigns financed by conservative groups and utilities ratchets up the pressure on lawmakers. One possible way to blunt some Republican opposition would be to modify the PTC and either reduce the amount of the credit or include a deadline by which projects must complete construction—or both.

Several scenarios exist where even a change of control in the Senate would not preclude the passage of a tax extenders package. A short-term extension would give lawmakers some breathing room to debate tax reform. Some Republicans from wind-friendly states might prefer the clean energy provisions to pass under a Democratic watch rather than under Republican leadership in the new Congress. In this optimistic scenario, the lame duck session could mirror the productive session of 1980.

Ironically, election results in any one of three bio-energy and wind states–Colorado, South Dakota, and Iowa—could help decide the balance in the Senate and the fate of clean energy tax credits.

ARTICLE BY

Bryan M. Stockton
 
OF 
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

SEC Brings Fraud Charges Against Oil and Gas Company and Its CEO

Katten Muchin Law Firm

On August 4, the Securities and Exchange Commission instituted cease-and-desist proceedings against Houston American Energy Corp., an oil and gas exploration and production company, and John F. Terwilliger, its CEO, for making fraudulent claims about the company’s oil reserves. According to the SEC, during late 2009 and early 2010, Houston American raised approximately $13 million in a public offering and saw its stock price increase from less than $5 to more than $20 per share after fraudulently claiming that a Colombian exploration concession, in which Houston American owned a fractional interest, held between one billion and four billion barrels of oil reserves that would be worth the equivalent of $100 per share to investors. The SEC alleged that those estimates lacked any reasonable basis and were falsely attributed to the concession’s operator, who actually had much lower estimates. The SEC order charged Houston American and Mr. Terwilliger with violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act); Rule 10b-5, Section 20(b) of the Exchange Act; and Section 17(a) of the Securities Act of 1933. The SEC seeks a civil penalty and disgorgement from Houston American, and to prohibit Mr. Terwilliger from acting as an officer and director of the company.

Matter of Houston American Energy Corp. et al, Admin. Proceeding No. 3-16000 (Aug. 4, 2014).

ARTICLE BY

Michael S. Gordon
Ashley H. Jones
Of
Katten Muchin Rosenman LLP

What 2014’s Continued IPO Surge Means for Clean Tech and Renewable Energy Companies

Mintz Levin Law Firm

The year 2014 is on track to be the most active IPO marketin the United States since 2000, with the mid-year total number of IPOs topping last year’s mid-year total by more than 60%.[1] There were 222 US IPOs in 2013, with a total of $55 billion raised, and 2014 has already seen 151 US IPOs, for a total of $32 billion, completed by the mid-year mark. The year 2000 (over 400 IPOs) was the last year of a 10-year boom in US IPOs that reached its peak in 1996 (over 700 IPOs).

What does this mean for emerging energy technology andrenewables companies that might be looking to the capital markets? As of mid-year 2014, there have been six cleantech/renewables IPOs, while there were a total of seven in all of 2013. In both years, these deals have represented a relatively small percentage of total IPOs and still do not match the level of activity in the more traditional energy and oil & gas sector.  In 2014, IPOs were completed by a range of innovative companies, including Aspen Aerogels, TCP International and Opower.

Two unambiguously positive developments for clean energy in 2013 and the first half of 2014 have been the strong market for follow-on offerings and YieldCo IPOs. As was the case in 2013, several larger energy tech companies that are already public completed follow-on offerings to bolster cash for growth in 2014. Following in the footsteps of Tesla, SunEdison, First Solar, and other companies who completed secondary offerings in 2013, Jinko Solar (January 2014), Pattern NRG (May 2014), Plug Power (January and April 2014), Trina Solar (June 2014), and several other public companies capitalized on the continued receptiveness of clean-tech capital markets.

Following on successful YieldCo IPOs in 2013 (NRG Yield, Pattern Energy), there have already been three YieldCo IPOs in 2014: Abengoa Yield, NextEra Energy Partners, and, most recently, Terraform Power. The continued growth of YieldCo deals as well as the growing dollar amount of such offerings is an extremely encouraging sign for the energy and clean-tech sector as a whole, signaling a longer-term market acceptance of the ongoing changes in domestic and global energy consumption. The successful public market financings of these companies – whose strategy typically involves the purchase and operation of existing clean, energy-generating assets – should result in increased access to capital for renewable energy generation assets, as well as related technologies and services across the sector.

