US energy policy changes: Trump vs Obama

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OIL AND GAS

UNDER OBAMA ADMINISTRATION

US oil production soared 75% over the last eight years from 5.1m bbl/day in January 2009 to an estimated 9.2m bbl/day in 2017, primarily because of shale drilling. The Barack Obama administration placed some restrictions on onshore shale and offshore drilling, in particular by keeping certain federal lands and waters off limits for drilling permits, including parts of Alaska and the outer US continental shelf. However, it did not ban hydraulic fracturing as requested by environmental lobby groups.

Obama also removed a 40-year ban on US crude oil exports, thereby providing an outlet to US production and hence, some potential upside. However, the US shale revolution was entirely engineered by the private sector thanks to a stronger US economy and balance of trade. Obama’s administration can only take credit from abstaining from over-regulating a sprawling industry.

UNDER TRUMP ADMINISTRATION

Donald Trump’s nomination of former ExxonMobil CEO Rex Tillerson as US Secretary of State sent a strong signal to the markets, showing support for oil and gas interests. As Morgan Stanley analysts recently said: “The US has become the new swing producer, with oil profit margins determining the pace at which the US increases or decreases its oil production, marking a significant difference to OPEC’s attempts to keep prices high by regulating supply via cartel-like agreements.”

US antitrust laws prevent US-based companies from joining price regulating agreements, which is the perfect excuse to keep producing incremental barrels of shale oil, in particular as funding conditions in North America have significantly improved. During his last quarterly earnings presentation, CEO of oil service company Schlumberger, Paal Kibsgaard, said that US shale producers were “largely driven by the US equity investors who are encouraging, enabling and rewarding short-term production growth in spite of marginal project economics”. Morgan Stanley’s head of foreign exchange strategy Hans Redeker said: “The availability of capital has significantly improved. And if you look at the spread that shale companies had to pay a year ago and compare that with the 30 basis points which is currently demanded on the market place, then you have a very good excuse to invest into these rigs.” While this has already skewed investment towards shale, weaker compliance of OPEC and Russia with their mutually agreed cuts may also result in failure to achieve a higher price, especially if the US itself adds up production. The resulting weaker prices may force US producers to scale back growth if not force them out of the market again. Rising labour expenses might also rise faster than the oil prices and gradually eat into US oil companies’ already thin margins.

MARKET IMPACT

Trump promised a doubling of shale oil production along with US energy dominance and total independence. However, cash-hungry cost-conscious oil exploration and production companies may have to take a more prudent approach to the ramp-up of US supply, lest they drill themselves into bankruptcy.

According to Goldman Sachs, shale productivity is increasing 3-10% per year across the major plays, which drives US oil breakevens from $80/bbl, to $40-60/bbl and flattens US producers’ cost curve. This forces other countries to focus on market share rather thWan price and to compete through deflation, foreign exchange and lower taxes, as Saudi Arabia did by lowering Aramco’s tax rate from 85% to 50% earlier this year.

PIPELINES

UNDER OBAMA ADMINISTRATION

Former president Obama blocked both the Dakota Access and Keystone XL oil pipelines due to environmental concerns. The Keystone XL pipeline was set to carry 830,000 bbl/day Canadian oil across the US to the Gulf coast. Meanwhile the Dakota Access pipeline was set to transport 470,000 bbl/day of North Dakota’s Bakken oil to an oil terminal in Illinois. The majority of work was already completed, except for a 20-mile section near the Standing Rock Sioux reservation, which had attracted protests over the possible threat to the surrounding water resources and Native American sites.

UNDER TRUMP ADMINISTRATION

President Trump was quite vocal during his campaign about his support for the oil industry. He signed executive orders in his first week in office in January paving the way for both pipeline projects to move forward. He attached a clause under which the new administration would renegotiate the terms of the projects. On 24 March, the US State Department approved a presidential permit to allow the construction of the Keystone XL pipeline, according to a statement from project owner TransCanada. But the pipeline is awaiting approval from Nebraska regulator, with public hearings on the project in August 2017 and a final decision expected by 23 November. While the completion of the Dakota Access pipeline was expedited, it had issues as early as April with its first leak at a South Dakota pump on 6 April. The spill was cleaned up and the pipeline was completed and up and running by June.

