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U.S. Navy Affirms Commitment to Use Alternative Fuels

Posted in Biofuels, Government Contracts

On August 25, 2014, the U.S. Navy announced that it would continue its four-year collaboration with the Chilean Navy to research, develop, and use “drop-in” alternative fuels to power surface ships and aircraft.  Both navies have established goals of significantly increasing their use of alternative fuels.  The Chilean Navy intends to use renewable energy sources for forty-five percent of its newly installed energy capacity over the next eleven years.  Similarly, the U.S. Navy hopes to satisfy fifty-percent of its energy needs with alternative energy sources by 2020.  As part of this effort, the U.S. Navy has been pursuing drop-in biofuels, which are chemically indistinguishable from petroleum-derived fuels and may be used in existing ships, aircraft, and infrastructure.  The U.S. Navy confirmed the viability of using drop-in biofuels during a fleet exercise in 2012 and intends to use drop-in biofuels in normal operations beginning in 2016.

The announcement of the continuing partnership between the U.S. and Chilean Navies comes shortly after the U.S. Department of Defense (“DoD”) issued its annual $3.5 billion procurement for bulk fuels for facilities located in the Eastern, Inland, and Gulf Coast Region, in which the U.S. Navy for the first time sought biofuel and petroleum blends.  The procurement represents a major development in the partnership between the U.S. Navy and the U.S. Department of Agriculture (“USDA”), which was formed in 2010 after President Barack Obama called on the U.S. Navy, USDA, and the Department of Energy to facilitate the development drop-in alternative fuels.  As we previously reported, the Department of Energy is independently making efforts to develop drop-in biofuel technology through its recently announced clean energy technology loan guarantee program.

The U.S. Navy is aiming to make ten percent of its purchases under the new procurement in biofuel and petroleum blends.  As part of the USDA’s partnership with the U.S. Navy, the Commodity Credit Corporation offered grants to suppliers of blended products to ensure that blended products were offered at a competitive price.  USDA’s role in the procurement is critical because the 2014 National Defense Authorization Act (“NDAA”) limits DoD’s ability to purchase drop-in fuels for operational purposes if the drop-in fuels are not cost-competitive with traditional fuels.  The current version of the 2015 NDAA contains a similar restriction that limits DoD’s ability to purchase biofuels until the cost of biofuel is generally equal to the cost of traditional fuel, which the U.S. Navy and USDA expect to occur by 2016.

The U.S. Navy is expected to seek petroleum and biofuel blends in a second bulk-fuel procurement later this year.  Through both procurements, the U.S. Navy intends to purchase up to 800 million gallons of biofuel by 2015.  The U.S. Navy’s efforts could result in an expansion of the domestic capacity to produce drop-in biofuels, which is currently about 210 million gallons per year according to the U.S. Energy Information Administration.

EPA Clarifies Standards for CERCLA Assessments

Posted in EPA

In a move designed to provide greater certainty to those purchasing, selling, or evaluating industrial or commercial properties, the Environmental Protection Agency (EPA) recently proposed to remove any lingering effect of ASTM International’s E1527-05, a nine-year-old industry standard practice for evaluating potentially contaminated sites under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

As explained in detail in our February 24, 2014 E-Alert, “Amended All Appropriate Inquiries (AAI) Rule Offers New Due Diligence Standard, Focuses on Vapor Releases,” the EPA referenced and countenanced ASTM International’s updated framework, E1527-13, as an alternative due diligence standard to ASTM E1527-05.  Issued on June 16, 2014, the Proposed Rule would clarify Phase I Environmental Site Assessment (ESA) standards by replacing ASTM E1527-05 with ASTM E1527-13.  Yet these requirements still leave significant uncertainty in the absence of more detailed guidance about how to conduct vapor intrusion evaluations.

I.  Background

International standards organization ASTM International modeled E1527-05 on the EPA’s All Appropriate Inquiries (AAI) Rule in 2005.  The AAI Rule is a due diligence standard that allows buyers of potentially contaminated properties who conduct an investigation meeting the rule’s requirements to preserve certain defenses to federal cleanup liability under CERCLA when conducting Phase I ESAs.  See 40 C.F.R. § 312 (2013).  The ASTM E1527-05 framework was developed to provide guidance for such investigations, and instructed would-be purchasers to undertake all appropriate inquiries regarding the condition of a property before completing its sale.  Any buyer who conducted such inquiries in compliance with ASTM E1527-05 could then qualify for certain landowner liability protections under CERCLA, including the innocent landowner, bona fide prospective purchaser, and contiguous property owner defenses.

