NEWS OF THE DAY:
Drilling auctions to resume as Interior appeals oil freeze ruling
Niina H. Farah, E & E News, August 17, 2021
The Biden administration is seeking to overturn a judge’s order blocking its pause on federal oil and gas leasing, even as the Interior Department said it planned to comply with the ruling and resume drilling auctions.
Interior announced yesterday it is challenging a June preliminary injunction from Judge Terry Doughty for the U.S. District Court for the Western District of Louisiana that barred the agency from halting lease sales as it led a comprehensive review of the federal oil and gas program.
President Biden had ordered the leasing freeze as part of a broader climate executive order in January, prompting objections from Republican state leaders and fossil fuel industry representatives who warned of the economic harms of preventing natural resource development.
Interior called yesterday’s appeal to the 5th U.S. Circuit Court of Appeals “important and necessary.”
“Together, federal onshore and offshore oil and gas leasing programs are responsible for significant greenhouse gas emissions and growing climate and community impacts,” the agency wrote in a press release. “Yet the current programs fail to adequately incorporate consideration of climate impacts into leasing decisions or reflect the social costs of greenhouse gas emissions including, for example, in royalty rates.”
Interior also noted the need for the agency to promote a more balanced management of public lands, pointing to the significant impacts of leasing on wildlife, historical and cultural resources, and the government’s obligations to Indigenous tribes.
“Federal onshore and offshore oil and gas leasing will continue as required by the district court while the government’s appeal is pending,” the agency said.
The appeal came the same day that a coalition of a dozen energy trade groups led by the American Petroleum Institute launched a legal challenge to the leasing pause that sought to push the government to resume lease sales.
“Defendants have suddenly and comprehensively upended the status quo by indefinitely postponing or canceling all federal oil and gas lease sales without providing any rationale,” the coalition wrote in a complaint yesterday to the same Louisiana district court that had blocked the government pause. “Indeed, Defendants are not even willing to publicly admit what they are doing, much less provide an explanation sufficient to justify the change.”
Echoing previous litigation from Republican-led states, the coalition argued that the Biden administration violated a federal requirement to hold quarterly lease sales. The government’s actions also prevented progress on drafting a new Five-Year Leasing Program for offshore oil and gas development to replace the plan set to expire in 2022.
The Biden administration had violated the National Environmental Policy Act and other statutes by failing to go through the correct regulatory process before implementing the leasing moratorium, the groups said.
The trade associations are asking for the court to order the government to proceed with onshore and offshore lease sales under the Mineral Leasing Act, the Mineral Leasing Act for Acquired Lands, and the Outer Continental Shelf Lands Act.
They also called for the court to compel Interior to adopt a new Five-Year Leasing Program for auctions on the outer continental shelf.
The oil and gas industry lawsuit came on the heels of a challenge in the U.S. District Court for the District of North Dakota from North Dakota Attorney General Wayne Stenehjem (R), who faulted the Biden administration for canceling auctions of public mineral rights in the state this spring (Energywire, July 9).
Wyoming and the Western Energy Alliance had launched their own challenges in the U.S. District Court for the District of Wyoming soon after Biden’s order.
‘Past time’ for new sales
Doughty, a Trump appointee, had blocked the administration’s leasing pause in response to another earlier suit from a coalition of 13 states led by Louisiana Attorney General Jeff Landry (R) (Energywire, June 16).
After halting all federal oil and gas lease sales in the first and second quarters of this year, the government still has not announced it is resuming leasing, the trade associations said.
But the government also had not made a definitive statement that all onshore federal lands are unavailable, the groups added in their lawsuit.
Following Interior’s statement that the agency would comply with the court order, the Independent Petroleum Association of America, one of the parties in the lawsuit, noted on Twitter that the Biden administration did not offer a timeline for restarting leasing.
“It is past time for U.S. offshore leasing to resume,” National Ocean Industries Association President Erik Milito said in a statement. The group is also part of the new lawsuit against Interior.
Milito called for Interior to follow the “letter of the law,” pointing to the higher environmental standards of offshore production in the U.S. compared with other nations.
“The department must hold lease sales and provide a justification for significant policy changes,” said API Senior Vice President and chief legal counsel Paul Afonso. “They have yet to meet those requirements in the eight months since instituting a federal leasing pause.”
Interior stated it would comply with Doughty’s order and would “exercise the authority and discretion provided under the law to conduct leasing in a manner that takes into account the program’s many deficiencies,” according to the press release.
Interior is still reviewing the leasing program’s “noted shortcomings” and completing its report, the agency said.
It is also conducting a programmatic analysis of Interior’s programs to meet Biden’s goal to achieve economywide net-zero greenhouse gas emissions in the U.S. by 2050. The agency also noted it will announce plans to review the federal coal leasing program next week, in response to separate litigation.
Environmental groups praised the government’s appeal and urged the administration to take action to end leasing.
