December 1, 2016
The day after the 2016 election, POLITCO described the victory of Donald Trump as “the biggest upset in U.S. history” – political, or otherwise. Though a few polls had indicated some tightening in the race in the final days, the vast majority of analysts predicted Sec. Hillary Clinton would win and efforts had already begun to game-out her first 100 days in office. Trump’s surprising win has forced everyone back to the drawing board.
In the energy and natural resources space, the question of what an incoming Trump administration will do is particularly important. Practically overnight, the fate of major regulations promulgated by the U.S. Environmental Protection Agency (EPA) has been cast into doubt. Restrictions on energy development on federal lands – including both fossil fuels and renewables – may be reversed or significantly altered. The White House is now unlikely to defend the contentious Clean Power Plan in court. Trump has also promised major investments in new infrastructure, including more oil and natural gas pipelines. But with so many projects caught up in court battles and administrative review, how can we separate rhetoric from reality?
FTI Consulting’s team of experts has analyzed what impact the Trump administration is likely to have on the U.S. energy and natural resources sector, and at what pace it is likely to have it. Where are the greatest opportunities for growth? What sectors will face additional uncertainty or challenges? How can the Trump administration realistically alter the existing regulatory landscape, and who will be the winners and losers? What are the challenges that the energy industry faces irrespective of what the Trump administration may do? In this brief memo, we will summarize what the industry should focus on in 2017.
Tax reform is expected to be a major priority for the incoming administration and the Republican-led Congress. Many tax credits that are important to various sectors of the energy industry will be revisited. Renewable energy and clean energy tax credits – which Congress extended in 2015 – are likely to be the biggest targets. Among these are the wind production tax credit, the solar investment tax credit, and the carbon capture and storage credit.
Another question on the tax reform side is whether the administration will retain the existing tax-exemption for municipal bond financing for projects such as electric grid infrastructure, highways, schools, hospitals and other public entities. Tax-exempt financing is one of the only tools that public entities have for accessing capital and retaining the exemption will be a priority for them as well as bond dealers, banks, and other entities that engage in these transactions.
It is unlikely that the incoming administration will defend the Clean Power Plan (CPP) in a litigation context moving forward, which is currently tied up in the DC Circuit Court of Appeals. Although the court is expected to issue a decision early next year, the losing side is likely to appeal if the court rules before Trump is sworn in. If the EPA loses, CPP’s last line of defense will be environmental groups, as the administration is not expected to defend the plan and, in fact, may take either a regulatory or legislative route to weaken or repeal it. There are some provisions that the industry could pursue in a new rule making process, such as establishing an appropriate value for nuclear power and gaining incentives or subsidies to keep existing nuclear power plants in operation.
The president-elect has already indicated that infrastructure investment will be among the top priorities his administration takes on, but how he intends to finance that work is a question that may prove contentious in Congress. Utilities could benefit from an infrastructure bill that would provide for the expansion and modernization of the electrical grid and natural gas pipeline infrastructure.
Throughout the campaign, both candidates, along with the business and labor community, stressed the importance of investing in America’s future through modernizing our nation’s infrastructure. With new oil and natural gas resource plays being discovered and rediscovered on a regular basis, getting those resources from the wellhead through the midstream and eventually to end users requires a build-out and expansion of our current inter and intra-state pipeline network. There’s also a need on the distribution end, with many major U.S. cities incrementally upgrading the pipes that deliver natural gas to homes and business for heating.
But the need and desire for infrastructure investment goes well beyond oil and natural gas pipelines. It also goes to water infrastructure, which was brought into focus in the aftermath of the Flint, Michigan water crisis. It’s also about modernizing our ports and dredging out rivers where appropriate to accommodate larger vessels, and spending the money needed to bring our airports and supporting air travel infrastructure back up to where it needs to be relative to our international peers.
