Category: Environment

Drill Baby, Drill

Technology has outpaced regulation when it comes to the latest advances in oil and gas drilling and extraction. However, with both state and federal regulations under development, the law may soon catch up.

At the federal level, the Bureau of Land Management (“BLM”) plans to release a set of revised proposed regulations addressing hydraulic fracturing (or “fracking”) by the end of March. A copy of the regulations, which will apply to drilling activities on federal lands, was recently leaked ahead of its publication in the federal register. The proposed regulations, originally released last May, have been revised in response to public comments. The revised regulations drop a pre-drilling compliance certification requirement, and although the rules would require disclosure of fracking chemicals to BLM, such disclosure would be made after drilling and would be subject to potential trade secret protection. The regulations additionally require that operators have an appropriate management plan for flowback water and set standards for well bore construction. Notably, unlike the original version, the revised regulations appear limited to fracking as opposed to other drilling techniques, such as “acidizing.”

The BLM is not the only federal agency looking into possible fracking regulation. For example, the Environmental Protection Agency is currently studying the effects of fracking on drinking water sources, something that could become a steppingstone to water quality based regulations.

Regulatory efforts are also heating up at the state level. For example, the California Department of Conservation, Division of Oil, Gas & Geothermal Resources (“DOGGR”), released a “discussion draft” set of rules in December that would require oil companies to notify state officials at least 10 days prior to fracking and to disclose fracking fluid chemicals on the website, unless such chemicals are protected as trade secrets or confidential business information. The draft rules also require well testing to assure that the well can withstand fracking force, and a public posting of information about the testing results and where fracking is scheduled to occur at least seven days before drilling.

Other recent California initiatives are also aimed at fracking. For example, SB 395 would have water produced during the drilling processes treated as hazardous waste. Other bills introduced in California would similarly subject fracking to greater scrutiny. For example, some of the provisions in proposed laws would require avoidance of seismicity risk, require oil companies to demonstrate that use of fracking would present no threat to public health and safety, require full disclosure of well construction materials and chemical use, and provide for citizen suits for disclosure failures. The California South Coast Air Quality Management District also appears ready to propose regulations governing fracking and its impact on air quality.

Between BLM and DOGGR’s proposed regulations, state legislative efforts, and indications of other possible rules, drilling oversight promises to be a big focus this year. How those efforts will impact the use of hydraulic fracturing in California remains to be seen, especially as domestic production of oil and gas surges, stimulating economic activity and reducing dependence on foreign sources. In the least, as both industry and environmentalists ramp up their arguments, we can expect a year of hearty debate over fracking related techniques and other technological developments in oil and gas exploration and production.

California Pushes Forward in the Carbon Frontier, Overcoming Legal Challenge

January was quite a month for California’s cap-and-trade program. For one thing, the program went live. For the first wave of approximately 350 regulated entities, January 1, 2013 marked the beginning of mandatory compliance with the program. Those “covered entities” will need to come up with emissions allowances or approved offsets (for up to 8 percent of the entity’s total emissions) to meet their compliance obligations, which are based on a gradual reduction of historical emissions.

On January 25, proponents of the program also defeated a lawsuit that challenged the very validity of the offset program. Namely, the Superior Court for the County of San Francisco determined that the California Air Resources Board (“CARB”) was within its authority to use a standards-based approach (as opposed to a project-specific evaluation) to determine whether an offset project would result in “additionality,” or additional emission reductions that would otherwise not have occurred. You can find a copy of the decision here.

The offset program victory follows on the heels of the launch of the first auction. Despite a last-minute lawsuit challenging CARB’s authority to raise revenue by auctioning off emission “allowances,” the first ever auction went forward. Although the $290 million generated by the auction was less than was estimated (some predicted as much as $1 billion would be raised), the auction was an important milestone.