Last December, the EPA amended the AAI Rule to allow a purchaser to satisfy Phase I ESA requirements by following either ASTM E1527-05 or ASTM E1527-13.  See 78 Fed. Reg. 79319 (Dec. 30, 2013).  As explained in our February 24, 2014 E-Alert, the 2013 framework included new regulatory file review requirements, updated definitions of certain key terms, including “de minimis condition,” “release,” “Recognized Environmental Condition,” and “Historical Recognized Environmental Condition,” and expanded ASTM E1527-05’s definition of “migrate/migration” to include vapor migrations.

II.  Proposed Rule

The EPA amended the AAI Rule through direct final rulemaking, an approach whereby an agency publishes a rule and a notice of proposed rulemaking simultaneously because it expects that the rule will prove non-controversial.  But the move nonetheless introduced confusion because in endorsing both ASTM E1527-05 and ASTM E1527-13, it recognized two distinct standards.

Responding to that criticism, the EPA has now proposed to replace ASTM E1527-05 with ASTM E1527-13 for purposes of the AAI rule so as “to reduce any confusion associated with the regulatory reference to a historical standard” and “promote the use of the standard currently recognized by ASTM International as the consensus-based, good customary business standard.”  Amendment to Standards and Practices for All Appropriate Inquiries, 79 Fed. Reg. 34480 (proposed June 16, 2014) (to be codified at 40 C.F.R. 312), at 11.  Besides removing all references to ASTM E1527-05, the Proposed Rule would not alter the substance of the AAI Rule.

III.  Implications

ASTM E1527-13 incorporates new language about the need to evaluate soil vapor risk when conducting Phase I ESAs.  Soil vapor intrusion is of particular focus with respect to TCE and other volatile organic compounds, but can also involve other contaminants.  The EPA has suggested, however, that a vapor intrusion evaluation may already have been required under ASTM E1527-05.  In its preamble to the rule offering ASTM E1527-13 as a new due diligence standard, the agency stated that it “in its view, vapor migration has always been a relevant potential source of release or threatened release that, depending on site-specific conditions, may warrant identification when conducting all appropriate inquires.”  78 Fed. Reg. 79319 (Dec. 30, 2013).  It is unclear, however, whether the EPA intended this statement to reflect near contemporary Phase I ESAs (conducted after ASTM E1527-13 was developed) or instead intended to suggest that the obligation has always existed.  Consequently, there may be future disputes as to whether a Phase I ESA not describing an evaluation of soil vapor intrusion actually satisfied the AAI Rule.

ASTM E1527-13 leaves open a number of key questions about vapor intrusion evaluations.  Neither ASTM E1527-13 nor the AAI Rule describes, for example, what levels in soil gas or groundwater should lead to concern or what levels would require mitigation.  The EPA and various states are developing guidance in this area to further clarify acceptable levels, how evaluations are to be conducted, whether one can evaluate risk based upon groundwater conditions alone, whether an evaluation must consider multiple lines of evidence, what vapor levels would be deemed acceptable in a residential setting, and what actions are required to mitigate risk.[1]

IV.  Conclusion

Consultants have already been transitioning toward the ASTM E1527-13 standard.  Should the Proposed Rule be adopted, ASTM E1527-05 will still satisfy the AAI Rule for properties acquired between November 1, 2005 and the effective date of the new action.  The EPA also anticipates providing for a delayed effective date of one year following any final action, to give those still using the previous framework time to complete ongoing investigations and become familiar with the updated standard.

However, it is important to recognize the potential that the EPA may claim that a failure to evaluate soil vapor, where otherwise appropriate, is a requirement under ASTM E1527-05 and not only ASTM E1527-13.  It is therefore essential that potentially-affected individuals keep current on EPA developments with respect to the evaluation of soil vapor intrusion, and obtain sound and up to date advice from environmental professionals.

 

EU Court Allows Discriminatory Green Energy Support Schemes

Posted in Europe, Renewables, Wind

David Haughan, Stagiarie, Summer 2014, contributed to this post.  Mr. Haughan was a legal trainee at the Brussels office of Covington and Burling LLP during the Summer of 2014.  David studies at King’s College, London.