If the first half of this year is any indication, 2014 should prove to be a strong year for clean-tech and renewable energy companies opting to pursue the IPO path. The IPOs, follow-on offerings, and YieldCo successes that we’ve seen so far should improve the prospects for forthcoming clean-energy IPOs in the second half of 2014 and beyond.  I expect to see more renewable/clean energy companies follow the IPO route and make the most of the market’s continued receptiveness.

[1]  Please note that there will be some variance in the statistics for IPOs generally. This is because most data sets exclude extremely small initial public offerings and uniquely structured offerings that don’t match up with the more commonly understood public offering for operating companies. The data above is based on information from http://bear.warrington.ufl.edu/ritter/IPOs2012Statistics.pdf and Renaissance Capital www.renaissancecapital.com.

ARTICLE BY:

Sahir Surmeli
OF:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C

Texas Supreme Court Clarifies Royalty Calculations For Enhanced Oil Recovery

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In French v. Occidental Permian, Ltd., the Texas Supreme Court clarified royalty calculations for enhanced oil recovery.  The Court:

  1. Rejected a royalty owners’ claim that royalties on casinghead gas should be determined as if the injected carbon dioxide (CO2) was not present
  2. Held that, under the applicable leases and Unitization Agreement, the costs of removing CO2 from the gas were post-production expenses that royalty owners must share with the working interest owner

In the opinion, the Court emphasized the importance of efficient production of oil and gas and the prevention of waste.

Background

The Plaintiffs-Appellants, Marcia Fuller French and others (“French”), were lessors on two different oil and gas leases.  Both lease royalty provisions provided that the casinghead gas royalty was net of post-production expenses, but not production expenses.  The Defendant-Appellee, Occidental Permian Ltd. (“Oxy”) owned a working interest.  The parties had entered into a Unitization Agreement to allow secondary recovery operations.

Oxy began injecting wells on these leases with CO2 in 2001 in order boost oil production when waterflooding became less effective.  As a result, the wells produced natural gas that was about 85% CO2.  Although Oxy could reinject the entire casinghead gas stream, Oxy had the gas treated off site to remove the CO2.   It sold the resulting gas and had the extracted CO2 sent back to the well to be reinjected.  Oxy paid royalties on the gas after it was treated and deducted the treatment costs from French’s royalties.

French sued arguing that, except for the removal of contaminants and the extraction of NGL, the costs of processing the casinghead gas (including transportation costs) were production costs that should be borne solely by Oxy.  Conversely, Oxy argued the CO2 removal was necessary to render the gas stream marketable.  At trial, the Court agreed with French and awarded her $10,074,262.33 in underpaid royalties and entered a declaratory judgment defining Oxy’s ongoing royalty obligations.  The court of appeals reversed with a focus on the damages calculations, but did not reach a decision on whether the cost of separating the CO2 from the casinghead gas was a production expense.

Supreme Court’s Decision

The Court examined the parties’ agreements noting that French consented to the injection of extraneous substances into the oil reservoir and gave Oxy the right and discretion to decide whether to reinject or process the casinghead gas.  The Court further pointed out the Agreement provided that the royalty owners agreed to forego royalties on any unitized substances used in the recovery process.  The Court found that French benefited from that decision and therefore must share in the cost of the CO2 removal.  The question then became whether the CO2 processing was a production or post-production cost.

French argued that the CO2 separation was akin to the removal of water from oil, which Oxy treated as a production cost.  The Court, however, found that oil and water are “immiscible” and separation of the two is a relatively simple process, unlike CO2 and gas separation, which requires special technology.  Water separation is necessary for reinjection into the reservoir and to make the oil marketable.  Conversely, CO2 separation is not necessary for continued production of oil.  The Court then noted that Oxy was not required to reinject the casinghead gas.  Therefore, based on the parties’ agreements, “French, having given Oxy the right and discretion to decide whether to reinject or process the casinghead gas, and having benefited from that decision, must share in the cost of the CO2removal.”  Id. at 7.

