A series of executive orders issued by President Joe Biden during the first weeks of his administration put the midstream industry on notice that government policy would be shifting away from Trump-era policies focused on permitting efficiencies to a renewed focus on climate change and environmental justice. These specific EOs include:
EO 13990 — “Executive Order on Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis,” issued Jan. 20, prioritizing climate considerations in U.S. policy that required a “pause” in approvals of oil and gas leases on public lands or in offshore waters. Among other things, EO 13990 established an Interagency Working Group on the Social Cost of Greenhouse Gases on updating the social cost of carbon, social cost of nitrous oxide and social cost of methane estimates used to assess monetized damages associated with incremental increases in greenhouse gases. It also revoked numerous Trump administration EOs that prioritized permitting speed over environmental reviews and consideration of greenhouse gas emissions, including EO 13807 (Establishing Discipline and Accountability in the Environmental Review and Permitting Process for Infrastructure Projects) and EO 13783 (Promoting Energy Independence and Economic Growth).
EO 14008 — “Tackling the Climate Crisis at Home and Abroad,” issued Jan. 27, placing climate change at the center of U.S. foreign policy and national security, taking a governmentwide approach to climate change and focusing on securing environmental justice and spurring economic opportunity for disadvantaged communities. Among other things, the EO creates a White House Office of Domestic Climate Policy, creates a White House Environmental Justice Interagency Council, directs the pause of oil and natural gas leasing on public lands and in offshore waters pending a comprehensive review of federal oil and gas permitting and leasing practices, and seeks to eliminate government subsidies for fossil fuels.
Emily Mallen
The impact of these EOs on the midstream industry is not immediate. While they set the tone for government policy and direct future agency action, they do not have force of law in the same sense as statutes passed by legislators and regulations subject to notice and comment rulemaking. Rather, the EOs serve as a placeholder and signal the future direction of government. In the meantime, the midstream industry is awaiting additional guidance in the form of federal regulations and agency action that will embody the EOs’ principles. This includes the Work Group’s updates to the social costs of greenhouse gases, potential National Environmental Policy Act reform from the Council on Environmental Quality, additional changes to the U.S. Army Corps of Engineers Nationwide Permitting program under the Clean Water Act and any changes to the U.S. Department of the Interior’s federal leasing and permitting program that may result from the comprehensive review thereof called for in EO 14008.
One federal agency that has jumped right into the regulatory process and immediately embraced the EOs’ ethos is the Federal Energy Regulatory Commission. This is not surprising given public statements made by FERC’s current Chairman Richard Glick about the need to address climate change and environmental justice in pipeline certificate reviews before President Biden took office. However, in some ways FERC is a strange agency to take a leadership role. This is because EOs only direct action by cabinet-level government agencies. FERC, as an independent agency, generally is exempt from their authority. Yet, perhaps because of FERC’s independence, the agency has been able to move ahead of other permitting agencies, including the Corps and DOI.
FERC’s embrace of the whole-of-government approach to climate change and environmental justice is evident in a number of orders impacting the midstream sector issued since President Biden took office. The most notable example is the Notice of Inquiry on the Certification of New Interstate Natural Gas Facilities that FERC re-issued Feb. 18. The NOI’s purpose is to guide FERC’s evaluation as to whether a natural gas pipeline facility is required by the “public convenience and necessity,” the standard for pipeline permitting set forth in the Natural Gas Act. FERC had issued a prior iteration of the NOI April 19, 2018, which solicited over 3,000 comments from industry stakeholders. However, FERC declined to move forward with the NOI until it had a full complement of five commissioners, which did not occur until shortly before President Biden took office.
Katy Lukaszewski
Both the 2018 and 2021 NOIs were notable for their references to EOs as drivers of FERC policy. The 2018 version referred to the now-revoked EOs 13807 and 13783 as guideposts for FERC policy. The 2021 NOI, in contrast, makes numerous references to EO 14008. EO 14008 also serves as the primary basis for FERC’s decision to include an entirely new category of questions in the 2021 NOI on Environmental Justice, a topic that was not discussed in 2018. FERC highlights EO 14008’s direction to federal agencies to develop “programs, policies, and activities to address the disproportionately high and adverse human health, environmental, climate-related and other cumulative impacts on disadvantaged communities, as well as the accompanying economic challenges of such impacts.”