In a landmark decision (CJEU, C-573/12, Ålands Vindkraft AB v. Energimyndigheten) the Court of Justice of the European Union ruled that Member States do not need to open up renewable energy support schemes to producers in other EU countries.  The Court made a clear choice in favor of investor confidence, allowing far-reaching limitations to the EU’s fundamental principle of free movement of goods. 

Background

Under Swedish law, electricity distributors are required to surrender a set amount of green certificates per year, which they need to purchase from electricity producers. The Swedish government only awards certificates to Swedish producers of renewable electricity, thereby effectively putting foreign producers at a competitive disadvantage.   Ålands Vindkraft, a Finnish producer of wind energy, located in Finland but mostly connected to the Swedish grid, challenged the Swedish support scheme on the grounds that it violates the principle of free movement of goods.

Importantly, the Swedish system was adopted in an effort to achieve the national renewable energy targets, provided by Directive 2009/28 on the promotion of the use  of renewable energy (“Renewable Energy Directive”).  This Directive allows Member States to adopt support schemes, and grants Member States “the right to decide (…) to which extent they support energy from renewable sources which is produced in a different Member State” (Article 3(3)).

Analysis of the Judgment

Under EU law, measures that restrict the free movement of goods may be justified if they are intended to protect the environment and are proportionate and not discriminatory.  The Court decided that while the Swedish system restricts the free movement of goods, such restriction is justified because it aims to protect the environment by promoting  renewable energy.  In doing so, Court rejected the  Opinion of Advocate General Bot, who argued that both the Swedish system and the Renewable Energy Directive are contrary to EU law.

The Court referred to its Preussen Elektra case, where a reduction of greenhouse-gas emissions was found to protect the environment, to hold that the Swedish scheme could be justified as a measure aimed at protecting the environment.  The Court then assessed the Swedish certification scheme in light of the proportionality principle, which only allows a restriction of the free movement goods  if it is necessary for achieving the environmental objective, and if such objective cannot be achieved by less intrusive measures.

The judgment lists three main reasons why the territorial limitation of the Swedish support scheme is not disproportionate.  First, the Court took note of the practical considerations that justify favoring energy at the production stage, rather than at the consumption stage.  According to the Court, once the green electricity has been allowed into the transmission or distribution system, its origin is difficult to determine, thus rendering identification at the consumption stage difficult to put in practice.  Second, the Court pointed out that the Renewable Energy Directive sets national targets, and that the energy mix of each EU Member State varies.  The Court went on to note that, in accordance with the Directive, “Member States must be able to control the effect and costs of their national support schemes according to their different potential.”  Third, the Court overruled Ålands Vindkraft’s argument that the Swedish territorial limitation was no longer necessary, as Sweden had already fulfilled its requirements relating to those targets.  According to the Court, even though Sweden already reached its target, the national scheme intends to foster investments in new installations, giving producers certain guarantees about the future marketing of their green electricity, thus assuring investors’ confidence.

While logical from a business perspective, this generous proportionality assessment fails to address precisely why territorial restrictions in national support schemes are necessary to achieve the objective of environmental protection.  In particular, the Court does not explain to what extent renewable energy is promoted more efficiently through such schemes than through mechanisms that are open to producers located throughout the EU.  Rather, the judgment focuses on the workability of the current system foreseen by the Renewable Energy Directive, which is based on national targets.  In that particular context, the Court considers that Member States must be able to remain in control of their national support schemes, and that territorial restrictions contribute to investor confidence, which can in turn boost the renewable energy produced by that Member State.