Conclusion

The Court indirectly emphasized efficient production of oil and gas and prevention of waste.  The gas processing was economically beneficial to both French and Oxy.  The CO2 separation increased the value of the stream to both Oxy and French by allowing sale of the extracted NGLs and allowing reinjection of more than 10% of the gas produced directly back into the field.  Because French received the benefit of Oxy’s decision, it had to share in the cost.

This opinion is an important reminder to carefully negotiate and agree to terms in all agreements.  It is a further reminder to proceed in an efficient and economic manner.

ARTICLE BY:

Christina A. Denmark
Of:
Steptoe & Johnson PLLC

New Supreme Court Ruling On EPA Authority Over Greenhouse Gases (GHGs) – Little Clarification on the 111(d) Regulations

Lewis Roca Rothgerber

Last week, the United States Supreme Court issued a significant decision in Utility Air Regulatory Group v. EPA, that substantially restricts the authority of the U.S. Environmental Protection Agency (EPA) to regulate greenhouse gas emissions (GHGs) from stationary sources under the Clean Air Act’s Prevention of Significant Deterioration (PSD) and Title V permitting programs. The Supreme Court’s decision holds that EPA may not impose permitting requirements on facilities based solely on their emissions of GHGs, but may regulate GHG emissions under the PSD and Title V programs, only if a facility is otherwise subject to major source permitting requirements.

Background

EPA interpreted the Clean Air Act to require stationary sources to obtain construction and operating permits under the PSD and Title V programs whenever a facility emits GHGs above certain threshold levels. The threshold levels EPA chose were different than the levels established by Congress in the Clean Air Act, because the statutory levels when applied to GHGs were too low (as compared to criteria pollutant thresholds), and applying those levels to GHG emissions would lead to “absurd results” by subjecting millions of small sources such as shopping malls, hospitals and churches to major source permitting requirements. These thresholds were established in what is known as the “Tailoring Rule.”

The Tailoring Rule triggered regulatory review for two different source categories (for purposes of GHG emissions): sources that were already subject to major source review under the Clean Air Act because of emissions of criteria pollutants in excess of the major source thresholds (so-called “anyway” sources) and those sources that would trigger major source review for the first time based solely on emissions of GHGs in excess of the “tailored” thresholds set by EPA.

Holding

The Supreme Court’s divided 5-4 decision, authored by Justice Scalia, held that EPA’s rulemakings setting “tailored” thresholds for GHGs were invalid. The Court, however, stopped short of holding that GHGs could not be regulated at all under the PSD and Title V programs.

Specifically, the Supreme Court upheld EPA’s approach of requiring “best available control technology” (BACT) standards for GHGs for those sources otherwise required to obtain a PSD permit (the “anyway” sources). The Court emphasized, though, that it was not approving EPA’s current approach to BACT regulation of GHGs, or of any future approach that EPA might adopt. The Supreme Court categorized this aspect of the holding as having only a small impact on the regulated community, stating that 85 percent of all GHG major sources are “anyway” sources, while only an additional 3 percent would be major sources under the GHG tailoring trigger.

The Supreme Court also reaffirmed its decision in Massachusetts v. EPA, which held that GHGs qualify as an “air pollutant” for purposes of the term’s general definition in the Clean Air Act.

Takeaways and Import of This Case on 111(d) Regulations:

1)      GHG Emissions Alone Do Not Trigger Major Source Permitting Obligations – The principal legal holding of the decision is also considered the most significant from a practical perspective. Stationary sources cannot, under the Court’s ruling, be subject to permitting requirements based solely on their emissions of GHGs. The Court’s math on the number of sources impacted by this core aspect of the decision is questionable, and there is suspicion that many potentially major sources were specifically planning facilities to avoid major source permitting review by designing facilities to avoid the tailoring trigger for GHGs. In short, the impact of this decision is potentially very significant for the regulated community.

