In 2020, the Trump administration exercised significant influence over the oil and gas industry, most notably by way of relevant federal regulatory agencies. These include the Environmental Protection Agency (EPA), Committee on Foreign Investment in the United States (CFIUS), Department of Energy (DOE), Federal Energy Regulatory Commission (FERC), Internal Revenue Service (IRS), Department of Justice (DOJ) and Federal Trade Commission (FTC), among others.
Despite the pandemic and major distractions such as the election, these agencies were active throughout 2020, each advancing their respective agendas and that of the Trump administration in meaningful ways. Indeed, the final quarter of 2020 saw significant regulatory activity as federal agencies sought to complete pending rulemakings and prevent priority rules from potentially becoming subject to a regulatory freeze under the Biden Administration by ensuring that they become effective prior to Inauguration Day on Jan. 20.
This article details the major petroleum-relevant agency actions in 2020. Each section provides a brief overview of the relevant agency and also provides, where possible, an indication of which actions are most susceptible to reversal or amendment under the incoming Biden Administration.
CFIUS is an interagency group tasked with reviewing certain foreign investments in the United States, specifically to determine whether such investments are a threat to national security. CFIUS is chaired by the Secretary of the Treasury, with members from the Departments of Homeland Security, Commerce, State, Energy, Defense, and Justice as well as the Office of the U.S. Trade Representative and the Office of Science & Technology Policy. Despite the pandemic, 2020 was a very active year for CFIUS.
- Expanded CIFIUS Jurisdiction. In February 2020, the Foreign Investment Risk Review Modernization Act (FIRRMA) regulations went into effect, which expanded CFIUS’s jurisdiction to include non-controlling investments in certain categories of U.S. business. Of particular relevance to the oil and gas industry is CFIUS’s new focus on non-controlling foreign investment in certain “critical infrastructure” as defined in the FIRRMA regulations, including certain interstate oil and gas pipelines, oil and gas refineries, LNG import and export terminals, and underground storage facilities.
- In addition to the increased focus on critical infrastructure, CFIUS’s new regulations regarding real estate transactions are likely to capture additional energy related transactions. Under FIRRMA’s new rule, the purchase, lease or concession of U.S. real estate is subject to CFIUS review when the real estate is (i) in close proximity to a U.S. military installation or other sensitive U.S. government location; or (ii) is located within, or will function as part of, an air or maritime port. This expansion of CFIUS’s jurisdiction is likely to affect energy-related projects that require the acquisition or lease of certain real estate.
- The FIRRMA regulations regarding real estate might also apply to the acquisition of offshore blocks. In February of 2020, the U.S. Department of the Interior warned potential purchasers of offshore blocks that CFIUS’s new regulations under FIRRMA include national security reviews of transactions involving certain real estate located within the territorial sea of the U.S., including some oil and gas lease blocks located within the territorial sea of the U.S. within a certain proximity to sensitive U.S. government facilities.
- Over the last decade, roughly 15% of CIFIUS-reviewed transaction have been energy related. Because notices and declarations filed with CFIUS are confidential, particular details on transactions reported to CFIUS are made public only if the parties to the transaction choose to publicize such information. CFIUS does, however, provide insight into the type and number of transactions it has reviewed in recent years. In CFIUS’s annual report, released in June 2020, CFIUS describes the number of transactions that were reviewed in 2019. Specifically, CFIUS reported that roughly 15% of the transactions it reviewed between 2010 and 2019 were in the mining, utilities, and construction business sector. In 2019, CFIUS reviewed cases involving electric power generation, transmission and distribution, natural gas distribution, pipeline transportation of crude oil, and oil and gas extraction, among others. The annual report also highlights the increased focus on Chinese and Japanese investment in any U.S. business, with transactions involving Chinese and Japanese acquirers constituting the largest categories of all notices filed with CFIUS in 2019
- New CIFIUS enforcement website. CFIUS also established an enforcement website during the first half of 2020, which includes an email address for tips, referrals, or other relevant information. In particular, CFIUS says on the CFIUS Monitoring and Enforcement webpage that it is primarily interested in (i) the identification of a contemplated or completed foreign investment in, or an acquisition of, a U.S. business or real estate that may be within CFIUS’s purview; (ii) incidents that may imperil or constitute an apparent violation of an existing CFIUS mitigation agreement or order; and (iii) other issues requiring the attention of the CFIUS Monitoring & Enforcement department. The establishment of an enforcement website signals an increased effort by CFIUS to identify and evaluate a greater number of transactions.
