The US oil and gas industry has been transformed over the past few years by development of new shale resources. The US is now the world’s largest producer of natural gas and on track to be the world’s largest producer of oil. These changes have affected America’s energy future, as well as global markets. With so much new production on the market, and continuing economic stagnation in Europe and China reducing demand, the global price of oil dropped dramatically in the last half of 2014. As Pulitzer Prize-winning analyst Daniel Yergin observed recently, America has now unexpectedly replaced OPEC as the world’s “swing producer” of oil and gas. As a result, US oil and gas producers must now make new decisions about investment, production and rate of return ratios. Against this backdrop, there are, as always, many other issues that will affect decisions and the market landscape.
Along with other developments, this makes 2015 a year of living “uncertainly.” We offer our thoughts below regarding other issues on the horizon for 2015, and how all of this may affect the US oil and gas industry specifically.
Economic: Impact on Energy Infrastructure and Development
The year ahead is likely to bring a reduction in the development of certain shale plays and new fields, as some companies scale back in response to the drop in the price of oil. Budget cuts are also likely to delay or completely table some planned pipeline construction and expansion projects. This may further stress existing infrastructure, whether pipeline or rail, as well as limit smaller planned investments and upgrades in pipeline and rail facilities. Since the US is not a kingdom and the oil and gas markets are not governed by one body (thankfully), these decisions will be made individually in scores of boardrooms and headquarters across the country. All of which makes the timing and scope of these impacts more unpredictable. The government obviously also plays a role, and certain actions already under consideration (such as lifting existing limits on oil exports or streamlining LNG export) could help lessen uncertain impacts on the economy.
Legislative: Legacy of Keystone and Reauthorization of the Pipeline Safety Act
Despite Congress’s commitment to approving the Keystone XL pipeline, the bill will most certainly be vetoed by the president. The bill presented to the White House does not resolve larger flaws in the presidential permit process in any event. A more permanent fix is required, one that ideally limits review to the border crossing itself, and that clarifies the judicial review process. After Keystone: A question of Presidential Permits, National Law Journal (Apr. 1, 2013).
The Pipeline Safety Act’s reauthorization expires at the end of this year. Even though PHMSA has yet to satisfy many of the requirements set forth in the 2011 Reauthorization, Congress will be convening hearings and preparing legislation to reauthorize the statute later this year. It remains uncertain whether reauthorization will only be a rubber stamp extending the budget for the agency (and likely requiring the agency to comply with its outstanding commitments and focus on existing rulemakings), or whether any substantive amendments to the statute will be proposed. PHMSA is expected to issue a progress report, and some new rulemakings, by late Spring, and those actions may influence the extent of congressional review.
The occurrence of pipeline accidents also increases the likelihood of congressional scrutiny in a reauthorization year, and the first few weeks of 2015 have already been marked by two high-profile pipeline incidents in Montana and West Virginia. In addition, House Representative DeFazio recently criticized PHMSA for failure to finalize “longstanding significant safety issues” with respect to rail and pipeline safety, even requesting an audit by the DOT’s inspector general. Further, in announcing the completion of a Safety Study on natural gas pipeline integrity management programs, the National Transportation Safety Board (NTSB) recently issued nearly two dozen new recommendations to PHMSA for improvement. In light of all this, the following issues may come up during reauthorization: aging infrastructure and pipeline abandonment, oversight of new pipeline construction, integrity management, and oil spill response.
Regulatory: PHMSA, NTSB and other Agencies
While PHMSA issued only one final pipeline safety rule in 2014 (updating industry standards that are incorporated by reference), the agency has numerous outstanding rulemakings that are projected to be issued in the coming year. These include: finalizing the crude by rail proposed rules, oil and gas proposed rulemakings on integrity management, state excavation damage prevention laws, proposed rules on operator qualification, incident notification, and design review cost recovery, among other proposed and final amendments to the pipeline safety regulations. In addition, we expect the agency to continue a controversial trend marked by the issuance of numerous guidance documents, written advisories and interpretations regarding substantive legal requirements, in lieu of notice and comment rulemaking (examples from 2014 include guidance on construction notice; flow reversal, product changes and conversion; IMP evaluation metrics; and oil spill response plans). Meanwhile, certified states are likely to remain active in enacting their own safety requirements for rail and oil spill prevention, and to expand their jurisdiction over certain intrastate gathering lines. Issues of federal preemption over state action are likely to continue to arise.
Other agencies are expected to remain active in oversight and regulation of the oil and gas industry. Even though pipeline safety was noticeably absent from the NTSB’s 2015 Most Wanted List of Transportation Safety Improvements (which included rail tank car safety), the NTSB Safety Study noted above found that current regulations have not resulted in a decrease of incidents occurring in high-consequence areas. EPA is also getting more active in the oil and gas sector, with proposed national contingency plan rules regarding the use of oil spill dispersants and consideration of whether to regulate methane leaks from natural gas distribution lines.
There has been an increase in the number of pipeline incidents for both gas and liquid pipelines in the past year (an increase of nearly 11 percent in 2014 as compared to 2013), yet PHMSA enforcement activity decreased by approximately 40 percent in 2014 along with a significant reduction in proposed penalties, although we recognize that there is often lag time between the occurrence of an incident and the issuance of an enforcement action. We expect this decrease in PHMSA enforcement to be short-lived, however, in light of the president’s approval of a significant funding increase for PHMSA pipeline safety oversight programs in 2015, a large portion of which is to be used to hire additional inspection and enforcement staff. In the interim, states have begun to aggressively pursue penalties for pipeline safety violations (e.g., the California Public Utilities Commission proposed $1.4 billion penalty for alleged violations relating to the San Bruno incident).
While enforcement slowed in 2014, the agency expanded the scope of its enforcement tools (particularly corrective action orders, safety orders, and compliance orders). With increasing frequency, PHMSA enforcement orders reflect a wide array of broad open-ended corrective actions requiring oversight by third parties and/or PHMSA, over large portions of operators’ systems, and for indefinite periods of time. In addition, those corrective measures have also included references to “safety management systems” and “safety culture,” for which the agency has not promulgated any regulations and the industry (API) has not yet finalized a standard (although that standard, API RP 1173, is expected to be finalized in 2015). This trend is expected to continue unless the agency is persuaded or challenged that such actions exceed its authority under the Pipeline Safety Act. The Department of Justice (DOJ) also continues to pursue criminal investigations and enforcement of the Pipeline Safety Act for knowing and willful violations, especially for issues related to cathodic protection, new construction and welds. DOJ just recently announced a plea deal in a case against a corrosion control monitor who falsified inspection records.
All these issues and developments make 2015 a year of living uncertainly for this industry. Operators can best position themselves for the year ahead by (1) ensuring that any budget cuts do not affect compliance with regulatory obligations; (2) monitoring and commenting on proposed legislation and rulemakings; (3) anticipating increased oversight from PHMSA, certified states, and other agencies; (4) challenging, as appropriate, agency actions that go beyond established law and guidance; and (5) participating in industry initiatives and working groups on developing issues. PHMSA can best fulfill its mission by continuing the outreach it makes to both the public and industry, which resolves many issues before they develop. Working together, industry and government can continue their shared focus on ensuring public safety and system integrity.