2)      Greenhouse Gas Emissions Are an “Air Pollutant” Subject to Regulation under the Clean Air Act. While the decision holds that GHGs are not an “air pollutant” for purposes of triggering PSD and Title V permitting requirements, it stops short of holding that GHGs are not an “air pollutant” for other purposes. To the contrary, the Court affirmed its prior holding in Massachusetts v. EPA, that the term “air pollutant,” as generally defined in the Clean Air Act, includes GHGs.

3)      Mixed Signals About EPA’s Authority to Issue NSPS Regulations Under 111(d). The Supreme Court was careful to note that EPA’s authority to regulate GHG emissions under the New Source Performance Standards (NSPS)  were not at issue and did not need to be addressed (that is, the Court specifically did not address the proposed 111(d) rules).

a)      As noted above, the Supreme Court reinforced that GHGs may be regulated as an air pollutant under other aspects of the Clean Air Act (just not PSD or Title V). Though the Supreme Court found that EPA was right to determine that the statutory thresholds for major source review would lead to “absurd results” in the PSD and Title V context for major source triggers, the Court said nothing about EPA’s authority to regulate under the NSPS provisions of Section 111(d). One way to interpret the decision is that it cloaks EPA with apparent authority to address GHGs as an “air pollutant” under Section 111(d).

b)      On the other hand, the Supreme Court took a stern tone in admonishing EPA for over-stepping its bounds. As an example, the Court warns EPA: “[W]hen an agency claims to discover in a long-extant statute an unheralded power to regulate ‘a significant portion of the American economy,’ we typically greet its announcement with a measure of skepticism.” That statement was directed at EPA’s attempt to regulate GHGs in the PSD and Title V programs, but the same argument might be made in the 111(d) context.

Conclusion

There are still many questions to be answered surrounding the 111(d) regulations proposed by EPA. This decision clarifies the overall picture of GHG regulation slightly, but does little to provide a clear boundary on EPA’s authority over GHGs. No doubt, this decision will be cited by both those in favor and those against the 111(d) regulations.

Article By:

Adam DeVoe
Of:
Lewis Roca Rothgerber LLP

EU Sanctions And The International Oil And Gas Industry

Andrews Kurth

The international oil and gas industry is continuously tasked with adapting to an ever evolving sanction-regulated environment. The level of sanction activity and implementation in recent years has been unprecedented, partly as a result of the political events which gave rise to the Arab Spring and the opposition to Iran’s nuclear programme. The recent crisis in the Ukraine, and associated sanctions against Russia, have sparked further debate around the need for effective, targeted punitive measures and the consequences they may have for Europe.

This article considers the EU’s sanction regime, explores the effect it has on international oil and gas companies and addresses the short-comings of the EU’s decentralised system.

What are sanctions?

Sanctions are political policy instruments used to encourage jurisdictions acting in contravention of international law to adopt standards supported by the wider global community. They impose measures designed to cause damage to the targeted government, non-state entity or individual (“Target”) in order to force it to undertake, or prevent it from undertaking, certain behaviour. They may inhibit the Target from accessing foreign markets for trade or deny it from pursuing financial and other forms of commerce. The professed ultimate objective of a sanction is to preserve or restore global peace and security.

What is the source of EU sanctions?

The UN Security Council imposes sanctions through Security Council resolutions which are binding on the EU. The EU implements all sanctions imposed by the UN Security Council through legislation enacted by the European Council. The process typically results in a European Council regulation which has direct effect in EU member states’ separate legal systems, creating rights and obligations for those subject to them, and overrides national law. Additionally, the EU may decide to impose self-directed sanctions or restrictive measures which go further than a UN Security Council resolution in circumstances in which the EU deems such action to be necessary.

Why do EU sanctions affect international oil and gas companies?

Over the past two decades, the EU has engaged in an active use of restrictive measures in the form of economic and financial sanctions, embargoes and restrictions on admission to a country. Economic and financial sanctions typically take the form of asset-freeze measures which involve the use of funds and economic resources by Targets or persons acting for and on behalf of Targets, and the provision of funds and economic resources to designated Targets. Embargoes may prohibit trade in certain goods, and activities relating to such trade, with Targets (including the flow of arms and military equipment). Visa or travel bans can be imposed preventing certain persons from entering the EU or transit through the territory of EU member states. These sanction measures are part of the EU’s strategy to support the specific objectives of the Common Foreign and Security Policy.

