A new era of U.S. energy leadership

A new era of U.S. energy leadership

Fred H. Hutchison
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Gas and crude oil exports are gaining pace and the new administration could give the industry a decisive boost. The U.S. is on track to meet its commitments under COP21

Alittle after the stroke of noon on January 20, 2017, Donald J. Trump will place his hand on a historic Bible, face U.S. Supreme Court Chief Justice John G. Roberts, Jr., and take the oath of office as the 45th President of the United States of America. As this is written (about two weeks after the election), the full implications of a Trump presidency remain impossible to ascertain, but one can make some educated guesses about what the new president and the next congress are likely to do with respect to energy and climate policy matters.

Election results and implications

The #United States are moving towards a higher position of global #energy leadership

The federal government of the United States has three "separate but equal" branches, all of which have been dramatically affected by the 2016 elections:

• | Executive Branch. Not only has President-elect Trump won the right to live in the White House and run the largest global ''enterprise'' from the Oval Office; he has also won the authority to hire and fire some 4,000 men and women to implement his domestic and foreign priorities. Although it will take many months to recruit, vet, and - for the 1,270 most important appointees - secure Senate confirmation, "Team Trump" can begin to shape US energy policy even before the Inauguration Day parade has ended. Topping the agenda for the new administration is ''rolling-back'' the many energy and climate regulations that the Obama administration put in place over the last eight years. (More on that below.)

• | Legislative Branch. In addition to winning the White House, the Republican party maintained its majorities in both chambers of Congress, although the Republican margin in the U.S. Senate was cut by two seats (from 54/46 to 52/48) and the majority in the U.S. House of Representatives was reduced by six seats (with the Republican/Democrat ratio changing from 246/186 to 241/194). While to the uninitiated, it might appear that the Republicans now have a blank check (since they control the House, Senate, and presidency), the practical reality is quite different. Because the Senate operates under long-standing ''filibuster'' rules, a 60-vote margin is still needed to end debate/approve legislation and to confirm Supreme Court nominations. (The House does not have similar rules.)

• | Judicial Branch. The president has sole authority to choose the judges for the federal judiciary (district, appeals, and supreme courts primarily), but these nominations must be submitted to the Senate for that body’s ''advice and consent'' (aka, ''confirmation''). During the 113th Congress (2013-2014), the Democrat majority—led by Sen. Harry Reid (Nevada) -changed Senate rules to permit a simple majority (51 senators) to confirm nominees below the Supreme Court level. The Republican majority in the 114th Congress (2015-2016) - led by Sen. Mitch McConnell (Kentucky) - kept this rule in place. This means that President Trump’s federal district and appeals court nominees will only need 51 votes for confirmation. (Since the Senate has 100 members, in situations where there is a 50-50 tie, the Vice President casts the deciding vote). However, Supreme Court justices will remain subject to the 60-vote threshold, unless Senate Republicans change that rule in early 2017. With one Supreme Court vacancy at present, the stakes are already very high. Since the death of conservative Justice Antonin Scalia in February 2016, the court is now comprised of four ''liberal'' justices, three ''conservative'' justices and one - Justice Anthony M. Kennedy - who is considered the ''swing'' vote. President-elect Trump is expected to name a conservative replacement for Scalia, thus returning the Supreme Court to the balance that existed for many years, namely a court closely divided, leaning right, and with the crucial vote resting in the hands of Justice Kennedy. However, during the four/eight-year tenure of the Trump administration, the president could replace three more aging justices (Justice Ruth Bader Ginsberg is 80 and Justices Stephen G. Breyer and Kennedy are both 78), thereby ensuring a ''conservative'' court for twenty years or more. The energy and climate implications of this possibility are - to say the least - profound since the Supreme Court is the final arbiter of whether executive and/or legislative branch decisions are ''Constitutional'' (i.e. in accordance with the U.S. Constitution).

Regulatory rollback

One reason why the Supreme Court situation is so important is that President-elect Trump has expressed interest in ''rolling back'' regulations imposed by the Obama administration on the U.S. energy industry. Many of those regulations were promulgated by the U.S. Environmental Protection Agency (EPA) under what is best described as a "liberal" interpretation of America’s basic environment statues, such as the Clean Air Act and the Clean Water Act. Premising what I am about to say with the disclaimer that I am not an attorney, most legal practitioners acknowledge that federal regulations that were ''finalized'' years ago could be more difficult to change than rules more recently developed. An example of the former is the rule promulgated by EPA in 2011 to limit mercury emissions (and other air ''toxins'') from coal and oil-fired electric power plants. An example of the latter is the Clean Power Plan (CPP), which was finalized by EPA in 2015 but is now under judicial review by the D.C. Circuit Court of Appeals. (The Supreme Court has prohibited the EPA from implementing the CPP until the appeals court has issued its decision.) Other regulations that are likely to be revisited by the Trump administration include those pertaining to oil and gas development on federal lands (about one third of the nation’s land is controlled by the U.S. government) and those offshore zones that are also under federal jurisdiction. As one might expect, the Obama administration’s political leaders are furiously finalizing rules aimed at preserving President Obama’s climate and ''clean energy'' legacy. However, there is a little-used U.S. law—the Congressional Review Act—that could permit Congress and President-elect Trump to invalidate any Obama administration regulations (including non-energy related rules) submitted after May 2016. According to the Congressional Research Service this mechanism requires only a majority vote in both the House of Representatives and the Senate and could, therefore, provide a way in early 2017 for the Republicans to eliminate many of the Obama administration’s "midnight" initiatives.