DOE is a cabinet-level department created to oversee the nation's nuclear weapons program, naval reactor production, other energy-related supervision, and domestic energy production. in 2020, DOE took actions that indicate an increased commitment to the advancement and protection of U.S. critical energy infrastructure. The agency has also been active in its approval of energy related projects, specifically in the LNG sector.
- Increased emphasis on securing critical energy infrastructure. In November 2020, DOE launched the Operational Technology Defender Fellowship, which it describes as deepening “the cybersecurity knowledge of key U.S. front-line critical infrastructure defenders.” The Operational Technology Defender Fellowship was designed, in part, to secure U.S. energy infrastructure from the threat of malign actors. The program facilitates the engagement of operational technology security managers throughout the energy sector with cyber and national security experts within the U.S. government to gain a greater understanding of the strategies and tactics of the United States’ adversaries and how U.S. government cyber operators defend the United States.
- Approval of Texas LNG exports. In February of 2020, DOE announced the issuance of four long-term orders authorizing the export of domestically produced LNG from the following LNG export projects in Texas: (i) Annova LNG, (ii) Rio Grande LNG, (iii) Texas LNG, and (iv) Corpus Christi LNG’s Stage III. According to the U.S. Secretary of Energy, “the export capacity of these four projects alone is enough LNG to supply over half of Europe’s LNG import demand.” Current Deputy Secretary of Energy Mark W. Menezes emphasized that “approval of these four LNG export authorizations in Texas is another step by the Trump Administration to ensure our country’s energy and national security.”
- Approval of Jordan Cove LNG exports. On July 6, 2020, DOE issued an order authorizing Jordan Cove to export LNG from the United States and Canada. In issuing its order, DOE found that there were a number of reasons for granting the authorization including, among other things, changes in market demand over time, the relative uncertainty associated with applications to export significant quantities of domestically produced LNG, and the fact that DOE found no adequate basis to conclude that Jordan Cove’s proposed exports would be inconsistent with the public interest.
- Approval of Alaska LNG exports. In August 2020, DOE authorized Alaska LNG Project LLC to export LNG produced from Alaskan sources by vessel from the Alaska LNG Project to any country with which the U.S. does not have a free trade agreement. In its order, DOE found that the opponents of the Alaska LNG project had failed to overcome the statutory presumption that Alaska LNG’s proposed exports are consistent with the public interest. FERC authorized Alaska Gasline Development to site, construct and operate the Alaska LNG Project with a liquefaction capacity of 20 mtpa of LNG.
- Changes in a Biden Administration. The Washington Post reported on Dec. 15 that President-elect Joe Biden will name former Michigan Gov. Jennifer Granholm as the secretary of energy. Granholm is reportedly a strong advocate for the development of alternative energy technologies and her nomination would be a clear sign from the Biden administration that the Department of Energy will play a role in combating climate change. In the months leading up to the election, Joe Biden pledged to build a clean energy future by stating that he would ensure that the U.S. achieves a 100% clean energy economy and net-zero emissions no later than 2050.
FERC is an independent agency comprising up to five commissioners appointed by the president with the advice and consent of the Senate. FERC’s authority includes, among other things, regulation of the interstate transmission of electricity, natural gas and oil and the review of proposals to construct LNG terminals.
- New FERC Chairman. On Nov. 5, President Donald Trump replaced Neil Chatterjee, the Republican chairman of FERC, with commissioner James Danly who, as a commissioner, reportedly took a more conservative approach than Chatterjee to federal energy policy, specifically with respect to clean energy initiatives. The White House has not issued a statement about the decision, but certain sources have speculated that it was Chatterjee’s decision to hold a technical conference on Sept. 30 on carbon pricing and his subsequent statement encouraging the organized electric power markets to explore ways to accommodate state-mandated carbon pricing that resulted in Trump’s decision to replace him with Danly. FERC commissioners serve staggered five-year terms. Danly’s term will end on June 30, 2023.
- New FERC Commissioners. On Nov. 30, the Senate confirmed Trump’s nominations of Mark Christie and Allison Clements to FERC. These confirmations bring the number of commissioners to the full complement of five.