MARKET IMPACT

The Dakota Access pipeline could make Bakken crude more accessible for US Midwestern refineries. Commerzbank’s senior analyst Carsten Fritsch said that while the impact on the global market will be limited, US refined products exports could see a boost and hence weigh on crack spreads – profit margins between crude prices and products extracted from it. Fritsch also said that global oil prices could be supported once the Keystone XL pipeline starts flowing heavy oil from Alberta, Canada to the US Gulf. Keystone XL might help “debottleneck” Canadian flows to US refineries which, at present, are being weaned off alternative supplies from Venezuela or Mexico where disruptions seem to last.

LIQUEFIED NATURAL GAS (LNG)

UNDER OBAMA ADMINISTRATION

The first LNG exports out of the lower 48 states were produced in 2016 at the end of Obama’s tenure. While upstream federal policies only focused on drilling specifically on federal lands and headline-grabbing reversals on pipelines such as the Keystone XL, gas production thrived without much impact from the Obama administration as a result of improved technologies and sometimes lease requirements from producers.

UNDER TRUMP ADMINISTRATION

The most recent executive order on rescinding the guidance that attempted to broaden the environmental scope of an LNG export project by including upstream greenhouse gas emissions was applauded by the US trade organisation Center for LNG. However, the move may have little or no impact, given that the Federal Energy Regulatory Commission, which is responsible for the siting, permitting and licensing of LNG export plants, already has determined that its regulatory overview would not reach back to the wellhead and only consider the infrastructure itself. Multiple legislative attempts also have been made to expedite the permitting of pending LNG export projects by the Department of Energy, without success.

MARKET IMPACT

Even with full-on approval advanced by the energy department under Trump, market conditions would be the deciding factors on whether or not new LNG export projects could be sanctioned and reach final investment.

COAL

UNDER OBAMA ADMINISTRATION

The Obama administration’s efforts to curb coal-fired power production have been widely dubbed a “war on coal”, although Obama himself never pledged to bankrupt the coal industry. He warned that tighter environmental regulations would make the cost of coal pollution prohibitive. His own words in 2008 were: “What I have said is that for us to take coal off the table as an ideological matter as opposed to saying if technology allows us to use coal in a clean way, we should pursue it.”

UNDER TRUMP ADMINISTRATION

Trump brought back coal to the table as an ideological matter. Flamboyant declarations to the beleaguered coal mining industry have no doubt propped up his candidacy in Appalachian states and Wyoming where coal is extracted. However, Trump’s decision on 16 February to roll back Obama’s eleventh-hour Stream Protection Rule will have negligible effects on the coal industry.

Global demand for coal is slowing. Coal from Wyoming costs a fraction of the coal from the Appalachians. And more importantly, low-priced gas from the US shale revolution has been the main cause of coal’s demise. Trump’s administration will have to recognise that it cannot support all fossil fuels, which compete with one another at some level. The bankruptcy of Peabody Energy, the world’s largest coal company, in May 2016 is ¬– by the company’s own admission – the effect of powerful market forces undermining the industry globally, not any regulatory impediments. Even China, the world’s largest producer and consumer of coal has scrapped the construction of 85 planned coal power plants in January 2017 to invest in renewable energy.

In fact, the number of mining jobs increased during Obama’s first term, and started to fall only after the shale boom began in March 2011.

MARKET IMPACT

Coal and gas are direct competitors, and Trump’s strong support for US shale could precipitate the end of coal. Environment regulations may have helped the downfall, but they are not the fundamental cause. As 13 of the 15 largest US oil and gas producers reasserted in March in their annual reports to the US Securities and Exchange Commission, compliance with current regulations is not affecting their operations.

FEDERAL LAND USE

UNDER OBAMA ADMINISTRATION

There were reports that the fiscal year 2016 figures reflected the lowest amount of lease acreage for the years statistically available since 1998, suggesting that the Obama administration had thrown a lot of sand into the gears of oil and gas production on federal lands. However, it is unclear to what degree the lower number of permit approvals on those lands is related to an elongated permitting process and fewer leases offered, or to the low oil prices that drove some applicants away from drilling.

UNDER TRUMP ADMINISTRATION

The Bureau of Land Management (BLM) is required by law to conduct lengthy environmental reviews and seek public comment before opening lands to drilling. Opponents to drilling can still stall projects by tying up the agency in court. The Trump administration would probably have to rewrite regulations entirely if it wants to speed up the pace of oil and gas drilling on federal lands.