COP21/Climate change

Beyond his interest in scaling-back Obama-era regulations, President-elect Trump also said during the campaign that he wants to ''pull the United States out'' of the climate agreement reached during the COP21 meeting in Paris in 2015. The COP21 agreement came into force on Nov. 4, 2016, which was 30 days after the required number of signatory nations (55) representing the requisite threshold percentage of greenhouse gas emissions (55%) ratified the agreement. There are formal means for the United States to withdraw from the COP21 agreement within one year after President-elect Trump takes office (by pulling the United States out of the underlying treaty) or at the end of his first term (by using the ''four-year exit'' mechanism within COP21 itself). However, if the President-elect wants to avoid the political firestorm (both at home and abroad) that would likely follow a formal U.S. withdrawal from COP21, he could just not implement/defend the Clean Power Plan (CPP), which is the principal mechanism whereby the United States plans to meet its COP21 obligations. Ironically, all of this may be more symbolic than substantive. Under current market conditions—with natural gas and some renewables now cheaper than coal - the United States has already met the CPP’s 2024 goal for reducing carbon dioxide emissions and the CPP’s 2030 target for cutting coal use. The United States is, therefore, ''on track'' to meet its’ COP21 commitments whether the country remains a signatory party to the Paris agreement or not.

There are formal means for the United States to withdraw from the COP21 agreement within a short time, however, if Trump wants to avoid the political firestorm that would likely follow a withdrawal, he could just not implement the Clean Power Plan

Potential areas of opportunity

However, there are various actions (not only legislative) that Trump’s administration and a Republican-led Congress could take to support the burgeoning U.S. energy exports industry:

• | LNG Export Authorizations. U.S. LNG exporters must obtain approvals from two federal agencies to export natural gas. The existing regulatory process - as revised by the U.S. Department of Energy (DOE) in 2014—in essence requires the two reviews to be completed sequentially with the DOE delaying its final authorization (to export the gas molecules) until after the agency with jurisdiction over the siting of the LNG facility (generally the Federal Energy Regulatory Commission "FERC") has issued its final ''order'' to proceed and resolved any "appeals" of that order. Bills pending before Congress would speed up that process (by five to eleven months) by requiring DOE to reach a final ''molecule'' export decision within a few weeks after FERC releases its final environmental documentation on the project itself. Because of the bipartisan momentum already achieved, we are optimistic that 114th Congress will enact such a requirement in 2016, but if Congress fails to do so, or should President Obama refuse to sign such a change into law, then the Trump administration could act unilaterally in 2017. (This is possible because the present DOE regulatory framework was created through executive branch rule-making without direct congressional involvement.)

• | Energy Infrastructure Permitting. A related but broader issue concerns the growing campaign by U.S. environmental groups to slow - by any means possible - major oil and gas infrastructure projects as a way to keep fossil fuels ''in the ground.'' Of course, LNG export projects are primary targets, but the keep-it-in-the-ground folks are also working hard to slow/stop interstate pipeline and other midstream projects that likewise fall under FERC jurisdiction. This opposition has expanded to the point where FERC meetings are now often closed to the public because of disruptions and FERC commissioners have even had protestors at their homes! Undoubtedly, those who support the timely development of new U.S. energy infrastructure will see the wisdom of joining with the Trump administration and sympathetic members of Congress to protect and enhance the FERC infrastructure review process. Likely focal points will be making sure that the agency has a full complement of commissioners and sufficient staff/budgetary resources to meet its critical energy infrastructure obligations.

• | Credit Enhancements. While current and prospective U.S. LNG exporters have labored to secure their FERC and DOE authorizations, another problem has emerged recently. For nearly two years, there have been almost no long-term LNG sales and purchase agreements involving U.S. projects, and this situation has been particularly problematic for those companies that require non-recourse (off-balance sheet) financing to build their projects. However, the current ''buyers’ market'' will not last indefinitely, and many experts are predicting that the global LNG demand will outstrip supply in the early 2020s. Since new LNG projects can take as long as five years to complete after a final investment decision, U.S. natural gas exporters must line up offtake agreements in the early years of the Trump administration (i.e. 2017-2018) in order to beat other nations’ LNG projects to market. A proactive approach by the U.S. Overseas Private Investment Corporation (OPIC), the Export-Import Bank of the United States (EXIM Bank), and similar organizations could possibly help bring smaller and less creditworthy customers to the table, thereby expanding the pool of ''bankable'' offtakers for U.S. LNG exports. While the EXIM Bank (for example) has typically avoided providing support for ''commodities,'' it is hard to argue that LNG - which requires billion dollar liquefaction facilities to manufacture - is demonstrably different from other manufactured products (e.g., steel). As mentioned at the outset, it is far too early to make definitive predictions about what the next few years will bring. However, there can be no doubt that we are entering a new era. U.S. exports of LNG, crude oil, and natural gas liquids are beginning in earnest and a Republican-controlled government will take office in January. This confluence of events is likely to create conditions that will elevate the United States to a new position of global energy leadership.