Belcher: Guaranteed Policy and Regulatory Uncertainty

Because we are in an election year, politicians are sure to be making some big promises over the coming months. With an expectedly close presidential election and small margins of control in both houses of Congress, we are again susceptible to massive swings in political power and public policy outcomes. These dynamics ultimately create more policy and regulatory uncertainty for the U.S. oil and gas industry.

Consider the EPA’s methane rule, where a final regulation was issued in December after years of conflicting regulatory, congressional and legal actions dating back to 2012. For years, ambiguity regarding that rulemaking has left oil and gas producers, service companies and midstream companies uncertain about the investments they need to make to comply with emissions leaks and mitigation requirements. After 11 years, while there appears some resolution about the rule’s leak detection and mitigation and repair program, litigation is likely to proceed, especially regarding the “Super Emitter Response Program.”

Another example of regulatory uncertainty pertains to the rollout of many provisions of the Inflation Reduction Act (IRA). In late December, the Treasury Department issued proposed rules on the use of the IRA’s 45V Clean Hydrogen Production Tax Credit that, according to many hydrogen advocates in industry and government, limit the ability of non-wind and solar energy sources to be competitive in the hydrogen market.

Draft requirements for the $3 per kilogram tax credit would require qualified projects to show, by 2028, that every hour of electricity they use to produce hydrogen is matched by another hour of qualifying green electricity. U.S. Sen. Joe Manchin (D-W.Va.), who played a key role in writing and passing the IRA, was joined by other key Senate Democrats in criticizing the proposal, which Manchin said did not reflect the intent of the statute and would “kneecap” U.S. hydrogen producers. It is unclear how the administration is going to respond to this feedback.

Guidance and regulations regarding other provisions of the IRA and federal regulations concerning greenhouse gas emissions reporting are due to be released in the coming weeks and months. Resource challenges within federal agencies, coupled with political and policy disputes surrounding their details, are creating further uncertainty for those impacted by these policy decisions. The complexities of election year politics exacerbate the situation.

For the Biden administration, this means walking a political tightrope when it comes to energy and environmental policy. With U.S. oil and natural gas production and exports at record levels, the Republican arguments regarding the administration’s “War on Energy” are less effective. At times, the administration likes to take credit for these accomplishments, but for some people, they appear to be in direct contradiction to Democratic climate policy goals. Additionally, bragging about oil and gas production might deflect criticism over high energy prices, but it doesn’t sit well with the party’s base.

President Joe Biden does have the advantage of not having to face a primary challenger who could flank him on the left regarding climate policy. As a result, he can boast about the climate accomplishments in the IRA and from the COP28 climate conference, as well as U.S. energy and national security benefits associated with high levels of energy production and exports to allies overseas.

Meanwhile, Republican candidates will continue to criticize the Biden administration for delaying and paring down oil and gas lease sales on federal lands and waters, fueling inflation and high energy prices and the burdens that climate and ESG-related policies are having on businesses.

Such positions are playing well in the primary with the Republican base. Republican policy alternatives include more federal leasing for oil and gas, less regulation and more regulatory reform, and rolling back federal laws including the methane rule and federal grants and tax credit provisions of the IRA and Bipartisan Infrastructure Law, like the 45Q tax credits for carbon capture and storage and funds for orphan well remediation. While oil and gas producers would benefit from more favorable policies toward leasing and permitting, they could also benefit from having stable regulatory and tax policies in place so they can make informed investment decisions with certainty.

As we head toward Election Day, we can be certain that the administration will promulgate more regulations that will be consequential to the oil and gas industry. We also can be certain that Republican and Democratic candidates will spar over energy and climate policies. Finally, given an evenly divided nation, we can be certain that through Election Day and beyond, we will continue to have policy and regulatory uncertainty.