According to a report from the Congressional Research Service, oil production on federal lands actually fell 6% between 2009 and 2013. Over the same period of time, oil production increased by 61% on state and private lands, or 2.1m bbl/day. Natural gas production on federal lands decreased by 28% from 2009 to 2013, while natural gas production on non-federal lands increased by 33% from 2009 to 2013.

In February 2017, the BLM made a large lease sale to mark the start of President Trump’s plans to expand drilling on federal lands, selling rights on 278 parcels of public land for $129.3m. Most of the land sold is located in the major coal-producing state of Wyoming, where the additional production of gas that this may enable will be in direct competition with that state’s coal industry.

On 28 April, Trump signed an executive order – the America-First Offshore Energy Strategy – aimed at opening up large areas of the Atlantic, Pacific and Arctic oceans where offshore oil and gas drilling has previously been banned by the Obama administration. However, given the lower cost of shale production compared with shelf production, plus the sharp drop of oil companies’ interest in offshore licences over the past five years, it remains unclear how this order may “unleash American energy”.

MARKET IMPACT

The impact is hard to quantify at this stage, but likely to be marginal. One essential reason is that the most profitable drilling in the next two years will probably occur in basins and plays that have already been extensively surveyed and drilled but possibly unexploited. Therefore, the acquisition of new, unchartered federal lands by oil companies is unlikely to make a significant difference at this point, unless the leases on offer are contiguous to existing, prolific plays.

GLOBAL TRADE AND 2015 PARIS AGREEMENT

UNDER OBAMA ADMINISTRATION

While admitting past trade deals haven’t always worked in the US’s favour, the Obama administration was keen to participate in international trade deals. Trade deals were viewed as access passes for US manufacturers to international markets. Obama once famously said that as 95% of the world’s customers live outside US borders, the US could not afford to close itself off from the rest of the world. He signed the Trans-Pacific Partnership (TPP) on 4 February 2016 with a view to acting as an economic bulwark in Asia against the rising power of China.

The Obama administration put forward several initiatives such as the Clean Power Plan, increased vehicle fuel economy, fewer methane emissions from the oil and gas industry, and increased use of biofuels in the transport sector to mitigate greenhouse gas (GHG) emissions. These initiatives would have helped the US align itself with the aims of the 2015 Paris Agreement. The landmark agreement’s central aim is to limit global warming to well below 2 degrees Celsius above pre-industrial levels.

UNDER TRUMP ADMINISTRATION

On his first full weekday at the White House, President Trump formally withdrew the US from the 12-nation Trans-Pacific Partnership. The move spoke volumes of his ambition to fulfill his America First campaign promise. The President has chosen Robert Lighthizer, a proponent of protectionist policies, as his chief trade negotiator.

Trump has also made his intention of elevating US manufacturing clear in his communications with CEOs of several US-based companies and is renegotiating the North American Free Trade Agreement (NAFTA) with Mexico and Canada. Trump is of the opinion free trade has eroded the US industrial base through unfair competition. The implications of rolling back NAFTA would likely send shockwaves to US natural gas producers that are poised to send gas exports via pipeline to Mexico from growing capacity at the border.

Throughout his campaign, Trump promised to withdraw the US from the 2015 Paris Agreement. On 28 March, Trump signed an executive order to nullify many of Obama’s climate change policies. Following the executive order, oil and gas giant ExxonMobil, previously led by Secretary of State Rex Tillerson, wrote a letter to Trump asking the government not to withdraw the US from the Paris Agreement. On 1 June 2017, Trump announced he would withdraw the US from the Paris Agreement, fulfilling his campaign promise.

MARKET IMPACT

Without these policies in place, the US is at risk of not meeting its 2015 Paris Agreement pledge to decrease greenhouse gas (GHG) emissions by a minimum of 26% relative to its 2005 levels by the year 2025.

ENVIRONMENTAL PROTECTION AGENCY

UNDER OBAMA ADMINISTRATION

The Supreme Court upheld the responsibility and right of the EPA to set GHG emission standards as outlined in the Clean Air Act at the Massachusetts vs EPA 2007 court case. Under the Obama administration, the EPA acted as a dominant agency in ensuring the reduction of GHG emissions, despite accusations from certain Congress members that the agency was overreaching its regulatory powers.