Impact

  • Investor Confidence – The Court’s decision has been widely welcomed by the renewable energy industry.   Opening up the national support schemes to foreign producers could have created uncertainty on the renewable energy market, thus potentially harming investor confidence.  In contrast, the judgment protects the predictability of investments in renewable energy and reassures green energy companies and investors alike.  Indeed, the Court held that the effectiveness of green certificate schemes “requires by definition a measure of continuity sufficient, in particular, to ensure the fulfilment of the legitimate expectations of investors who have committed themselves to such projects, and the continued operation of those installations.”
  • Decision to the Relief of Member States – Several EU governments will undoubtedly have breathed a sigh of relief after reading the Court’s decision as many of them apply support schemes that are similar to the Swedish system.  Should the Court have followed Advocate General Bot, then the very existence of national support schemes would have been questioned, potentially rendering the well-established support systems in many Member States illegal.  German economy and energy minister Sigmar Gabriel welcomed the decision, saying that it would help Germany’s case as it seeks approval for its reformed system of renewable subsidies.
  • EU Internal Electricity Market – Not everyone will be pleased with the Court’s judgment, as it is clearly at odds with the European Commission’s ambition to establish an “internal electricity market.”  In its Communication on the Internal Electricity Market, the European Commission explicitly advocates removing “possible distortions to the single market arising from different national approaches” (original emphasis).  Significantly, according to the Communication, “the Commission specifically as regards renewables envisages exploring options for […] ‘Europeanisation’ of support schemes for the future EU legal framework on renewables.”   In light of the Court’s decision, it seems unlikely that true “Europeanisation” will be achieved any time soon.
  • Spill-Over Effects? – This Court’s decision may have an impact well beyond the sphere of national support schemes.  For instance, the decision provides Member States with strong arguments to publish nationally oriented public tenders in the field of renewable energy.   Indeed, the Court considered that the purpose of the Swedish scheme is “to support the operation of installations producing green electricity once they become active,” and that it is “designed to facilitate the sale of green energy that they produce at a price higher than the market price for conventional energy.”   This reasoning could also apply to public tenders for projects that contribute to the increase of renewable energy shares in a particular Member State.

UK Parliament Announces Tighter Planning Guidance for Onshore Oil and Gas Applications

Posted in Europe, Natural Gas, Oil

In the first blog of this two-part series, we considered the potential impact of the 14th Round on the commercialisation of the shale gas in the UK in light of recent developments in this industry.

This second blog post focusses on the additional planning guidance for licence applications in National Parks, Areas of Outstanding Natural Beauty and World Heritage Sites, which was simultaneously released with the announcement of the 14th Round on 28 July 2014.

As we noted in part one, the 14th Round is the first opportunity for bidders to obtain onshore PEDLs following the release of a study that estimated the UK has a potentially vast amount of shale reserves. The 14th Round is also the first licensing round to follow protests in 2013 by members of the public at Cuadrilla’s site in Balcombe in West Sussex, after which Cuadrilla did not pursue fracking activities at the site. Shortly after these events, the UK Government published a new Environmental Report for public consultation, which assessed the likely significant effects of the draft Licensing Plan for the 14th Round.

Responses to the consultation showed that there was “strong support for the exclusion from licensing of environmentally sensitive sites”. The announcement of tighter planning guidelines acknowledged these such concerns and expressed the need to “create the right framework to accelerate unconventional oil and gas development in a sustainable way”.

On 28 July 2014, Lord Ahmad of Wimbledon, a Tory communities minister, clarified the Government’s approach to the exploration of unconventional hydrocarbons, stating that: “there are areas of outstanding landscape and scenic beauty where the environmental and heritage qualities need to be carefully balanced against the benefits of oil and gas from unconventional hydrocarbons.”

The planning guidance attempts to strike this “careful balance” by requiring mineral planning authorities to give “great weight” to “conserving [the] landscape and scenic beauty” of National Parks, the Broads and Areas of Outstanding Natural Beauty when considering applications for unconventional hydrocarbon development in such areas. Further, where applications represent “major development” in such areas, planning permission should be refused, “except in exceptional circumstances and where it can be demonstrated they are in the public interest”.[1]  In relation to World Heritage Sites, mineral planning authorities should “refuse consent unless wholly exceptional circumstances apply”.[2]

In addition, licence applicants will be required to submit a Statement of Environmental Awareness to demonstrate their understanding of environmental sensitivities relevant to the area proposed for licence.[3]

The planning guidance does not exclude the possibility of licensing fracking activities in even the most significant of the UK’s environmentally sensitive areas, should such activities be considered capable of deriving an exceptional benefit. Proponents of the shale gas industry in the UK, and its potential economic and energy security-related benefits for the nation, would view this as a pragmatic approach to balancing the possibility of exploiting highly lucrative hydrocarbon reserves against preserving the UK’s landscape.

Perhaps unsurprisingly, the announcement has not silenced all of the critics of fracking activities in the UK. Greenpeace UK reiterated its opposition to fracking in light of the 28 July 2014 announcement. In March 2014, the National Trust publicly advocated a complete ban on fracking in National Parks. In a 28 July 2014 press release, the National Trust welcomed the Government’s new planning proposals, but also suggested that the scope of the planning guidance should extend further still, to cover “nature reserves and other wildlife sites like Sites of Special Scientific Interest (SSSIs) as well”.