“Our planet can’t afford any more new fossil fuel extraction,” said Taylor McKinnon, a senior campaigner at the Center for Biological Diversity. “We’re out of time. The world’s existing oil and gas fields will already push warming past 1.5 degrees Celsius if they’re fully developed.
“We need to end new federal oil and gas leasing and production to have any chance at a livable planet,” McKinnon added.
Oil and gas industry claims climate report doesn’t legally justify pause on leases
Baton Rouge Business Report, August 17, 2021
If the Biden administration cites the Aug. 9 United Nations climate report as evidence to support keeping federal oil and gas leasing on pause, it may not have the law on its side, according to Bloomberg News.
“Until they are able to convince a majority of lawmakers to change the law, they are still bound by the law,” including the Mineral Leasing Act, says Kathleen Sgamma, president of the Western Energy Alliance, which represents oil and gas producers operating on federal land.
The U.N. report, published by the Intergovernmental Panel on Climate Change and ratified by 195 U.N. member countries, represents the scientific consensus that climate change is unequivocally caused by human greenhouse gas emissions, primarily from burning fossil fuels. However, the report is insufficient for justifying the lease pause under the Mineral Leasing Act for Interior, says John C. Martin, a partner at Holland & Hart LLP in Wyoming.
The White House ordered the Interior Department in January to “pause” federal oil and gas leasing to allow for a review of the federal leasing program in the context of climate change. A Louisiana federal judge in June said the pause violates the Administrative Procedure Act because Interior offered no reason for canceling 2021 lease sales and issued a preliminary injunction against it.
Interior Secretary Deb Haaland said in July that the agency is complying with the injunction, but the pause remains in effect. Interior will likely propose a new leasing rule and prepare a draft environmental impact statement on the leasing program, which will take some time, says Mark Squillace, a natural resources law professor at the University of Colorado Law School. Read the entire story.
Column: Coal’s runaway rally makes crude oil-linked LNG competitive
Clyde Russell, Reuters, August 16, 2021
Thermal coal’s spectacular rally in Asia is now running the risk of becoming a victim of its own success, with the fuel becoming uncompetitive versus liquefied natural gas (LNG) priced against crude oil.
Benchmark high-quality Australian thermal coal at Newcastle Port rose to a 13-year high of $168.71 a tonne in the week to Aug. 13.
The grade, which is preferred by Japanese and South Korean utilities, has now surged 264% since its 2020 low of $46.37 a tonne in September, hit at a time when demand was suffering as Asian countries locked down their economies to combat the spread of the coronavirus pandemic.
The Newcastle weekly index, as assessed by commodity price reporting agency Argus, is now closing in on the all-time high of $195.20 a tonne from July 2008. That was reached at a time when China was rapidly increasing imports, switching to becoming a net importer having previously been a net exporter.
Data from Refinitiv shows that the natural gas switching price in Japan, which is the price at which generating electricity from coal is equal to that from LNG, has been moving in favour of the super-chilled liquid fuel in recent weeks.
It is currently $10.01 per million British thermal units (mmBtu), while the Brent crude oil-linked LNG price is $10.28 per mmBtu.
This means that it is almost as cheap to use LNG to generate power as coal, which is a reversal from recent history.
At the end of last year, the switching price was $4.71 per mmBtu, while the Brent-linked LNG price was $7.03, meaning that coal was substantially cheaper to use than LNG.
While spot LNG prices in Asia have also surged amid a scramble for cargoes amid strong summer air-conditioning demand, it’s worth noting that the bulk of LNG traded in the region is still under long-term, oil-linked contracts.
Japan and South Korea are the two countries most able to switch between coal and LNG for power generation and are major importers of both types of the fuel.
Japan was the world’s biggest importer of LNG but is likely to be surpassed by China this year, while South Korea ranks third. Meanwhile Japan is the world’s third-biggest coal importer behind China and India, while South Korea ranks fourth.
While the incentive price to switch to oil-linked LNG from coal is almost at parity in Japan, in South Korea it has already flipped in LNG’s favour.
That switching price is currently $12.51 per mmBtu, while the Brent-linked LNG price is $10.28, according to Refinitiv data.
SWITCHING TAKES TIME
It’s worth noting that just because the switching price moves in favour of LNG, it doesn’t automatically follow that utilities will immediately change their generation mixes.
It usually takes several months for the switch to take place as oil-linked LNG prices typically move with a lag to fluctuations in the crude price, and coal purchases are usually agreed on a quarterly basis.
But if the current trends continues with flat to modestly lower crude prices and high coal prices, then in the coming months it’s likely that some fuel switching will occur.
This is more likely to result in a softening in thermal coal prices, rather than movements in LNG prices and demand.
In effect, LNG in Asia is two separate markets: the traditional long-term, oil-linked contracts and the short-term contract and spot market.
About two-thirds of LNG supplied in Asia is on long-term, oil-linked contracts, while the balance is made up of short-term and spot deals.
