State of the Energy

In his recent State of the Union Address, President Barack Obama pledged his support for domestic oil and natural gas production. However, the President made it clear that his administration may seek stricter regulation over areas impacting the growth of shale gas operations. In addition, while the President backed oil and gas permitting on federal lands, he drew a direct link between increased mining of domestic resources to his primary theme of clean energy initiatives and conservation. These themes may be inherently contradictory and the oil and gas industry awaits the possible effects of enhanced federal regulation.

The Obama administration has yet to unveil a comprehensive policy regarding the growth of shale gas mining. Individual states regulate most of the operational areas of shale gas production including well construction, chemical disclosures, ground water sampling and reporting requirements. However, the EPA and the Department of Interior already have extended their authority into these areas and are anticipated to increase their involvement.

For example, the industry is anxiously awaiting the EPA’s final report on the impacts of Hydraulic Fracturing. The report, which is being prepared in collaboration with the Department of Energy and Interior, is expected to be complete in 2014. This comprehensive collection of studies presumably will inform the Administration and shape an overall federal policy concerning shale gas operations. In the meantime, the EPA has exerted its regulatory authority over water disposal and discharges through the Safe Drinking Water and the Clean Water acts. The agency recently reaffirmed its intention to become more involved with shale gas operations, particularly concerning surface and subsurface discharges from the fracturing process.

Leveraging Permits

President Obama recognized in his speech that many of the viable shale plays are located within public lands. Expect agencies such as the Department of Interior's Bureau of Land Management to leverage mine permitting in order to fund various administration goals. For example, the president proposed the use of oil and gas revenues from public lands to capitalize an Energy Security Trust to drive research and development into clean vehicle fuels. Obviously, these initiatives will increase the costs of oil and gas production on federal lands. In addition, collateral agencies such as the Fish and Wildlife Service will maintain their vigilance in enforcing statutes such as the Endangered Species Act, which can impact mine permitting on an individual basis.

Perhaps the area awaiting the most policy development is within the potential liquefied natural gas (LNG) export industry. The industry predicts a spike in global LNG demand over available supply in the foreseeable future.

While there may be some domestic costs to LNG exports, there is a growing consensus that LNG exports represent a potential opportunity for the United States to play a major role in the global energy sector.

As a result, major companies are considering terminal projects throughout the country. Federal agencies such as the Federal Energy Regulatory Commission will be instrumental in certifying these facilities while the potential market coalesces. The president was silent on this issue but his Administration undoubtedly will have an impact on the viability of LNG exporting.

Finally, President Obama's recent nomination of Ernest Moniz as his Energy Secretary has been greeted by the industry with tacit approval. Moniz, who served as undersecretary for energy under former President Clinton, has voiced support for shale gas production in the past, at least as a bridge fuel to a "low-carbon future."

For the foreseeable future, the administration seems to be in support of shale gas production efforts, but is implementing measures that may increase the costs to the industry. With domestic natural gas prices at an all-time low and production increasing, it appears that the administration perceives some margin to increase costs in order to move the country toward a "cleaner" future.

Regulatory impediments, however, often become more arduous and costly than intended. Increased domestic costs not only will hamper current growth but may also impact exporting potential.

Brian S. Heslin is a Charlotte, N.C.-based member at Moore & Van Allen. He can be reached at brianheslin@mvalaw.com. For more information, visit www.mvalaw.com.

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