The 2021 NOI’s updated questions on how FERC should consider climate change in its certificate evaluations also take on a whole new meaning following the issuance of EOs 13990 and 14008. Both NOIs asked for comments on how and whether FERC should use the social cost of carbon to weigh a pipeline project’s costs and benefits. The questions, revised for 2021, take on new meaning with the revocation of EO 13783 and EO 13990’s directive to resurrect the Working Group. EO 13783 had rescinded 2016 CEQ guidance advising federal agencies to quantify greenhouse gas emissions and consider both the extent to which a proposed project’s emissions would contribute to climate change and also how a changing climate may impact the proposed project in their NEPA documents. While the FERC of 2016 was reluctant to adopt the social cost of carbon to abide by that directive, the current FERC may not be. Chairman Glick has made several statements in support of FERC’s adoption of the social cost of carbon in pipeline decision-making.
Much of what FERC is considering in the 2021 NOI and beyond could be hamstrung by the NEPA regulations updated by CEQ in 2020. For example, federal agencies are no longer permitted to consider the indirect effects or cumulative impacts of their decisions. In the past, this was the primary avenue for environmental justice and climate change advocates to challenge an agency’s NEPA review. While new regulations are expected that restore the indirect effect and cumulative impacts analysis, a timeline for that has not yet been announced. Hence, FERC appears to be searching for ways to incorporate climate change and environmental justice into its Natural Gas Act analysis and to avoid direct reliance on NEPA for authority. It is also unclear whether other permitting agencies are looking to the FERC dockets as indicators for how they should move forward with their own regulatory programs.
While regulations with direct impacts to the midstream industry are in flux, it is incumbent on the sector to also consider regulatory changes to their customers in the upstream sector. The EOs’ focus on the federal leasing and permitting program may result in future restraints on upstream production in basins containing federal lands (or in offshore U.S. waters). Pipelines that operate in these regions or rely on shippers with federal acreage may need to concern themselves with throughput declines as a result of future regulations. While President Biden made a campaign promise not to ban fracking, a pipeline’s customers may be impacted by restraints on permitting and leasing or by new environmental regulations that would restrict production. Lower throughput could be a harbinger of lower revenues.
The uncertainty created by the fluctuating regulations may serve to further reinforce the trend of industry consolidation, which actually predates the Biden administration (such as with Berkshire Hathaway Energy’s acquisition of Dominion Energy’s gas transmission and storage business in 2020), but had waned some during the Covid-19 pandemic. However, it seems to have gained a second wind in 2021 – Energy Transfer LP and Enable Midstream recently announced a combination, while Brookfield Infrastructure Ltd. made an offer to acquire Inter Pipeline Ltd. in Canada. These recent midstream consolidations follow the flurry of consolidations in the upstream space before and during the pandemic, such as the Anadarko/Occidental Petroleum and Chevron/Noble Energy mergers. These upstream and midstream consolidations have occurred for a variety of reasons, which would be an entirely separate article in and of itself. But, for purposes of this particular topic, we think it possible that the federal government’s renewed focus on environmental regulations, particularly climate change and environmental justice, may serve to increase consolidation efforts as companies position themselves to navigate the energy transition. These changes may further restrict growth in the traditional midstream space. Other factors include the tightening of industry financing standards, making access to capital increasingly expensive and difficult, and the exit of more traditional lenders from the space – in some ways, consolidation can also be seen as a means for survival for the smaller and midsize industry players impacted the most by these financing constraints. Additionally, these acquisitions and consolidations may help companies balance their portfolios between lower-carbon energy sources and more traditional oil and gas supplies as a means of diversifying during transitional times, while the increased cash flow they may realize from capitalizing on synergies may help them invest in these solutions.
Emily Mallen is a partner in Sidley’s Washington, D.C., office. A member of the firm’s Energy, Government Strategies, and Project Finance and Infrastructure practice groups, she counsels clients in the natural gas, oil and products pipeline industries in federal regulatory and transactional matters.
Katy Lukaszewski is a partner in Sidley’s Houston office. A member of the firm’s Energy, M&A and Private Equity practice groups, she represents clients in all aspects of mergers and acquisitions and private equity transactions, with significant experience in the energy and consumer products sectors.
The opinions expressed are those of the author and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.