The 14th Round expands the possibility for increased commercial exploitation of shale gas in the UK, while also attempting to balance new exploration activities with concerns to safeguard the UK’s most significant environmental sites. These developments are likely to be of interest to energy companies considering investment in unconventional gas in the UK; this appears to be the hope of the UK Government, which is taking steps to actively encourage the future development of the UK’s shale gas industry. However, it remains to be seen whether the latest licensing round will be a “game changer” for the shale gas industry in the UK or public attitudes towards the impact of fracking activities on the UK’s countryside.


[1] The assessment that needs to be carried out is set out in paragraph 116 of the National Planning Policy Framework.

[2] The test to be considered by mineral planning authorities is set out in paragraph 133 of the National Planning Policy Framework.

[3] Statement by Baroness Verma on the outcome of the strategic environmental assessment (SEA) which has been conducted for further onshore licensing. [https://www.gov.uk/government/speeches/outcome-of-the-strategic-environmental-assessment]

UK Parliament Announces the 14th Landward Licensing Round

Posted in Europe, Natural Gas, Oil

In the first of a two part series on recent developments in the UK shale gas industry, this blog post considers the potential impact of the announcement on 28 July 2014 by the Business and Energy Minister, Matthew Hancock, inviting applications for Licences in the 14th Landward Licensing Round (the 14th Round) on the exploitation of shale gas in the UK, in the context of key recent developments in this fledgling industry.

The licensing system for the exploitation of the UK’s onshore and offshore oil and gas reserves is administered by Department for Energy and Climate Change (DECC). The award of a Petroleum Exploration Development Licences (PEDL) by DECC grants the licensee exclusivity in respect of oil or gas exploration or production within the licence area.[1]

The 13th onshore licensing round (the 13th Round) was the latest onshore licensing round in the UK, occurring in 2008. In the 13th Round, onshore PEDLs were awarded by DECC for the exploration of unconventional hydrocarbons, including shale gas, for the first time. After planning permission was granted, consent was given to drill for shale gas in five locations, two of which were held by Cuadrilla, an independent UK exploration and production company. To date, the UK shale gas industry remains in the exploratory phase, which is the earliest phase of development.

During this initial stage, the shale gas industry in the UK has experienced notable setbacks. The UK Government announced a moratorium on fracking in the UK following seismic tremors (with magnitudes of 2.3 and 1.5) arising from fracking activities at Preese Hall in Lancashire in April and May 2011. Preparations for the 14th Round originally began in December 2010, but were suspended after the events at Preese Hall.

In December 2012, the Energy and Climate Change Secretary of State announced that new regulatory requirements were being introduced to reduce the potential seismic risks associated with fracking activities in the UK and that fracking could resume in the UK. With this announcement, preparations for the 14th Round also resumed.

Further positive news for the industry followed in June 2013, when a report published by the British Geological Survey (BGS) in association with DECC estimated that there is 1,300 trillion cubic feet (tcf) (central estimate) of shale resources deposits in the Carboniferous Bowland-Hodder Shale area, which stretches from Blackpool and Wrexham in the North West of England to Scarborough in the North East of England. The potential significance of these estimated reserves for the UK’s future energy needs is put into perspective when compared to the annual consumption in the UK of just over 3 tcf.

In June 2014, the BGS announced that it had completed an estimate for the amount of shale gas and oil in the Midland Valley of Scotland. The shale gas in place is estimated at 80.3 tcf (central estimate), and the shale oil in place is estimated at 6.0 bbl (central estimate). The UK Onshore Operators Group (UKOOG), the representative body for the UK onshore oil and gas industry, welcomed the BGS’s estimates as a “reassurance to investors who wish to explore for oil and gas onshore in Scotland”.

However, the commercial viability of extracting some or all of the country’s potential shale resources must also be considered. A 2013 report by the US Energy Information Energy has estimated that technically recoverable shale oil and shale gas resources in the UK could amount to up to 26 tcf. Various studies have been undertaken on the potential impact of the commercialisation of shale gas for the UK, but so far have not produced concrete conclusions on the outlook for shale gas in the UK. For instance, an Energy and Climate Change Select Committee (ECCC) inquiry in 2011 concluded that although shale gas resources in the UK could be considerable — particularly offshore — shale gas was unlikely to be a “game-changer” as in the US. A follow-up ECCC inquiry in 2013 on the impact of shale gas on energy markets concluded that it was “too early to say whether domestic production of shale gas could result in cheaper gas prices in the UK” and that “[…] it remains uncertain whether industry will consider shale oil economically worthwhile to explore”.