At the time of writing, the EU has announced asset freezes and travel bans against around twenty individuals in Russia and the Ukraine. Companies conducting their business in the oil and gas sector should be particularly vigilant to ensure they act in compliance with EU sanctions, as Ukrainian and Russian entities and individuals who operate in this industry may increasingly become sanction targets.

US sanctions are questionable under international law because they apply extra-territorially to third state parties involved in business activities with the Target. Unlike the US, the EU has refrained from adopting legislation with extra-territorial effect. However, the EU’s recent sanctions against Iran displayed a greater resemblance to those levied by the US than had previously been the case. For example, sanctions were imposed prohibiting the provision of key resources to various parts of the Iranian oil and gas industry, as well as the provision of financial services to that sector. As a result of EU financial sanctions most, if not all, banks and other financial institutions have declined from conducting any business relations with the Iranian regime.

It is clear that EU sanctions are wide reaching and their scope has a significant impact on business activities. They will apply to international oil and gas companies in the following situations:

  • within EU territory, including its airspace;
  • on board of aircrafts or vessels under the jurisdiction of an EU member state;
  • to EU nationals, whether or not they are in the EU;
  • to companies and organisations incorporated under the law of a member state, whether or not they are in the EU (this captures branches of EU companies in non-EU countries); and
  • to any business done in whole or in part within the EU.

The corporate behaviour, performance and conduct of international companies are powerful channels through which the objectives of sanctions against Targets are achieved. Since an international oil and gas company has little option but to observe EU sanctions to the extent such company falls within the EU’s jurisdiction, these restrictive measures are likely to play a big part in a company’s commercial decision making processes.

Why are EU sanctions difficult to manage?

A principal reason why EU sanctions are difficult for international oil and gas companies based in various EU member states to manage largely stems from the fact that the European Union lacks a centralised licensing body. Instead, the responsibility for implementing and enforcing EU sanctions is delegated to the relevant competent authorities of the EU member states. The potential for variance and discrepancy is rife in a system where there are twenty-eight EU member states, each with their individual national resource constraints and self-centred policy objectives.

Typically, the competent authorities of EU member states are responsible for:

  • granting exemptions and licences;
  • establishing penalties for sanction violations;
  • coordinating with financial institutions; and
  • reporting upon the implementation of sanctions to the European Commission.

There have been calls for a central EU licensing body which would produce a single licensing and exemption policy for EU member states. Although EU guidelines on sanctions and best practices for the effective implementation of restrictive measures go some way to plug the gap, arguably a more comprehensive regime for implementing sanctions is required to provide a better level of certainty to international businesses operating in the realms of the EU.

Managing the risks

International oil and gas companies have always had to function in politically active climates. As sanctions initiated by multilateral organisations such as the UN and EU become more fashionable, so too does the exposure to political risk that these companies will face. Given the considerable levels of investment that can only be recouped over extended periods of time, and in accordance with pre-determined contractual apportionments, international oil and gas companies need to be able to recognise, assess and manage these political risks effectively.

Oil and gas companies can relieve the risks imposed on them by sanctions through political lobbying, taking pre-emptive measures and by reacting quickly to sanctions once they are implemented. Commercial negotiations will need to focus on the allocation of risk as a result of one party’s failure to perform or withdrawal from the contract on the grounds of applicable sanctions.

International oil and gas companies need to be proactive and consider both the legal solutions and pre-cure safeguards. Time and effort should be spent focusing on drafting and negotiating the relevant contractual documentation, following a careful risk assessment, instead of deferring to dispute resolution provisions. For instance, careful construction of force majeure provisions can allocate each party’s obligations in the circumstance where an event outside of a party’s control causes contractual performance to become impossible. Thus, whilst conventional force majeure clauses relating to physical events afford relief to an affected party from its liabilities under the contract, oil and gas companies should consider expanding such contractual provisions to cover sanctions and other restrictive measures imposed on them by the UN and EU.