UNDER TRUMP ADMINISTRATION

It is highly unlikely Congress would allow Trump to dismantle the EPA as lawmakers require an agency to enforce federal environmental laws, notably the Clean Air Act. But Congress could modify or repeal the Act itself, from which the EPA derives its authority. This could be a lengthy process, which could end up with the Supreme Court. In the short term, Some analysts expect Congress to approve Trump’s proposal to slash the EPA’s 2017 budget by 31%. The White House has suggested EPA manage costs by cutting close to 50 of its initiatives including all climate programs. However, the House Appropriations Committee cut EPA’s budget by far less, from $8.06bn, to $7.5bn.

MARKET IMPACT

It is difficult to quantify at this stage.

TRANSPORT

UNDER OBAMA ADMINISTRATION

Under the Obama administration, the EPA’s role included overseeing a stricter Renewable Fuels Standard (RFS), first passed into law with the Energy Policy Act of 2005 and subsequently expanded in 2007, which aims to reduce GHG emissions by ensuring transport fuel contains a minimum volume of renewable fuel. On 23 November 2016, the EPA set the total renewable fuel volumes for 2017 at 19.28bn gallons, 6% above the 2016 numbers. RFS has support across farm states that produce corn ethanol but not from the oil producing states.

In addition, the Obama administration in 2011 introduced new and stricter fuel economy (CAFE) standards for US vehicles. As per these rules, car manufacturers have to steadily increase the fuel economy of newly manufactured cars and light duty trucks to 54.5 miles per gallon by 2025. Volkswagen was one of the carmakers to resist the move. The standards have been locked into place until 2021, giving Trump room to change the standards for 2022-2025.

UNDER TRUMP ADMINISTRATION

The EPA’s new chief Scott Pruitt recently stated he did not believe carbon dioxide was the primary driver behind climate change. GHG emissions from the transport sector constitute one third of all US emissions. Pruitt is in a powerful position to lower the amount of ethanol required to be blended into gasoline under RFS, a move he has long supported. In addition, he could delay the EPA taking on the regulation of refineries and chemical plants. In March 2017, Trump visited Detroit, Michigan, the heart of the US auto industry, and announced to automakers he was reopening a review into how stringent vehicle (CAFE) standards should be for 2022-2025.

MARKET IMPACT

The review follows months of lobbying by the Auto Alliance trade group and could potentially weaken or delay the implementation of fuel economy standards in the US.

NUCLEAR POWER

UNDER OBAMA ADMINISTRATION

Nuclear power is classified by some as a form of renewable energy given the low CO2 emissions, but it also attracts criticism with sentiment against it growing following the 2011 nuclear accident at Fukushima, Japan. Advanced nuclear reactors lacked some funding under the previous administration after Obama reduced spending for the Office of Nuclear Energy. The former US president signed an executive order that described the Small Modular Reactors (SMR) as an alternative energy, together with solar, geothermal and biomass technologies. However, the general policy focused on supporting wind and solar installations. Data from the Nuclear Energy Institute (NEI) indicated that in 2015, nuclear power generation accounted for 19.5% of total electricity production, while in 2008 the equivalent figure stood at 19.6%.

UNDER TRUMP ADMINISTRATION

Trump announced at the end of June 2017 a review of its nuclear policy, among a number of other energy initiatives, with the aim to expand and revive the industry. However, no details have emerged on what changes can be expected. Given the mantra of Trump’s campaign of increasing jobs in the US, nuclear power appears to be a sector that would contribute fairly adequately with the NEI stating the country’s 99 reactors add around $50bn to the economy and employ 100,000 people. The sector also adds to the security of energy supply, given the continuous baseload electricity that a nuclear power plant provides, but the US is set to see its nuclear capacity cut almost in half by 2050 as some its old nuclear units retire. Some existing nuclear power plants need subsidies in this low cost of generation environment, which includes renewable, gas- and coal-fired production.

MARKET IMPACT

Eliminating regulation which stands as an obstacle in the face of new nuclear capacity could trigger some interest given Trump’s overall stance to reform licensing. However, this might not prove enough, given the high cost of building nuclear units. In certain regions such as the US East coast, nuclear power plants are not generally perceived viable without the aid of government subsidies. This is because of competition from low gas prices which enable cheaper gas-fired generation. In addition, some environmental groups in California have already criticised nuclear, with utility PG&E announcing in June 2016 that it would close the last power plant in the state within the next decade.

