By: James Wiltraut, Jr. and James O’Toole

 

“. . . full of sound and fury, signifying nothing.”

 Macbeth to Seyton, Macbeth, act 5, scene 5.

After Congress failed to appropriate funds for fiscal year 2014, the federal government closed shop for 16 days.  In the end, the shutdown curtailed, but did not cripple, most routine government operations resulting in delays and mild aggravation for the energy industry.  For most of us this is par for the course.  Partisan gridlock has, for years, impeded the development of a coherent and comprehensive federal energy policy.  The shutdown is just the most recent and visible manifestation of that gridlock. With the budget deal and debt ceiling suspension expiring on January 15 and February 7 respectively, it is time to take stock of the shutdown’s past and potential future impacts on the energy industry.

Assessing the Immediate Impact of the Shutdown from the Regulated Community’s Perspective

Unsurprisingly, the shutdown’s biggest impact to the energy industry stems from Department of the Interior’s (“DOI”) furlough of more than half its employees. Offshore oil and natural gas activities, such as inspections and processing of drilling permits were curtailed and leasing activities and reviews of exploration and environmental plans ceased. Processing of onshore oil and gas permits stopped altogether.  DOI’s Bureau of Land Management (“BLM”) was unable to process about 200 Applications for Permit to Drill, delaying energy development on Federal lands in several states.  BLM also stopped or delayed environmental reviews of planned transportation and energy projects, preventing companies from moving forward on these projects.

Other federal agencies regulating the industry, like the Environmental Protection Agency (“EPA”) and the Army Corps of Engineers were effectively shut down, while others, including the Department of Energy (“DOE”) and the Federal Energy Regulatory Commission (“FERC”) were largely able to hobble along on carryover funds from the prior fiscal year.  Despite some delay in issuing reports, the lasting impact from the shutdown in most respects is negligible.

Looking Forward:  Is there a Potential for a Grand Bargain?

In the deal reached on October 16th, Congress passed, and signed by the President the following day, a continuing resolution to keep the federal government operating until January 15th.  In the meantime, the Budget Conference Committee, chaired by Rep. Paul Ryan (R-Wis.) and Senator Patty Murray (D-Wash.) has been meeting to work out a budget agreement, in a process many on Capitol Hill are characterizing as “slow-moving.”

Considering the makeup of the Conference Committee, some of the parties’ big-ticket energy items like the Keystone XL Pipeline Expansion (“Keystone”) and streamlined Liquefied Natural Gas (“LNG”) export approvals could become bargaining chips in resolving the larger budgetary impasse. Rep. Ryan is a strong advocate for Keystone’s approval, which he incorporated into the House Budget Committee’s Fiscal Year 2014 Budget Resolution back in March.  However, the Conference Committee also includes Senator Ron Wyden (D-Ore), Chairman of the Senate Energy and Natural Resources Committee who is outspoken in his opposition to the Keystone Expansion, and cautious regarding DOE’s approval of LNG export terminals.  Wyden is also an outspoken advocate of the Wind Production Tax Credit (“PTC”), set to expire this year, which Ryan is on record opposing.

Early in the post-shutdown budget negotiations, there was keen interest on the part of Republicans to include approval of Keystone in the final deal.  However, the budget agreement currently being discussed has moved away from any mention of Keystone or other energy-related issues. Tension among conferees instead currently centers on how to deal with another round of sequestration cuts set to go into effect next year, particularly the scheduled $20 billion cut in defense spending set to go into effect in January.

Senior Members of Congress, including committee and subcommittee chairmen, privately voice their growing concern that Congress may end up with yet another continuing resolution to fund the federal government.

Outside the conference, both parties continue to work in their own separate spheres on energy issues.

With the gridlock in Congress preventing the passage of any meaningful energy legislation, the White House is filling the legislative void with agency action (or inaction).  President Obama has not hesitated to use his executive authority to block Keystone at the presidential permit stage or to implement his 2013 Climate Action Plan.  In advancement of the latter, EPA released its Proposed Carbon Pollution Standard for New Power Plants on September 20th.  The Climate Action Plan instructs EPA to publish draft regulations for modified, reconstructed, and existing power plants by June 1, 2014.

Though empowered by the 2007 Supreme Court Massachusetts v. EPA ruling recognizing EPA’s authority to regulate greenhouse gas emissions from mobile sources as pollutants under the Clean Air Act (“CAA”), it remains to be seen how far EPA can stretch its authority. The Supreme Court recently announced it would hear argument on whether EPA permissibly determined that its regulation of greenhouse gas emissions from mobile sources triggered CAA greenhouse gas permitting requirements for stationary sources like power plants.  The Court’s ruling on this issue could either undercut EPA’s current program for regulating power plants, or reinforce EPA’s ability to regulate greenhouse gases.

With Senate Democrats recently exercising the “nuclear option,” most of President Obama’s judicial and executive-branch nominees may be approved with 50 votes, instead of the 60 previously required to overcome a filibuster.  This rule change likely paves the way for the appointment of President Obama’s three nominees to the U.S. Court of Appeals-D.C. Circuit – which will rule on most of the major energy cases to arise in the conceivable future.

The House, meanwhile, continues to advance energy legislation.  The Federal Lands Jobs and Energy Security Act (H.R. 1964) would accelerate onshore drilling permit decisions and require that a quarter of nominated federal lands be made available for leasing.  The Protecting States’ Rights to Promote American energy Security Act (H.R. 2728) would block the Interior Department from regulating hydraulic fracturing on public lands where state regulations are already in place.  The Natural Gas Pipeline Permitting Reform Act (H.R. 1900) would establish firm timelines for the review of natural gas pipeline permit applications and allow for the automatic approval of natural gas pipeline projects.

At the committee level, the House Energy and Commerce Committee’s Energy and Power Subcommittee voted to approve the North American Energy Infrastructure Act (H.R. 3301) co-sponsored by Committee Chairman Fred Upton (R-Mich.) and Rep Gene Green (D-Tex.), which standardizes the approval process for oil pipelines, natural gas pipelines, and electric transmission lines.  The legislation requires agencies to approve cross-border applications within 120 days of submission unless it is determined that the project is not in the national security interest of the United States.  However, none of these bills have much of a chance to become law (the President said he would veto the three that passed the House), and mostly serve as a means for the GOP-controlled House to highlight its differences with President Obama’s regulatory policies.

So, with the cards we are dealt, is there a chance for a grand bargain?  What appears more likely is a continuing funding resolution, or a compromise budget that skirts the major issues of contention. Another shutdown in 2014 is not off the table.  Those who took heart at our conclusions in the beginning of this article that the October shutdown was no great loss to the energy industry should not be so complacent about a repeat next year.

A shutdown in early 2014 would likely be worse than what the country experienced in October.  The shutdown occurred at the beginning of a new fiscal year, a time generally spent ramping up new programs, not finalizing and closing out existing items.  Also, the shutdown was resolved quickly enough for some agencies, such as FERC and DOE, to continue to operate on past years’ financial reserves – significantly mitigating its impact.  Should a shutdown occur in the middle of a fiscal year – such as in January or February of 2014, it is likely to be far more disruptive.

*This article was published by Oil & Gas Monitor (OGM) on December 6, 2013*