Since the framework for a cap-and-trade system was first adopted, there has been a number of lawsuits challenging either the legality of the program as a whole or its components. But, despite a year’s delay, the program has now commenced. The government faces a new domain and continuing objection as it implements the regulatory framework, but California’s program could serve as a model for other government programs, resulting in a possible expansion of the market. Already there has been a proposal to link California’s market with Quebec’s, and there has been chatter of linkage to Australia’s carbon economy as well.

Players in the market are looking forward to the prospect of numerous opportunities, from investments relating to the trading of allowances to the development, accreditation and verification of offset projects. As California pushes forward with the cap-and trade program, we are reminded that the State’s pioneering mindset is alive and well.

California’s First Carbon Auction: Without a Hitch or Full of Glitch?

For those interested in California’s cap-and-trade program, all eyes are on the first-ever auction of greenhouse gas emission credits (or “allowances”) scheduled for Wed., Nov. 14. Although the first wave of regulated entities were allocated free allowances to meet up to 90 percent of their recent emissions, such entities will have to cut their emissions in coming years or buy allowances or offsets to make up for any emissions over and above the allocated allowances.

Although buying and selling of offsets and allowances has been going on for some time via spot and exchange trades, the auction puts a spotlight on the burgeoning market as the program’s Jan. 1 compliance commencement date looms.

More than 23 million allowances for use in 2013 are being auctioned, with an additional nearly 40 million being auctioned for use in 2015. Bids are being sold in multiples of 1,000, and the floor price has been set at $10 per allowance. Both the state and private entities holding allowances will be selling at the auction. It is anticipated that the auction could raise more than $600 million for the state, and that future auctions could raise billions more.

The auction will be conducted electronically. To participate, eligible participants must have already registered and been approved as users in CARB’s market tracking system. Various market players have planned to participate in the auction, including regulated entities and investors.

A test run of the auction took place last month and was reported by CARB and others as a success. Whether next week’s actual auction, if it occurs as scheduled, will be perceived as a success will depend not only on the auction’s mechanics, but also, of course, on the trade price established for the allowances.

There has been some speculation that state officials might yet decide to postpone the auction due to threatened litigation that, if filed, could chill potential buyers’ willingness to bid. However, with the re-election of President Obama, the Democratic dominance in state government and the national discussion regarding a possible link between climate change and Hurricane Sandy, a decision could be made to go forward with the auction despite potential auction participation impacts.

All Politics is Local: Should State or Local Government Approve Renewable Energy Projects?

Who should have primary authority to approve solar photovoltaic (“PV”) and other renewable energy projects not within the California Energy’s Commission’s (“CEC”) exclusive jurisdiction?  Certain interests, such as the utility-scale solar industry and independent energy producers, are in favor of the CEC permitting or having the option to permit such projects.  Other interests, including local government agencies, the wind industry, and the Sierra Club, strongly believe that the decision to site and approve these projects should be made by counties and local government.

This issue has taken on a new level of prominence with the introduction of AB 2075, a bill that would expressly strip the CEC of jurisdiction over solar PV projects and would eliminate a  code section that gives an option to applicants proposing energy “facilities” otherwise exempt from CEC jurisdiction to submit to the CEC’s exclusive jurisdiction.  Currently, the CEC has clear jurisdiction over solar thermal projects, but it is unclear whether Public Resources Code Section 25502.3 in fact authorizes CEC to agree to take jurisdiction over non-thermal energy projects such as solar PV plants.  The CEC claims that Section 25502.3 in fact does allow renewable energy powerplant proponents, including solar PV applicants, to submit to CEC jurisdiction, thereby bypassing local control over such projects.

There is a common view that the environmental review process marshaled by the CEC is less onerous and more predictable than the environmental review conducted by local government.  Local agencies and certain environmental groups believe that the CEC is not adequately protective of local interests and the environment, and that project applicants should not be able to “cherry pick” the regulator.  Those in favor of CEC jurisdiction argue that local control over energy projects can result in unpredictable permitting issues and impediments to achieving California’s 33% renewable portfolio standard (“RPS”) requirement by 2020.  For example, it is claimed that Riverside County has stalled on all its solar applications in retaliation for a trade association (the Independent Energy Producers) lawsuit attempting to overturn a new property tax on project sites.