- New rule regarding aggregated distributed energy resources. On Sept. 17, FERC established a final rule that it describes as “amending its regulations to remove barriers to the participation of distributed energy resource aggregations in the capacity, energy, and ancillary service markets operated by Regional Transmission Organizations [RTO] and Independent System Operators [ISO].” The rule gives aggregated distributed energy resources the opportunity to participate in wholesale markets when the individual distributed energy resources are smaller in size. FERC found, in adopting the rule, that the previous market rules were “unjust and unreasonable in light of barriers that they presented to the participation of distributed energy resource aggregations in the RTO/ISO markets, which reduce competition and fail to ensure just and reasonable rates.” Some of the key aspects of the rule are as follows:
- FERC directed the ISOs/RTOs to implement a minimum size requirement not to exceed 100 kW for all distributed energy resource aggregation, stating that a minimum size requirement not to exceed 100kW will help improve competition in the markets and avoid confusion about appropriate minimum size requirements for distributed energy resource aggregations under existing or new participation models.
- FERC required that each RTO/ISO’s rules be technology neutral in that they do not prohibit particular types of distributed energy resource technology from participating in distributed energy resource aggregations, finding that such limitations would create a barrier to entry for emerging or future technologies.
- FERC directed RTO/ISO to reject bids from a distributed energy resource aggregator if its aggregation includes distributed energy resources that are customers of utilities that distributed 4 million megawatt-hours or less in the previous fiscal year unless the relevant electric retail regulatory authority permits such customers to be bid into the RTO/ISO markets by a distributed energy resource
- New regulations regarding small power producers and cogenerators. On July 16, FERC revised its regulations governing small power producers and cogenerators under the Public Utility Regulatory Policies Act of 1978 (PURPA). According to previous Commission Chairman Neil Chatterjee, the rule modernizes regulations in a way that meets FERC’s statutory obligations, while also protecting consumers and preserving competition. In the final rule, among other things, FERC grants additional flexibility to state regulatory authorities by establishing avoided cost rates for qualifying facility sales inside and outside of organized electric markets. The rule also grants states the ability to require energy rates (but not capacity rates) to vary during the life of a qualifying facility contract.
- Approval of Alaska LNG Project. On May 21, FERC authorized the Alaska Gasline Development Corp. to liquefy and export LNG in connection with the Alaska LNG project. The commission granted a Section 3 Natural Gas Act authorization for to site, construct and operate the Alaska LNG project. The project consists of liquefaction facilities designed to produce up to 20 million metric tons per annum (MMTPA) of LNG.
PHMSA, which is part of the Department of Transportation, is responsible for regulating for the safe and secure movement of hazardous materials by all modes of transportation, including pipelines. PHMSA’s Office of Pipeline Safety regulates the design, construction, operation, maintenance and spill response planning for natural gas and hazardous liquid (including oil) transportation pipelines.
In 2020, PHMSA focused on responding to the COVID-19 pandemic and furthering its goals for de-regulatory reform. In addition, 2020 saw some long-awaited pipeline safety regulatory developments, such as the effective date of the first part of the Gas Mega Rule. Pipeline safety regulatory developments in 2020 included:
- Final Rule on underground natural gas storage facilities. On Feb. 12, PHMSA published a final rule to amend standards for underground natural gas storage facilities, incorporating API Recommended Practices 1170 and 1171, clarifying the threshold for reportable changes and events, and revising the definition of underground natural gas storage facility. The final rule builds upon an interim final rule issued on Dec. 19, 2016 establishing regulations in response to the 2015 Aliso Canyon natural gas leak incident and the subsequent mandate in section 12 of the Protecting our Infrastructure of Pipelines and Enhancing Safety Act of 2016. This rule is not expected to be rolled back by the incoming Biden administration.
- Stays of enforcement and compliance deadlines due to the pandemic. In March and April, PHMSA issued guidance documents giving notice that it was exercising its discretion to stay certain enforcement actions in response to the COVID-19 national emergency. This exercise of discretion included a stay of the compliance deadlines for the Gas Mega Rule until Dec. 31, 2020 for any issues attributable to the COVID-19 national emergency.
- Proposed rulemaking regarding hazardous liquid pipelines. On April 16, 2020, PHMSA published a notice of proposed rulemaking (NPRM) to reduce regulatory burden and improve regulatory clarity for hazardous liquid (including oil) pipelines. In part 190, PHMSA proposed to clarify the requirements for producing records during an inspection or investigation and reduce the burden required to submit confidential commercial information under most circumstances. In part 194, PHMSA proposed amendments that would streamline the oil spill response plan requirements. In part 195, PHMSA proposed amendments that would relieve accident reporting burdens, allow remote monitoring of rectifier stations and clarify integrity management guidance. The comment period for the NPRM ended on June 15, with a target date for a final rule in April 2021, but the priorities and timeline for this rulemaking are expected to change under the incoming Biden administration.