All of this – from pipes to ports, from power lines to bridges – requires approvals and permits from the federal government regardless of how projects are financed or if Congress can agree on how best to move forward with an infrastructure package. It is here, at the regulatory level, that we believe a Trump administration could differ considerably from the current environment in streamlining and expediting projects that enhance our nation’s transportation, water and energy delivery systems.
The EPA’s methane rules and updated National Ambient Air Quality Standards (NAAQS) for ozone could quickly find themselves on the chopping block as the new administration comes in.
National security experts and foreign ambassadors have publicly called for additional liquefied natural gas (LNG) exports from the United States. Expediting the LNG approval process could win enough support in Congress that a bill lands on the president’s desk, opening up new markets for a commodity that has experienced a prolonged price slump.
Many believe a Trump presidency will translate into fundamental reform of the Endangered Species Act (ESA), with an increased focused on the economic impacts associated with species listings and on making investments in conservation programs. Efforts to align ESA with the Republican platform to “ensure that this protection is done effectively, reasonably, and without unnecessarily impeding the development of lands and natural resources,” are likely to take priority as reform efforts move forward.
However, conservation groups that continue to petition for additional species listings are threatening increased legal action and a doubling down on their current efforts – actions that could both create delays for reform and increased scrutiny on industries operating within specific habitat regions. Leaders for ESA reform in Congress say these efforts will not change until the underlying statute is itself reformed.
This fall, the U.S. Fish and Wildlife Service (FWS) also issued its new 2017 species listing work plan, charting a course for the agency to address listing decisions for an additional 320 species. How these species are prioritized moving forward – notably species of bats and pollinators – remains to be seen. The work plan also indicates that FWS intends to make a new decision on the lesser prairie chicken in 2017, following the July 2016 court decision to vacate the previous threatened listing. On November 29, Fish and Wildlife announced a new 12-month review of the species to determine if a future federal listing is warranted, a move that has already received substantial pushback from leaders in industry and Congress.
U.S. Bureau of Land Management regulations (i.e. hydraulic fracturing, venting and flaring) are currently tied up in court. While Trump’s campaign has defended some federal lands protections, we expect the incoming administration to take a softer approach on regulation generally. Nonetheless, the outcome of those court decisions will arguably play the largest role, irrespective of the administration’s priorities.
Additionally, leasing plans for the Outer Continental Shelf (OCS) are typically in place for five years, but the Trump team’s desire to “shake things up” leaves additional OCS leasing uncertain. The decision by the Obama administration to exclude Arctic planning areas from the most recent proposed five-year plan, coming on top of a decision to remove Atlantic areas in a previous version, could spur action by the new administration to propose a new five-year plan upon entering office — several years earlier than it would otherwise be required.
Numerous studies have linked increased seismicity in the Midcontinent to saltwater disposal wells. To capitalize on this, environmental groups have teamed with trial lawyers to file class-action lawsuits against exploration & production companies (E&Ps), while states have come under pressure to close injection wells or even adopt moratoria across wide regions.
We expect these issues to be largely unaffected by the Trump administration, since the seismic events are largely occurring in states with primacy over their injection well programs. However, over the past year, the EPA has taken a more public and aggressive stance in response to seismicity, so a “pulled back” agency would give states the lead with less federal involvement.
Donald Trump ran for president essentially as a third-party candidate – he just happened to be listed on the Republican line. Owing to that, and the unconventional nature of the campaign he ran, there is still much we do not know about the specific approach he intends to take on issues in the energy and environmental realm.
In the near term, the person he selects to head the Department of Energy, the Interior, and EPA will tell us a lot about the policy direction in which he wants to take the country. That said, working with a Congress where both chambers are controlled by Republicans is likely to create a number of opportunities for regulated parties, particularly related to tax reform and the streamlining of a number of existing regulatory proposals.
FTI Consulting’s global Energy & Natural Resources team is uniquely qualified to advocate on behalf of its clients, using our industry specific expertise to provide intelligence, spot fresh opportunities and anticipate hurdles throughout both the transition phase and the new administration.