Although the arguments surrounding this issue do not always hold up (a number of California counties have, for example, emerged as leaders in the development of renewable energy), both sides in this debate have a point.  On the one hand, local governments should certainly have a say in the land use of their domain.  On the other hand, the CEC is our state’s energy expert and is perhaps better situated to help meet California’s hefty RPS mandate.

At the end of day, although AB 2075 could potentially bring greater clarity to renewable energy permitting processes, perhaps the status quo is not all that dysfunctional.  Most renewable energy applicants will likely still go to the local government for project approval, and the local government will likely conduct an appropriate review of the project.  However, if local government politics unduly interfere with the processing of a particular project, the CEC can be an appropriate escape valve.  Given the statewide 33% RPS, a permitting process that helps route around local political tit-for-tat is not necessarily a bad thing.

Adaptation: The Future of Climate Change

For those who believe in Climate Change, there is news: True to its word, the Union of Concerned Scientists  has published Cooler Smarter: Practical Steps for Low-Carbon Living, a guide examining which green actions make the most difference. How important is it to turn off the lights? According to these environmentalists, not very.  The vast majority of the green advice you’ll read? Nothing more than nice gestures; perhaps a little better than the alternatives.

According to their research, when it comes to climate change, there are four primary activities that dump carbon into the atmosphere:

  • traveling from place to place;
  • keeping buildings at pleasant temperatures;
  • creating electricity;
  • and raising animals for meat.

These conclusions raise some disturbing questions for those who believe in Climate Change. Cap and Trade?  Energy from solar and wind power? Nothing seems to be working. And indeed, with China, India and other underdeveloped countries yearning to have a standard of living commensurate with ours, it’s almost a moot point to consider what we should do if the largest populations in the world are not on board. Even in the United States, environmental groups were angered and frustrated by Obama’s decision in September to postpone indefinitely a regulation to tighten ozone standards.

Perhaps the answer is adaptation. This is not a new idea, but maybe a little more energy and money should be devoted to answering some very basic questions. How do we keep our water supply intact? How do we keep our coastal cities from flooding? What are going to be the biggest issues and how can they be fixed?

There is a silver lining. For those who believe there will be major problems, consider the new business opportunities arising due to climate change. In the next ten years, it is possible that one of the new approaches to climate change will be about adapting to it.  If so, we can expect significant business investment in that nascent arena as well.

The Great Carbon Shuffle

Government programs designed to reduce greenhouse gases in the atmosphere appear to be having the unintended consequence of actually increasing the amount of carbon dioxide being emitted.  Programs at both the federal and state level in California intended to reduce the amount of carbon dioxide (CO2), a greenhouse gas produced from among other activities, the combustion of fossil fuels in cars, trucks and other forms of transportation, are a particularly noteworthy example.  Unfortunately, the old adage that unintended consequences will frequently result from changes made with the best of intentions is truer than ever in the area of climate change-related policy and regulation.

When fossil fuels, which contain carbon, are burned in a vehicle’s engine, the carbon is converted to CO2 and, unless somehow trapped, this gas is emitted into the surrounding air.  The general objective of climate change-related policy and regulations is to reduce the overall amount of CO2 and other greenhouse gases that are being emitted into the earth’s atmosphere in order to slow global warming.

At the federal level, a regulation known as the “renewable fuel standard program” or “RFS2” requires that ethanol, which generally has a lower carbon content than the crude oil used in most petroleum-based transportation fuels, be added during the fuel manufacturing process to reduce the fuel’s overall carbon content.  An increasing amount of ethanol is required to be added during manufacturing over the multi-year life of the program.  To even further reduce the carbon content, the RFS2 regulation requires that a certain percentage of “advanced biofuel” be used in fuel manufacturing and, in essence, requires fuel manufacturers to select only those ethanols that contain the very lowest levels of carbon.