- Proposed rulemaking regarding gas pipelines. On June 1, 2020, PHMSA published an NPRM on proposed amendments to gas pipeline regulations, which included proposals on incident reporting thresholds, remote monitoring of rectifier stations, distribution pipelines, pressure vessels, welder requalification, low-stress pipeline testing and incorporating ASTM standards for polyethylene pipe. The comment period for the NPRM ended on Aug. 10, with an expected target date for a final rule in 2021, but the priorities and timeline for this rulemaking are expected to change under the incoming Biden administration.
- Part 1 of the Gas Mega Rule takes effect. On July 1, the first part of the Gas Mega Rule took effect. The Gas Mega Rule part 1 finalized requirements for: integrity management; maximum allowable operating pressure (MAOP) for previously untested pipelines; assessment of pipelines in populated areas; reporting of exceedances of MAOP; seismicity; in-line inspections; integrity management reassessment intervals; and related recordkeeping provisions. The compliance deadlines are subject to a six-month stay of enforcement for issues attributable to the COVID-19 national emergency.
- Hazardous liquids pipeline rule takes effect. Also on July 1, the long-awaited hazardous liquids pipeline rule took effect. This final rule was the culmination of a multi-year rulemaking effort to address congressional mandates, National Transportation Safety Board recommendations, and public input. The final rule extends reporting requirements to certain hazardous liquid gravity and rural gathering lines; requires the inspection of pipelines in areas affected by extreme weather and natural disasters; requires integrity assessments at least once every 10 years of onshore hazardous liquid pipeline segments located outside of high consequence areas and that are ‘‘piggable’’; extends the required use of leak detection systems beyond high consequence areas to all regulated, non-gathering hazardous liquid pipelines; and requires that all pipelines in or affecting high consequence areas be capable of accommodating in-line inspection tools within 20 years, unless the basic construction of a pipeline cannot be modified to permit that accommodation.
- Proposed rulemaking regarding gas transmission pipelines. On Oct. 14, PHMSA published an NPRM to amend requirements for gas transmission pipeline segments that experience a change in class location. PHMSA proposed to add an alternative set of requirements operators could use, based on implementing integrity management principles and pipe eligibility criteria, to manage certain pipeline segments where the class location has changed from a Class 1 location to a Class 3 location. The comment period for the NPRM ended on Dec. 14. The target date for a final rule has not been announced, but the priorities and timeline for this rulemaking may change under the incoming Biden administration.
- New PHMSA reauthorization law. On Dec. 21, Congress passed a new PHMSA reauthorization bill, the PIPES Act of 2020, reauthorizing funding for federal pipeline safety programs through Fiscal Year 2023. The reauthorization bill includes a new mandate to adopt regulations for LNG facilities, which has followed recommendations from the Government Accountability Office and the Inspector General for PHSMA (as well as other agencies) to update regulations and technical standards covering LNG facilities.
EPA’s mission is to protect human health and the environment, which includes the goal of ensuring Americans have clean air, land and water. The agency’s primary tool in accomplishing this goal is the development and enforcement of regulations implementing federal environmental laws. 2020 witnessed numerous regulatory actions from EPA with potential impacts for the oil and gas sector, as the agency sought to advance the regulatory reform priorities established by the Trump administration. This summary contains brief updates on some of these key environmental developments, the majority of which represented de-regulatory efforts. While many of these actions may be the target of rollbacks under a Biden administration, the summary highlights actions that may receive priority focus in light of the president-elect’s platform.
- Methane emissions rollback. On Sept. 14, EPA published final amendments to the New Source Performance Standards (NSPS) for Subpart OOOO/OOOOa to render the NSPS inapplicable to oil and natural gas transmission and storage emissions sources. The rule also rescinded the methane-specific requirements of Subpart OOOO/OOOOa for oil and natural gas production and processing sources. This constitutes a rollback of the Obama administration’s Subpart OOOO/OOOOa rule. As a result, the requirements of the subpart no longer apply to sources in the transmission and storage segment, and the methane requirements have been eliminated for sources that remain subject to the Subpart. A second, related rule, effective upon publication on Sept. 14, made technical amendments to Subpart OOOO/OOOOa to simplify compliance, including changes to leak monitoring and repair schedules. Based on Biden’s focus on climate change and emissions associated with fossil fuels, Subpart OOOO/OOOOa could see additional changes under the next Administration.