DECC’s plans to create an attractive and effective framework for the exploration of shale gas are intended to encourage the development of the shale gas industry in the UK. In addition to inviting bidders to apply for PEDLs in the 14th Round, the UK Government has recently introduced measures to make the tax environment more appealing to investors in unconventional hydrocarbons. The development of the shale gas industry will, in turn, help to more accurately ascertain the amount of estimated reserves that can be viably extracted and exploited from the UK’s underground shale deposits, as the most accurate estimates can be obtained from test drilling.[2]

The announcement of the 14th Round represents a step forward in this development plan, creating the first opportunity for applications for new onshore PEDLs since the BGS published its estimates of the UK’s shale gas reserves. The competition for licences is likely to attract significant interest from energy companies seeking to explore the UK’s potentially vast shale reserves. Of particular interest are likely to be the Bowland basin of the north-west, a central belt of Scotland and the Weald in the south-east.

The identity of the bidders for PEDLs in the 14th Round will be noted with interest. In June 2013, Centrica acquired a 25% stake in Cuadrilla’s interest in the Lancashire Bowland shale gas exploration licence area. The introduction of larger players, such as Centrica, investing in UK shale gas after the 13th Round indicates an increased confidence in the industry. However, it would be premature to conclude that this acquisition marks the beginning of a trend of activity in UK shale gas by larger energy companies. At present, the industry remains dominated by independent energy companies, notably Cuadrilla.


[1] In addition to the award of a PEDL, there are various other statutory and legal requirements in order for exploration or production activities to be commenced within the licence area. The licensee must also obtain: access rights from landowners; planning permission under the statutory planning regime (which may also involve undertaking an Environmental Impact Assessment); permits from the Environment Agency; and approval from the Health and Safety Executive. Further activities such as the drilling of wells, installation of facilities or production of hydrocarbons require additional authorisation by the Secretary of State for Energy and Climate Change.

[2] Parliamentary Note SN/SC/6073, 5 June 2014.

CFTC Commissioner O’Malia Resigns from the CFTC to join ISDA

Posted in CFTC

On Monday, July 21, CFTC Commissioner Scott D. O’Malia announced his resignation from the Commission as of August 8, 2014.  On July 23, the International Swaps and Derivatives Association (ISDA) announced that Mr. O’Malia was appointed chief executive officer and a director of ISDA.  See Scott O’Malia Appointed Chief Executive Officer of International Swaps and Derivatives Association.  Commissioner O’Malia was considered a strong advocate for end-user issues, specifically those impacting energy companies.  Therefore, energy companies should be sure to meet with the new Commissioners to discuss the impact of the new CFTC regulations on their businesses.

Commissioner O’Malia’s departure will, once again, leave vacant a Republican seat on the Commission.  Once Commissioner O’Malia departs, the sole Republican Commissioner will be Christopher Giancarlo, who was recently sworn in on June 16.  Commissioner O’Malia began his service on October 16, 2009, prior to the passage of the Dodd-Frank Act, and is currently the most senior Commissioner at the CFTC.  Upon his departure, Commissioner Mark Wetjen will be the longest serving Commissioner; his term began on October 25, 2011.

Commissioner O’Malia reconstituted the CFTC’s Technology Advisory Committee and served as its chairman.  The Committee was very active during O’Malia’s tenure and took a leading role in examining market issues such as the “flash crash,” and “high frequency trading,” as well as highlighting the importance of investments in technology by the CFTC.  It is as yet unknown who will be the next chairman of the Committee, but it is of particular importance as international regulatory scrutiny surrounding “high frequency trading” continues.

During his term, Commissioner O’Malia was an advocate for the impact of the CFTC’s Dodd-Frank regulations on end-users, including energy companies, and their ability to hedge commercial risk.  Earlier this month Commissioner O’Malia continued to express concerns for the increased costs of the CFTC regulatory reforms:

. . . CFTC regulations are negatively impacting liquidity for end-users and making hedging too costly.  These increased costs will ultimately trickle down to consumers through higher prices for commodities . . . The legitimate hedging and risk mitigation activities of commercial businesses like end-users were not supposed to be impacted by the OTC derivatives reforms in Dodd-Frank because they did not contribute to the financial crisis.