To avoid falling foul of existing EU sanctions, oil and gas companies should also consider putting in place comprehensive compliance procedures and systems to implement applicable sanction regimes. Penalties for breach of sanctions can be severe; a person guilty of a sanction-related offence may be liable on conviction to imprisonment and/or a fine. Falling foul of sanctions also means that a transaction can immediately become unlawful.

Conclusion

In view of the economic significance of the EU, the application of economic financial sanctions can be a powerful tool. But like a chain is no stronger than its weakest link, the effectiveness and success of the EU’s sanction regime depends on all EU member states applying, implementing and enforcing EU sanctions in a consistent manner.

The current EU sanction regime warrants a fully integrated approach which would undoubtedly benefit its policy objectives and move some way to reducing the unduly high economic cost that international oil and gas companies face when operating their businesses in the EU.

In voicing the sentiments of Henry Kissinger: “No foreign policy – no matter how ingenious – has any chance of success if it is born in the minds of a few and carried in the hearts of none”, perhaps now, in the dawn of the recent events which have taken place in the EU’s backyard in the Ukraine and Russia, the EU should further global security measures by tightening its ranks and implementing a more centralised, and better monitored, sanction regime.

Article By:

Rebecca Downes
Of:
Andrews Kurth

The North Carolina Senate Passes Energy Modernization Act

Womble Carlyle

When I was a child, and daring, “frack” was my risky substitute cuss word; but not substitute enough…. Well it’s back at the General Assembly this summer as lawmakers set the stage for hydraulic fracturing “fracking” in North Carolina. Opponents claim there is not enough clarity regarding the rights of property owners under which the fracking might occur and not enough public disclosure regarding what chemicals are used in the fracking process. Proponents insist that the revenue and job creating opportunity is too good to delay further and that the state’s Mining Commission can adequately oversee the process.

SB 786 – Energy Modernization Act. Also known as An Act to

(1) Extend the Deadline for Development of a Modern Regulatory Program for the Management of Oil and Gas Exploration, Development, and Production in the State and the Use of Horizontal Drilling and Hydraulic Fracturing Treatments for that Purpose;

(2) Enact of Modify Certain Exemptions from Requirements of the Administrative Procedures Act Applicable to Rules for the Management of Oil and Gas Exploration, Development, and Production in the State and the Use of Horizontal Drilling and Hydraulic Fracturing Treatment for that Purpose;

(3) Create the North Carolina Oil and Gas Commission and Reconstitute the North Carolina Mining Commission;

(4) Amend Miscellaneous Statutes Governing Oil and Gas Exploration, Development, and Production Activities;

(5) Establish a Severance Tax Applicable to Oil and Gas Exploration, Development, and Production Activities;

(6) Amend Miscellaneous Statutes Unrelated to Oil and Gas Exploration, Development, and Production Activities; and

(7) Direct Studies on Various Issues, as Recommended by the Joint Legislative Commission on Energy Policy.

Attempts to amend the bill with stricter water quality and property protections failed. The latest version of the bill is here: http://www.ncleg.net/Sessions/2013/Bills/Senate/PDF/S786v2.pdf

 

Wind Farms and Eagle “Take” Permits – Litigation is Coming Over the New “30-Year” Permit Rule

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The U.S. Fish and Wildlife Service (FWS) recently changed its eagle “take” permitting rules to allow wind developers to apply for 30-year take permits; previously, such permits, which allow the incidental killing of eagles, were available for a maximum of just five years.  Wind developers had lobbied for the rule change based on concerns that shorter permitting periods inhibit their ability to obtain financing.  But now, a bird conservation group, the American Bird Conservancy (ABC), is threatening litigation to overturn the “30-Year” rule.

 

How strong are ABC’s claims?

Not especially strong, because the FWS has powerful responses to each of ABC’s contentions.  The FWS will also be protected by the deferential standard of review that typically applies in this type of lawsuit.  And even if ABC were to prevail on its claims, the end result is less likely to be wholesale revocation of the rule than some delays in implementing it.  That is because ABC’s claims are largely procedural in nature, not substantive.