- Once in, always in, amendment. On Nov. 19, EPA amended the general provisions of the National Emission Standards for Hazardous Air Pollutants (NESHAP) to allow major sources of air emissions to functionally limit their potential to emit pollutants and thus qualify for regulation as a smaller “area source” of emissions. Specifically, major sources can now “reclassify” themselves as area sources by limiting their potential to emit hazardous air pollutants to below the major source thresholds. The change implements EPA’s withdrawal of the longstanding “Once In, Always In” policy that previously prevented such reclassifications. As a result, major sources that reduce their potential to emit can immediately become subject to the applicable area source requirements, which generally are less stringent. The revised approach is more consistent with the plain language of the Clean Air Act, the agency explains in its rulemaking.
- NSR project emissions accounting. On Nov. 24, EPA published a long-anticipated rule that allows sources to consider both emissions increases and decreases from a proposed project during Step 1 of the two-step New Source Review (NSR) major modification applicability test. The rule allows sources to “aggregate emissions from nominally separate activities when there is an apparent technical or economical inter-connection between those activities.” There is, however, a rebuttable presumption that activities that occur outside a three-year period are not related and should not be grouped into one project. The change is likely to reduce the number of projects required to undergo federal permitting.
- Ambient air quality standards. EPA continued its efforts to maintain the current levels of the National Ambient Air Quality Standards (NAAQS), retaining the current NAAQS for both PM2.5 and ozone instead of making them more stringent. In justifying its final decision to retain the PM2.5 standards on Dec. 18, EPA concluded that “there are important uncertainties in the evidence for adverse health effects below the current standards and in the potential public health impacts of reducing ambient PM2.5 concentrations below those standards.” With respect to ozone, EPA determined in a final rule published on Dec. 31, that “current health effects evidence and quantitative information” warrant the retention of the current standards. Despite its finalization late in Trump’s term, the PM2.5 rule became effective on Dec. 18 and the ozone rule was effective upon publication in the Federal Register on Dec. 31, making them out of reach of the regulatory freeze that Biden is anticipated to issue on Jan. 20. Nevertheless, EPA may undertake a regulatory action to reverse course under the Biden administration, especially in light of recent studies linking air quality to COVID-19 risk and the president-elect’s focus on environmental justice issues.
- Proposed CSAPR update rule revisions. EPA took comments on a proposed rule that would make NOx emissions trading budgets more stringent under the Cross-State Air Pollution Rule (CSAPR). While EPA is proposing to determine that only electric generating units (EGUs) are subject to the trading program, EPA requested comments on the potential inclusion of non-EGUs, including sources in the oil and gas sector, in the final rule. EPA explained that it has limited information on potential NOx control strategies for non-EGUs and requested information about the feasibility and cost of these controls. Comments were due Dec. 14. EPA’s consideration of non-EGUs as potential additions to the CSAPR emissions trading program suggests that EPA will begin to focus more closely on these sources, including those in the oil and gas sector, in upcoming rules addressing the ozone NAAQS.
- New guidance on startup, shutdowns and malfunctions. EPA issued a new guidance memorandum on Oct. 9 that reflects the Trump administration’s efforts to reverse course on the prior administration’s treatment of excess emissions during periods of startup, shutdown and malfunction (SSM). This memorandum represents a formal change in EPA’s position in the 36-state “SIP call” that the agency issued in 2015, which found that neither exemptions from emissions requirements during SSM periods, nor affirmative defenses for periods of excess emissions related to SSM events are consistent with the Clean Air Act. EPA plans to continue its review of the 2015 SIP call to consider whether it should be maintained, modified, or withdrawn. EPA anticipates completing this review by Dec. 31, 2023.
- Redefined Clean Water Act jurisdiction. EPA, in conjunction with the U.S. Army Corps of Engineers, completed its multi-year effort to redefine the scope of Clean Water Act jurisdiction. With the publication of the final rule addressing the definition of “waters of the United States” (WOTUS) on April 21, the agencies ceded federal jurisdiction over certain waters. The rule will generally restrict the reach of several federal programs, including those that regulate point-source discharges under Section 402, discharges of dredged or fill material under Section 404, and oil pollution prevention and response. This issue has been highly litigated for a number of years and will continue to be for the foreseeable future.