Almost all ethanol produced in the United States is made from corn and, unfortunately, corn-based ethanol tends to contain relatively high levels of carbon.  Brazilian ethanol, on the other hand, which is made from sugarcane, contains relatively low levels.  As a result, sugarcane-based ethanol produced in Brazil is being shipped by tank vessel to the refineries in the United States that manufacture transportation fuels and corn-based ethanol produced in the United States is being shipped back to Brazil, where it is refined into fuel to power that country’s large and growing vehicle population.

Because a molecule of CO2 emitted anywhere in the world has exactly the same impact on the earth’s atmosphere as a molecule emitted anywhere else, the actual effect of this cross-shipping program is a net increase in the amount of CO2 being emitted into the atmosphere, along with an increase in product costs, because of the not insubstantial CO2 emissions that result from the long tanker voyages that are required to make it work.  This “crude shuffling” and its adverse effect on overall CO2 emissions is an unintended consequence of a program that was designed to reduce CO2 emissions from the combustion of domestic transportation fuels.

Another example at the federal level is the debate over the XL Keystone Pipeline proposed to transport Canadian crude oil, much of it from that country’s vast stores of oil contained in tar sands, to refineries on the U.S Gulf Coast.  Opposition has been mounted to the project because Canadian crude oils tend to be higher in carbon content than most domestic crude oils.  One of the arguments made against approving the pipeline is that the United States should not be encouraging the use of higher carbon-containing crude oils in domestic fuel production.  As a result, the project has been delayed and the Canadians have advised that, if the delays continue or the project is ultimately disapproved, they will have no choice but to construct a pipeline to Canada’s west coast to allow shipments of their crude by tank vessel to refineries in Asia or Europe that would be happy to receive the product.  If this were to occur, the Canadian crudes containing higher levels of carbon would still be refined into transportation fuels which are combusted in vehicles, and the resultant CO2 would still be emitted into the atmosphere.  The emissions would simply occur in another part of the world.  There would again be an overall net increase in the amount of CO2 emitted because of the much greater level of crude transportation emissions associated with shipping the crude to the other side of the globe.

In California, one of the climate change-related programs being aggressively promoted by the state’s Air Resources Board is the Low Carbon Fuel Standard or “LCFS.”  Like the federal renewable fuel standard program, the LCFS seeks to reduce the level of carbon that exists in the components that make up petroleum-based transportation fuels, but do so by penalizing the use of higher carbon containing crude oils in gasoline and diesel fuel manufactured at California refineries.  The difference is that the LCFS focuses on the crude oils, rather than the ethanols, that are used to manufacture transportation fuels.  While the objective of the program is to encourage California refiners to lower the amount of CO2 that results from fuel production, it is questionable whether there are really any feasible or cost-effective ways of achieving that result.  Instead, the effect could be to force California crude oil producers to either ship their crude to out-of-state or out-of-country refiners that are not subject to the LCFS or to shut in existing production that tends to have higher carbon content and therefore lower profitability.  A likely result is that most California crudes that would be penalized if used by nearby California refiners will be used somewhere else in the world instead, with an attendant increase in overall CO2 emissions due to the transportation-related emissions required to ship to these more remote refining locations.

Whether the foregoing result will in fact occur is now in doubt because of a December ruling by a federal judge in consolidated cases brought by major trade groups for both the petroleum refining and ethanol production industries challenging the legality of the LCFS program.  The court enjoined enforcement of the program, which was scheduled to commence on January 1, 2012, on the ground that it violates the Dormant Commerce Clause of the United States Constitution.  The Air Resources Board, which promulgated the LCFS, has appealed that decision to the 9th Circuit Court of Appeals.  Whether the LCFS will ultimately be put in place is therefore currently unclear.

One may wonder why such programs, that result in unintended adverse consequences despite their good intentions, remain in place.  Unfortunately, policy makers and regulators often adopted a narrow and parochial focus on the issues they must deal with, while remaining oblivious to the more global consequences of their actions, or they incorrectly assume that the rest of the world will quickly follow their example.