ABC’s claims are summarized in an April 30 letter to the U.S. Department of the Interior and the FWSannouncing the group’s intention to file suit over the 30-Year rule.  The letter contends that the FWS committed three legal errors when it extended the maximum take permitting period from five years to 30 years.  According to ABC, the FWS violated:  (1) the National Environmental Policy Act (NEPA), by failing to prepare an environmental impact statement or environmental assessment for the 30-Year rule; (2) the Endangered Species Act (ESA), by allegedly failing to ensure that the rule is not likely to jeopardize the continued existence of endangered species; and (3) the Bald and Golden Eagle Protection Act (BGEPA), which is the statute that authorizes take permits, by prioritizing the concerns of wind developers over those of the eagles the statute is designed to protect.

The problem for ABC – and the good news for wind developers – is that FWS has strong defenses to ABC’s assertions.  First, the NEPA claim will almost certainly turn on whether the FWS correctly concluded that the 30-Year rule falls within a “categorical exclusion” from NEPA’s requirements.  In its letter, ABC quibbles with the FWS’s conclusion, but courts generally review such conclusions under a highly deferential standard of review.  Indeed, agencies often prevail on such claims simply by offering a facially plausible explanation of why NEPA does not apply.  Here, the FWS has done that.  The agency’s NEPA implementation regulations permit the FWS to forego NEPA analysis for rules that have broad or speculative impacts, provided that those impacts will be analyzed on a case-by-case basis in the future.  The FWS contends that is the situation here – it will conduct a NEPA analysis on a permit-by-permit basis in the future.  Courts have rejected NEPA claims under similar circumstances in the past.

The FWS has a similar defense to ABC’s ESA claim.  That claim turns on whether the FWS had a duty to engage in internal consultation about the potential impact of the 30-Year rule on endangered species or critical habitat.  ABC’s letter insists that the FWS was subject to that duty and failed to comply with it.  But the FWS previously concluded, in 2009, that the eagle take permitting rule as a whole would not have any impact on endangered species.  That leaves the FWS in a strong position now, because the 30-Year rule does little more than change the maximum available permitting period under the existing permitting rule.  The FWS will also likely argue that, contrary to ABC’s assertions, the 30-Year rule does not affect endangered species because all it does is authorize the issuance of permits, it does not itself grant any developer permission to undertake any activity.  In sum, the FWS will likely argue that the proper time for ESA consultation is in the context of specific permit applications in the future, not in the context of this more general rulemaking that is not project-specific.

Finally, although ABC insists that the FWS should not have privileged the interests of wind developers over the protection of eagles, that is probably not enough to establish that the 30-Year rule violates the BGEPA.  The BGEPA expressly allows the FWS to permit eagle takes “for the protection of . . . other interests in any particular locality.”

ABC will likely wait 60 days before actually commencing litigation, so as to comply with the ESA’s citizen suit provision.  In the interim, the FWS will surely be evaluating the merits of ABC’s contentions and considering what options it has for addressing them.  Wind developers may want to make their voices heard during that 60 day period, and may want to consider intervening to defend the 30-Year rule in the event this matter does in fact proceed to litigation.

Article By:

Jacob Hollinger
Of:
McDermott Will & Emery

Environmental Review Commission Holds Final Meeting Prior to Start of 2014 Short Session

Poyner Spruill

It seemed fitting that the Environmental Review Commission (the Commission), met yesterday, Earth Day, for its last scheduled meeting before the start of the 2014 short session.  Yesterday’s meeting was chaired by Representative Ruth Samuelson.  The Commission heard presentations from Tom Reeder, Director of the Division of Water Resources at DENR, Paul Newton, North Carolina State President of Duke Energy, Edward Finley, Jr., Chairman of the North Carolina Utilities Commission, and Chris Ayers, Executive Director of the North Carolina Utilities Commission Public Staff.  At the close of the meeting the Chairwoman entertained public comment for close to an hour.