- Updated regulations regarding 401 certifications. EPA finalized a rule on July 13, to update its regulations implementing Section 401 of the Clean Water Act. The rule was developed in response to EO 13868, “Promoting Energy Infrastructure and Economic Growth,” which specifically directed EPA to assess the regulations to address concerns that the regulations were “causing confusion and uncertainty and … hindering the development of energy infrastructure.” The final rule establishes procedures designed to promote consistency and certainty in federal licensing and permitting for activities that may result in a discharge from a point source into a water resource of the United States.
U.S. Army Corps of Engineers
The Corps’ mission is to “deliver vital public and military engineering services; partnering in peace and war to strengthen our nation’s security, energize the economy and reduce risks from disasters.” This includes oversight of some energy projects.
- Public Comment on NWP renewal. The U.S. Army Corps of Engineers took comment on its proposed early renewal of the nationwide permitting (NWP) program, which authorize certain activities, including pipeline projects, under Section 404 of the Clean Water Act and Section 10 of the Rivers and Harbors Act of 1899. Among other things, the proposal would split NWP 12 into three authorizations, separating oil and gas pipelines from other pipeline projects and utility lines, e.g., power lines. The comment period closed on Nov. 16.
Council on Environmental Quality (CEQ)
CEQ coordinates Federal environmental efforts. The entity works closely with other offices in the development of environmental policies and initiatives. CEQ was established within the Executive Office of the President by Congress as part of the National Environmental Policy Act of 1969 (NEPA).
- NEPA overhaul. In July, CEQ overhauled regulations implementing NEPA, including by revising definition of “effects” and removing the requirement that cumulative impacts be considered. Under NEPA, certain infrastructure projects like bridges and pipelines are subject to rigorous environmental review and public input. The effect of the recent changes is to speed up agency reviews of proposed projects. This regulatory rollback is a likely target for reversal under the Biden administration.
Securities and Exchange Commission (SEC)
Created after the stock market crash of 1929, the SEC is an independent agency with a three-part mission: to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation. To that end, the SEC enforces statutory requirements regarding public disclosures by corporations, specifically, requirements that public companies and other regulated entities submit quarterly and annual reports, along with other disclosures.
- New rules regarding public disclosure. On Dec. 16, the U.S. Securities and Exchange Commission adopted final rules to require certain publicly reporting oil, natural gas and mineral companies to disclose payments made to the U.S. federal government or to foreign governments for the commercial development of oil, natural gas or minerals. The SEC originally adopted rules related to this topic in August 2012, but those rules were subsequently vacated by a federal court in July 2013. The new rules will cover nearly all publicly reporting companies in the U.S. that are engaged in upstream oil and gas activities, as well as some companies engaged in gathering and processing or other midstream activities. Oilfield services companies and companies engaged in downstream activities should be excluded. The rules also cover publicly reporting companies engaged in mining activities.
Internal Revenue Service (IRS)
The IRS is a bureau of the Department of the Treasury and is responsible for the administration and enforcement the United States internal revenue laws. In 2020, the IRS issued several key pieces of guidance relevant for energy companies, primarily to implement existing laws and provide taxpayers with needed certainty regarding the application of such laws.
- Pandemic-related relief, generally. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, enacted on March 31 in response to the COVID-19 pandemic, contains roughly $2 trillion in economic relief to eligible businesses and individuals, including modifications to the Internal Revenue Code (IRC) with significant implications for the energy industry. The CARES Act contains various tax relief measures that may present opportunities for energy companies, including, in part, the following:
- Five-year net operating loss carrybacks with no taxable income limitation
- Temporary modification of interest deduction limitations
- Acceleration of alternative minimum tax credits
- Modification of the excess business loss rules
- Pandemic-related relief, renewable energy. On May 27, in response to the COVID-19 pandemic, the IRS issued Notice 2020-41, relating to the beginning of construction requirement for both the production tax credit for renewable energy facilities under IRC Section 45 and the investment tax credit for energy property under IRC Section 48. Prior to the notice, taxpayers generally were eligible for credits under a safe harbor if they completed construction of alternative energy projects within four years of the beginning of construction. This safe harbor was extended to five years for projects which began construction in either 2016 or 2017. The notice also allowed taxpayers to avoid a credit sunset at the end of 2019 by prepaying costs for property or services, initially for receipt in early 2020, until Oct. 15, 2020, to receive such property or services and still lock in the 2019 credit amount.