See Keynote Address by Commissioner Scott D. O’Malia at the Federal Reserve Bank of New York.  Commissioner O’Malia also voiced support in his speech for the CFTC reauthorization bill recently passed by the U.S. House of Representatives that provided, among other things, relief to end-users.  The bill would excluded end-users from the “financial entity” definition, which would potentially relieve entities such as energy companies from registration as a “swap dealer.”  CFTC reauthorization and the House bill still need to be considered by the U.S. Senate before any changes to the end-user provisions become law.  The specifics and timing of the ultimate outcome of the CFTC reauthorization remain unclear.

Mr. O’Malia’s statement in the press release announcing his CEO appointment notes the importance of hedging commercial risks through the use of derivatives: “The need by thousands of companies around the world to manage and hedge their business and financial risks via derivatives remains as important as ever.  ISDA’s role is to ensure derivatives markets help to fulfill this promise.”  According to ISDA, 42% of its members are end-users of derivatives and 8% are energy and commodity firms.  See ISDA: The Value of Derivatives. Therefore, it would appear that end-user issues will have a place on Mr. O’Malia’s agenda at ISDA.

The recent changes at the Commission continue to be of importance to energy companies.  The energy industry and market participants should follow developments at the CFTC, particularly as the agenda under new Chairman Timothy Massad takes shape over the next months.

Commerce Department Rulings Spur Oil Export Battle

Posted in Oil

As reported in our blog post of last week, the Commerce Department Bureau of Industry and Security (“BIS”) recently determined in two private classifications that lease condensate — a type of stabilized and distilled light crude oil — is not subject to the United States’ broad ban on crude oil exports.  BIS has for years defined “crude oil” in its regulations as “a mixture of hydrocarbons that existed in liquid phase in underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating facilities and which has not been processed through a crude oil distillation tower.”   Although the regulations state that this definition includes lease condensate, BIS appears to have determined that lease condensate that has been distilled is a refined petroleum product that is not subject to the broad ban on crude oil exports from the United States.

While BIS claims that there has been “no change in policy on crude oil exports,” the recent determinations have spurred the debate over whether the U.S. should change its position on crude oil exports.  In particular, Senators Robert Menendez (D-NJ) and Edward Markey (D-Mass.) — who have been vocal opponents of lifting the ban on crude oil exports — wrote a letter to Commerce Secretary Priztker alleging that BIS may have impermissibly approved the exports of lease condensate and demanding copies of the two determinations and information on the legal rationale for approving such exports by July 14, 2014.  Senators Markey and Menendez argue that allowing exports of crude oil would increase reliance on foreign oil and cause domestic gas prices to rise.  However, with U.S. crude oil production surging as a result of the advancements in hydrofracking technology, Senators Lisa Murkowski and Mary Landrieu have championed the effort to reconsider the ban on crude oil exports, which has been in place since the Arab oil embargo and global energy supply shortages of the 1970s.  In particular, Senator Murkowski has issued a report calling for a “renovation” of U.S. energy export policy, which includes an April 2014 white paper in advocating for condensate exports.

While some view BIS’ approval of condensate exports as a step towards a greater liberalization in crude oil export policy, financial analysts such as Morgan Stanley are not bullish on any significant changes occurring before this years’ mid-term elections.  Moreover, recent reports indicate that the White House may not have been aware that BIS was planning to issue such determinations, and therefore this may not represent a conscious effort on the part of the Obama Administration to change crude oil export policy.  Indeed, Secretary Pritzker has confirmed publicly that the rulings were not a change in policy.  However, the Secretary also said that “it’s a mistake to think there isn’t serious conversation going on within the administration about what we should do,” and that the issue of energy exports overall should be “examined holistically from an economic, strategic, and diplomatic standpoint.”  These statements suggest that the Administration is not backing down from the condensate rulings, and is considering the broader policy issues involved in allowing exports of other oil products.

DOE Finalizes $4 Billion Clean Energy Technology Loan Guarantee Program

Posted in Biofuels, Government Contracts

On July 3, 2014, the U.S. Department of Energy (“DOE”) issued a final solicitation for the Renewable Energy and Energy Efficient Projects Loan Guarantee Program.  As we previously reported with respect to the draft solicitation issued on April 16, 2014, the Program is expected to make up to $4 billion in loan guarantees available for projects located in the United States that use innovative renewable or energy-efficient technologies that avoid, reduce, or sequester greenhouse gases.  The Program offers yet another opportunity to obtain financial assistance from DOE for innovative clean energy technology projects, as part of the Administration’s “all-of-the-above” energy strategy.