Much of the spot buying is conducted by countries other than Japan and South Korea, including China, India, and Pakistan.
Brent crude oil had rallied strongly from its pandemic lows, gaining some 300% to reach a 2021 high of $77.84 a barrel on July 6.
However, since then Brent has trended lower. It was trading around $70 a barrel in early Asian trade on Monday, amid growing market realisation that while demand is recovering in Europe and North America, it remains soft in Asia – the top-importing region – as several major importers continue to battle coronavirus outbreaks.
A softer crude price will only serve to make oil-linked LNG more competitive against thermal coal in coming months.
Group releases recommendations for Alaska fiscal policy (apnews.com)
Becky Bohrer, Associated Press, August 17, 2021
A comprehensive fiscal policy for Alaska “must be negotiated and agreed to as whole” and not taken up piecemeal, according to a report from a legislative working group that was charged with making recommendations for the special session that opened Monday.
Pieces the report said the group agreed to as necessary parts of a comprehensive approach include restructuring Alaska’s oil-wealth fund and limiting what is drawn from it and providing constitutional certainty for a dividend for residents.
Other elements include a new dividend formula; new revenues; budget cuts and a “healthy” state infrastructure budget, as well as spending cap revisions and possible changes in how the constitutional budget reserve fund works.
Lawmakers faced with deficits in recent years have relied heavily on the budget reserve fund, which requires three-fourths support in each the House and Senate to access.
The report states that working group members “do not support addressing only one or two issues to the exclusion of others.”
The report said members recommended considering two approaches to the perennial debate over dividends: placing in the constitution a dividend formula or constitutionalizing the promise of a dividend that would be based on a formula in law.
It said members recommended working toward a formula that would provide half of what’s drawn from the permanent fund toward dividends, though Rep. Jonathan Kreiss-Tomkins, a co-leader of the group, said different members had different perspectives and that this was an assessment of “where a political median might be.”
The group agreed it was important to keep in mind in weighing a fiscal package what realistically could pass the Legislature, the report said.
It did not recommend specific revenue measures but said the Legislature should consider additional revenues of $500 million to $750 million, and budget cuts ranging from $25 million to $200 million over multiple years.
The report outlined two transition approaches, with some members favoring one or the other. One would take money from permanent fund earnings, in excess of a withdrawal limit currently in law, to help cover deficits through “the first few fiscal years” after a fiscal plan is adopted. The other would take a phased approach that begins with “more modest” dividends and steps up to what a dividend under a new formula would be.
Sen. Jesse Kiehl, a Juneau Democrat and group member, noted there wasn’t unanimity on a transition approach. “There are still hard questions to work out,” he said.
Kiehl said there would never be a “magical solution” that moves quickly through the Legislature.
“If our colleagues are willing to put in the work and do the same kind of hard talking that we’ve done, I think we can get to a place where a bill passes the Senate and a different bill passes the House and we watch each other like hawks” and shepherd through pieces of legislation, he said.
The group, which was composed of two members from each legislative caucus, was created in June as part of an effort to avert a government shutdown amid a budget dispute.
Gov. Mike Dunleavy has urged lawmakers to act on his proposed constitutional amendment that would restructure the permanent fund and put 50% of the draw from the fund toward dividends.
Concerns have been raised about costs associated with the plan, and House Speaker Louise Stutes told reporters she didn’t see support in the Legislature currently for a constitutional amendment for the dividend.
Proposed constitutional amendments require two-thirds support in each the House and Senate to qualify for the ballot.
The special session agenda, which Dunleavy set, did not include an appropriations bill for a dividend check this year or to address programs whose funding was left in limbo after a critical vote failed in the House and Senate earlier this year.
Dunleavy spokesperson Jeff Turner has said budget issues, including a dividend, “can be addressed at the appropriate time by adding an appropriation bill” to the agenda.
Stutes sent Dunleavy a letter Monday asking him to add an appropriations bill “immediately.”
Holding the dividend and “other essential programs hostage while we work towards a solution is unconscionable and counterproductive to compromise,” she wrote.
Meanwhile, the Legislative Council voted 8-6 to require masks at the state Capitol amid a rise in COVID-19 cases.
The city of Juneau requires masks in indoor public places, regardless of vaccination status, though the Capitol doesn’t fall under the city jurisdiction, said Rep. Sara Hannan, the chair of the Legislative Council.
The adopted policy, passed by the council Monday, calls for face coverings in legislative facilities regardless of vaccination status. A proposal that would have recommended face coverings failed.
The adopted policy also states that masks are optional in an individual lawmaker’s office but that masking rules must be adhered to if Legislative Affairs Agency staff or lounge staff are to enter. The lounge provides food service.
The council, composed of House and Senate leaders, in May voted to make mask-wearing optional, following an easing of testing rules as more people got vaccinated against COVID-19.
Recent U.S. Centers for Disease Control and Prevention guidance recommends masks in indoor public settings in areas of substantial or high transmission.