- Tax credits for carbon capture. On May 28, the IRS issued long-awaited proposed regulations relating to the federal income tax credit for carbon capture, utilization, and sequestration under IRC Section 45Q. The proposed regulations cover critical topics relating to the meaning of “secure geological storage” (required for credit eligibility), the life-cycle analysis required for utilized carbon, the ability to transfer the credit between taxpayers and the circumstances that may give rise to recapture of the credit. The proposed regulations provide additional certainty regarding credit availability and may cause investors and developers to move forward with planned carbon capture projects that had been tabled pending such guidance. Prior guidance had been issued by the IRS earlier in February 2020, under IRS Notice 2020-12 and Rev. Proc. 2020-12, which addressed beginning of construction and partnership allocation issues. Final regulations are anticipated in early 2021.
- Clarification of “real property” under IRC Section 1031. On Nov. 23, the IRS issued final regulations providing guidance as to what constitutes “real property” for purposes of the Section 1031 like-kind exchange rules. The proposed regulations draw from a variety of other federal income tax rules defining “real property,” but are intended to craft a definition that is unique to the policies of Section 1031. The proposed regulations indicate that real property under Section 1031 generally includes (i) land, (ii) improvements to land, which include inherently permanent structures and the structural components of inherently permanent structures, (iii) unsevered natural products of land, including growing crops, plants and timber, mines, wells and other natural deposits, and (iv) water and air space superjacent to land. These regulations provide additional certainty to oil and gas companies desiring to dispose of mineral interests and certain midstream assets in a tax-deferred manner.
- Clarification of limitations on interest deductibility. On July 28, the IRS issued final regulations regarding the limitations on the deductibility of business interest expense under IRC Section 163(j) (which limitation was temporarily modified by the CARES Act). The regulations provide guidance to taxpayers on how to calculate the limitation, what constitutes interest for purposes of the limitation, which taxpayers and trades or businesses are subject to the limitation, and how the limitation applies in consolidated group, partnership, international and other contexts. Importantly, the IRS changed its position set forth in prior proposed regulations and allowed taxable income, for purposes of applying the limitation, to be calculated with an addback for depreciation, depletion or amortization deductions that are capitalized into inventory under IRC Section 263A—a change that could be significant for those in the energy industry with significant inventory (such as drillers, refiners and LNG).
- Clarification and expansion of bonus depreciation. On Sept. 21, the IRS issued final regulations related to the additional first-year depreciation deduction under IRC Section 168(k). The final regulations reflect and further clarify the increased deduction and the expansion of qualified property, particularly to certain classes of used property, authorized by the Tax Cuts and Jobs Act. The final regulations generally affect taxpayers who depreciate qualified property acquired and placed in service after Sept. 27, 2017 and will be of particular interest to energy companies utilizing substantial amounts of heavy equipment.
- Regulations regarding partnership withholding rules. On Oct. 7, the Treasury Department and the IRS published final regulations regarding the withholding requirement under IRC Section 1446(f) for transfers of certain partnership interests. These rules will be of particular significance to energy companies structured as publicly traded partnerships. The Tax Cuts and Jobs Act imposed new withholding obligations under IRC Section 1446(f) on the transfer by a non-U.S. owner of an interest in a partnership engaged in a U.S. trade or business. The final regulations address both general withholding rules and related exceptions to them, as well as special rules applying to brokers in the case of transfers of publicly traded partnership interests. In order to provide adequate time for publicly traded partnerships and their brokers to adjust their systems to the new withholding rules, the withholding obligation on transfers of interests in publicly traded partnerships is generally applicable only to transfers that occur on or after Jan. 1, 2022.
- Year-End Tax Legislation. On Dec. 27, 2020, Trump signed into law the “Taxpayer Certainty and Disaster Tax Relief Act of 2020,” which contains significant extensions of renewable and clean energy tax credits. Among other items:
- Carbon Capture. The bill extended by two years (to Jan. 1, 2026) the deadline for beginning construction of a carbon capture facility eligible for the credit under IRC Section 45Q.
- Wind. The bill extended by one year (to Jan. 1, 2022) the deadline for beginning construction of a wind facility eligible for the production tax credit under IRC Section 45.