The final solicitation continues to identify five key areas of interest to DOE, including advanced grid integration and storage, drop-in biofuels, waste-to-energy, enhancement of existing facilities, and efficiency improvements.  Although a number of comments on the draft solicitation took issue with DOE’s intent to support waste-to-energy technology, as well as drop-in biofuels, which are chemically indistinguishable from petroleum-derived fuels and may be used in existing infrastructure, DOE highlighted in response that the statute authorizing the Program—the Energy Policy Act of 2005—defines both combustion and non-combustion technologies as eligible to receive loan guarantees.

DOE reiterated that projects will be evaluated on a case-by-case basis.  It further explained that the technologies identified in the final solicitation are for illustration purposes only; projects using an identified technology will not automatically be eligible to participate in the Program.  DOE will conduct a life-cycle assessment to determine the extent to which a proposed project avoids, reduces, or sequesters greenhouse gases.  DOE intends to issue guidance on the nature of the life-cycle assessment to ensure transparency in the evaluation process.

Although any project that meets the final solicitation’s requirements is eligible participate in the Program, DOE will look favorably on projects that have a catalytic effect on the commercial development of innovative technologies.  DOE will also look favorably on projects that make use of other sources of financing.

The final solicitation provides for five rounds of evaluation.  In each round of evaluation, DOE will subject an application to a complete review only after making a preliminary determination that a proposed project meets the Program’s requirements.  Initial applications for the first round of evaluations are due on October 1, 2014, with complete applications due on January 14, 2015.  Initial applications for the fifth round of evaluations are due on December 2, 2015, with complete applications due on March 2, 2016.  Applications must be submitted via a web-based portal, which has yet to be established.

Commerce Department Clarifies Requirements for Exporting Condensate Oil

Posted in Oil

In a determination rendered last week, the Commerce Department provided guidance to two companies on the application of export controls to processed  condensate  that could mark a potential thaw in the long-standing ban on exports of crude oil. Condensate is an ultra-light oil that has seen increasing domestic development alongside the recent boom in shale oil production.  However, there is little domestic demand for the product, and the United States has substantially restricted the export of domestic crude oil since the 1970s.

Early reports on the decision, which was limited to the two companies and was not made public, suggested that the Department had partially lifted the ban on crude oil exports.  But as more details emerged, it became apparent that the Department had not officially altered these rules. Instead, its decision was based on a more expansive interpretation of what constitutes a “refined” petroleum product.  Unlike crude oil, refined petroleum products (such as a gasoline or diesel) are eligible for export with minimal restrictions.  The Department reportedly concluded that processing condensate through a stabilizer could suffice in certain circumstances to convert condensate into a refined product.  Since this is a relatively unobtrusive procedure, the decision should make it easier to convert unprocessed condensate into a product eligible for export.

As noted, the decision—which reportedly took the form of a classification determination under the export control regulations—is not public and limited to the two particular energy companies.  As a result, it is unclear how far it extends or the degree to which it marks a material change in oil export policy.  While Commerce Department officials denied that there had been any alteration to the ban on crude oil exports, the Department also indicated it was working on industry-wide guidelines that might further clarify any new opportunities that may exist for exporting oil products.  Pending such guidelines, a wave of similar classification requests involving processed condensate is likely. Two Senators have written to Commerce Secretary Pritzker questioning the decision.

Covington SEO Intern Kendra Mells provided integral research assistance on this blog post.

FERC Exploring RTO/ISO Market Pricing And Operational Practices

Posted in Electricity, FERC

At its recent public meeting, FERC opened a staff-led proceeding to address price formation and related issues in the RTO/ISO wholesale electricity energy markets.  Concerns with whether these organized markets are attracting appropriate levels and types of new generation capacity and the markets’ performance during last winter’s Polar Vortex have raised questions regarding their designs and operational practices.

The RTOs and ISOs run hourly energy auction markets to call forth, through price signals, the generators that will run, and the demand that is willing to be cut, to keep the grid in balance.  The operators also ensure that sufficient resources are committed over some future periods; some accomplish this through capacity auction markets.  There have been concerns recently that the capacity markets are attracting mostly low-cost gas generators and not taking into account the need for fuel diversity and for generators that can serve as workhorse “base load” resources.  During a FERC conference on the capacity markets, it was suggested that pricing rules in the energy markets also play a role in attracting investment and should be examined.  Subsequently, comments during FERC’s conference on market performance during the Polar Vortex suggested that energy market pricing rules and operational practices may have interfered with the markets’ response to the extreme conditions.

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