Duke Energy presented its support for a coal ash plan that could potentially incorporate several options into one solution and addresses, not only the Dan River, but other active and retired sites.  Duke Energy presented three scenarios to the committee.  The first plan, costing $2.0-2.5 billion, 1) incorporates the use of hybrid caps in places of the closure of some sites, 2) moves some sites to new lined structural fills or landfills, 3) continues the Asheville structural fill, and 4) converts some sites to dry fly ash.  The second plan, costing $6.0-8.0 billion, would incrementally excavate ash from 10 sites to landfills over a 20 to 30 year period.  The third plan, costing $7.0-10.0 billion, would incrementally move the ash to all-dry pneumatic bottom ash handling systems and include the thermally-driven evaporation of other process water.  Mr. Newton stated Duke believed the answer was somewhere between the first and second options.

The Sierra Club, the Roanoke River Basin Association, and the Catawba Riverkeeper, among several others, offered their comment.

The Sierra Club urged that the General Assembly set minimum standards for the closure of coal ash ponds such that Duke Energy could propose alternatives that adequately demonstrate effective protection of water supplies.  The Sierra Club also asked the legislature to bring coal ash under its waste management laws, since North Carolina is the only state that does not treat wet coal ash as solid waste.  Finally, the Sierra Club asked legislators to regulate structural fills and require liners and groundwater monitoring when coal ash is used as structural fill.

Other speakers asked the Commission to require the drainage and removal of coal ash from all open coal ash pits and the storage of all coal ash in dry, sealed above-ground containers or the reuse of the ash in products such as concrete.

The Commission did not take any votes and did not introduce any potential legislation.  The Commission had previously met on April 9th of this month and voted to approve its final report for the 2014 short session, which includes the Commission’s legislative proposals.

Article By:

Jillian DeCamp
Of:
Poyner Spruill LLP

Reform Opens Door to Private Investment in Mexico’s Energy Sector

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Mexican Senate presents comprehensive Energy Reform Bill to the House of Representatives with tremendous potential for domestic and foreign energy companies.

In an encouraging move toward energy reform, the Mexican Senate approved today and presented to the House of Representatives a bill—the combined effort of Partido Acción Nacional (PAN) and Partido Revolucionario Institucional (PRI)—with a constitutional reform proposal (the Energy Reform Bill) that paves the way to allow production and profit-sharing arrangements with, and the issuance of risk-sharing licenses to, private parties. The bill further advances the efforts of both parties, detailed in our August 15, 2013 LawFlash,[1] to promote energy reform in Mexico.

If the bill is enacted, these production and profit-sharing arrangements could be entered either directly by private parties or in association withPetróleos Mexicanos (Pemex), the state oil company. It is expected that risk-sharing licenses will mimic a concession-based system that would allow the booking of reserves for accounting purposes. Mexico has struggled with the adoption of a “pure” concession-based system due to a deeply engrained social and political belief that Mexico’s oil and gas reserves are and should remain the exclusive property of the Mexican state.

In addition, the Energy Reform Bill proposes the creation of the Mexican Oil Fund, with Mexico’s central bank, Banco de México, acting as the trustee. The fund would manage, invest, and distribute hydrocarbon revenues.

In the power sector, the Energy Reform Bill reaffirms the state monopoly with respect to the operation of the national grid and transmission and distribution activities. However, if enacted, the bill would break horizontal processes by permitting private parties to participate and contract with the Comisión Nacional de Electricidad (CFE), the state-owned utility company, and by allowing competitive activities with respect to power generation and commercialization.

Details on the reform are expected to be addressed in subsequent legislation that would follow congressional approval of the Energy Reform Bill; however, the bill underlines the reality of the reform and its potential for domestic and foreign private investors. The Energy Reform Bill, if approved, would give Congress a 120-day period to establish the necessary legal framework and regulate the new contracting mechanisms.

In order to pass, the bill will have to be approved by the House of Representatives and by 17 of the 32 state legislatures. It will then be submitted back to Congress for presentment of the final bill to the president, who must sanction and sign the proposed Energy Reform Bill into law, at which point it will be published in the Mexican Federal Official Gazette. Although some adjustments are expected, both PRI and PAN have indicated their intent to complete the congressional approval of the constitutional amendments on or before December 15, 2013.

[1]. View our August 15, 2013 LawFlash, “Mexican Government to Consider Overhaul of Energy Sector,” available here.

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Of:

Morgan, Lewis & Bockius LLP