- Solar and Fuel Cells. The bill extended the phaseout of (i) the IRC Section 48 investment tax credit for fuel cell property by two years and (ii) the IRC Section 48 investment tax credit for solar energy property by two years.
The DOJ and FTC enforce the nation’s antitrust laws, among others, and each is responsible for particular portions of the oil and gas industry. The DOJ typically reviews upstream transactions involving oil field services companies while the FTC reviews mid- and downstream transactions. Despite disruptions of the pandemic, the agencies brought numerous relevant enforcement actions, the most prominent of which are detailed below.
- New e-filing option mandated for HSR. The antitrust agencies—DOJ and FTC—found ways to continue their regulatory efforts during the global pandemic. Here is a link to a joint statement on antitrust. The pandemic motived the DOJ and FTC to institute a number of procedural changes. Perhaps most importantly, the agencies are now accepting Hart-Scott-Rodino (HSR) filings only through a new e-filing system. Also, the agencies are conducting all meetings, investigational hearings, depositions, etc., by videoconference or phone.
- FTC blocks proposed combination of Arch Coal and Peabody Energy Corp. In February, the FTC sued to block a proposed joint venture between Arch Coal and Peabody Energy Corp.The trial took place in July and August in the Eastern District of Missouri. The FTC argued that Arch Coal and Peabody Energy Corp. represent some 60% of coal produced in the Powder River Basin. The loss of competition, according to the FTC, would lead to increased prices. The parties argued that coal prices are increasingly constrained by natural gas, which is quickly replacing coal as the primary input for production of electricity. In late September, the judge granted the FTC’s request for an injunction, officially blocking the transaction. Here is a link to the FTC’s press release, and the court’s ruling
- FTC requires divestitures in Tri Star/Hollingsworth acquisition. In June, the FTC required Tri Star Energy LLC and Hollingsworth Oil Co. Inc. to divest retail fuel stations in order to gain regulatory approval for Tri Star’s acquisition of assets from Hollingsworth. The divestiture addressed the FTC’s concerns that the proposed acquisition would harm competition for retail gasoline and retail diesel in Whites Creek, Tenn., and Greenbrier, Tenn. As the FTC put it: “The Acquisition would eliminate competition in these local markets, resulting in a merger to monopoly in each market for the retail sale of gasoline and the retail sale of diesel fuel.” Here is a link to the FTC’s conclusions regarding the deal.
- Potential change to Energy Market Manipulation Rule. The FTC is considering public comments on whether it should revise its Prohibition of Energy Market Manipulation Rule.May 18 that it was seeking public comment regarding the rule, which prohibits fraudulent or deceptive conduct relating to purchase or sale of wholesale gasoline, crude oil or petroleum distillates. The FTC had previously published a Guide to Complying with Petroleum Market Manipulation Regulations, which explains key terms and provides examples of prohibited conduct. The agency accepted public comment through Sept. 3, 2020. The agency announced
- FTC requires divestitures in Arko/Empire acquisition.FTC complaint alleged that the acquisition would reduce the number of competitors to three or fewer in all local markets. The FTC argued, “The Acquisition would substantially lessen competition in each of these local markets, resulting in seven highly concentrated markets for the retail sale of gasoline and three highly concentrated markets for the retail sale of diesel fuel.” Here is a link to their public statement on the analysis. In August, the FTC required that Arko Holdings Ltd. and Empire Petroleum Partners LLC divest retail fuel assets in gasoline and diesel fuel markets in Indiana, Michigan, Maryland and Texas. The
- FTC fines Alimentation Couche-Tard. In June, the FTC fined Alimentation Couche-Tard Inc. and its former affiliate, CrossAmerica Partners LP, $3.5 million to settle accusations that they violated a 2018 order requiring divestiture of 10 retail fuel stations in Minnesota and Wisconsin to Commission-approved buyers no later than June 15, 2018. The FTC accused the parties of failing to meet the specified deadline, failing to provide certain required periodic reports and failing to sufficiently maintain at least one of the relevant divestiture assets. Here is a link to the press release and the FTC’s official statement.
Jeffrey Oliver is a partner in Baker Botts’ Antitrust and Competition Practice, and Thomas Holmberg is a partner in the Global Projects Group at Baker Botts and firmwide co-chair of the LNG Practice Group. Allison Watkins Mallick, Jared Meier, Joyce Adetutu and Kimberly White of Baker Botts also contributed to this article.
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