RENEWABLES

UNDER OBAMA ADMINISTRATION

Obama’s Clean Power Plan was meant to cut down GHG emissions from coal- and gas-fired power plants, with CO2 widely recognised as a prime cause of global warming. The administration encouraged renewables expansion through the Recovery Act in 2009, which included more than $70bn in tax credits and spending for projects regarding clean energy. Declining costs in green power technologies as well as lower finance costs have made renewable generation more competitive and, in some areas, cheaper than coal or gas.

UNDER TRUMP ADMINISTRATION

Some campaign promises regarding the renewable industry are poised to materialise as Trump looks to replace or retract various policies aimed at tackling climate change. Trump signed an executive order on 28 March undoing some of the previous administration’s efforts to tackle climate change and triggering a review of the Clean Power Plan. The 2018 budget was revealed in May, with the administration cutting down on spending for the Office of Energy Efficiency and Renewable Energy (EERE), Environmental Protection Agency (EPA) and the Department of Energy (DOE). EERE’s funding was slashed by almost 70%, bringing down its previous $2.09bn to only $636m. This brought an outcry from environmentalists, who highlighted the strong contribution that sectors such as solar have had to the US economy.

MARKET IMPACT

States are expected to stick to green energy goals under the Renewable Portfolio Standards (RPS), encouraging investment in renewables. California has already made it law that by 2030 at least 50% of its electricity must be renewably sourced. The Energy Information Administration still expects wind and solar power to be the fastest growing green energy sources, with nearly 70 gigawatts (GW) of new wind and solar photovoltaic (PV) capacity added over 2017-2021, encouraged by declining capital costs and the availability of tax credits. However the budget cuts to the EERE could slow down research and technology development in the renewable sector.

CARBON

UNDER OBAMA ADMINISTRATION

During Obama’s tenure, California and the Regional Greenhouse Gas Initiative (RGGI) launched cap-and-trade programmes in anticipation of a national cap-and-trade programme developing under a Democrat president. The Waxman-Markey bill, or the American Clean Energy and Security Act, failed to win approval in Congress, stalling out efforts to create a national cap-and-trade programme. However, Obama’s proposed Clean Power Plan had the ability to create regional cap-and-trade programmes as states looked to comply with the EPA carbon reduction requirements.

REX/Shutterstock Trump, (left to right) Ryan Zinke, Mike Pence, Rick Perry and Scott Pruitt at a DC event

Carbon market participants were eagerly awaiting the programme to pass the final legal hurdles, because they believed it could increase demand, liquidity and participation in US carbon markets. The Clean Power Plan was slated to start in 2022, but a US Supreme Court ruling temporarily halted its progress until the court heard a lawsuit challenging the EPA’s authority or denied an appeal to hear the case. The case is currently being held by the DC Circuit Court of Appeals.

UNDER TRUMP ADMINISTRATION

Trump campaigned on pulling the US out of the Paris Climate Agreement and rolling back a series environmental regulations, including the Clean Power Plan. He acted quickly on a few of those campaign promises. On 28 March, Trump signed an executive order that authorised the EPA to withdraw and amend the Clean Power Plan. His order also revoked previous policies on methane emissions and leases on federal lands. Trump also ordered the EPA to notify the US Attorney General’s office of any changes to the rule to allow the office to ask the court to hold any litigation until the agency reviews the rule. The D.C. Circuit has agreed to hold the case for two separate 60-day periods, making it likely that the rule will never be implemented.

MARKET IMPACT

Trump’s action will not have any impact on existing cap-and-trade programmes, such as the California cap-and-trade programme or the RGGI system. However, none of those programmes are expected to expand as they may have done if the Clean Power Plan had remained in place. Some states have become more proactive in the wake of the US plan to withdraw from the Paris Climate Agreement. Virginia and New Jersey have discussed joining the RGGI scheme in an effort to combat climate change.

ICIS Energy authors:

Julien Mathonniere, market reporter, crude oil
Sophie Udubasceanu, deputy editor, world crude report
Cuckoo James, senior editor, crude futures and refined products
Ruth Liao, editor, LNG Americas
Dan McGraw, US Carbon Markets senior market strategist

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