Taxes and Regulation: The Twin Banes of Natural Gas Development

"Environmentalists" - MarkindDaniel B. Markind, Esq.
Weir and Partners, LLP

 

Natural gas development isn’t easy. Politicians want to tax it and regulate it. The pols are now in a bind, though, and offering to trade one for the other.

Pennsylvania’s House of Representatives continues to struggle with the funding plan needed to balance the $32,000,000,000 state budget allowed last month by Governor Wolf to come into law. To pay for it, the Senate agreed for the first time to impose a mineral extraction tax. In return the Senate gave some permitting relief to the natural gas industry. The House has not presented its plan, but as the days drift on it looks more and more possible that they could follow the Senate regarding an extraction tax. They don’t seem to have many other options.

In all the discussions of the extraction tax, the permitting provisions often get lost.  They are very interesting, however.  The Senate bill would require the Pennsylvania Department of Environmental Protection to do three things.  First, it must contract with outside professionals to handle applications for any type of permit.  Second, it must approve or deny permits within the mandated time periods, and limit the ability of the regulators to “restart the clock” by kicking the permit application back for more information.  Third, it would create a panel with veto power over any new permits being written by the DEP to impose limits on methane emissions at natural gas wells and transmission sites.

natural gas development

Pennsylvania’s capitols complex – perhaps they should cut back?

The industry is appalled that they in effect are being told they must accept an extraction tax to get the efficient action on permits already written into State process.  The environmentalists are equally upset that environmental provisions are being bartered away in budget negotiations.  Guess what?  That’s called politics.  It happens at every level in every State and at the Federal government.  There’s nothing remotely surprising about it, and if the producers’ or environmentalists’ government affairs advisors are surprised they are the wrong advisors.

Regarding the extraction tax, it’s difficult to tell whether the position of the producers that no tax increase or structure be allowed to change is political posturing or not.  If this truly is their position, it once again calls into question their public relations strategy and understanding of the Northeast. Given Pennsylvania politics and the current budgetary mess, the producers had to see this coming. One might think they would take steps to make a tax structure change work best for them.

If the producers continue to resist any changes in the tax rate or structure, and if they succeed in squashing it in the Pennsylvania House, is that good for the industry in the long run?  The Atlantic Sunrise Pipeline (hopefully) is about to be built. On  Friday State Environmental Judge Bernanrd Labuskes permitted Sunoco Logistics to resume drilling the Mariner East 2 pipeline in 16 of 17 locations where incomplete work created potential danger.  With both on line, the demand for gas will increase dramatically. Is it worth it for the producers to fight the tax battle tooth and nail at this stage and face the adverse political ramifications, especially when it very well may be a losing battle?

Just north of Pennsylvania, New York continues to struggle with the effects of its Gubernatorial Moratorium.  The Energy Committee of the New York City Building Council just prepared a report that states the obvious: “New York City is facing a confluence of events that will impact the availability of an adequate supply of energy…Almost all in-city electricity generation now comes from natural gas burning plants, which has led to a 25 percent increase in the demand for natural gas… in the past six years.”  Does anyone notice a contradiction here between energy reality and New York energy policy?

natural gas developmentOn Thursday, the United States Senate approved two new FERC commissioners – Neil Chatterjee and former Pennsylvania PUC Commissioner Rob Powelson.  With its quorum restored, many expect FERC now to approve the Jordan Cove LNG terminal in Oregon.  The terminal was denied twice by FERC during the Obama Administration.  President Trump’s Chief Economic Advisor, Gary Cohn, said that “..the first thing we’re going to do is we’re going to permit an LNG export terminal in the Northwest.”  This would be the only LNG facility on the West Coast.

Environmentalists, of course, are appalled.  One common sentiment they express is why are we building more natural gas infrastructure instead of investing in infrastructure for renewables?  Fair enough.  In light of that sentiment, why don’t the renewable energy-only proponents do what the gas companies do and prepare detailed plans for how solar, wind and other “renewable” energy can be generated, stored, transmitted and delivered in a safe and efficient manner?  That would be very enlightening.

natural gas development

Venezuela’s thug dictator

Finally today south of the border.  Venezuela held its phony plebiscite last Sunday, and a new Constituent Assembly was installed that will make Nicolas Maduro a dictator.  He already began arresting his political opponents and furthering his country’s devolvement into a police state.  On Monday, President Trump sanctioned Maduro personally.  Trump however, has not moved further against the Venezuelan oil industry.  That caution may be wise.

Such sanctions could really hurt Venezuela, but to what end?  It would give Maduro a “Yankee” excuse for his economic incompetence.  The history of Latin American sanctions is not good in forcing regime change.  After all, Raul Castro still is in Havana.  Despite reports today of a small uprising in Valencia in northwest Venezuela, Maduro certainly has support among the armed forces.   The key question is why?  Until we figure that out, do we really want to put our face on Maduro’s failure?

Directly related to what is happening in Venezuela is what is not happening to the price of oil.  It rose above $50/barrel, but has not skyrocketed.  Predictions for the future are all over the map.  Some analysts see $70/barrel  in the next few months.  Others see the price dropping as OPEC and shale producers pick up the slack.  Unlike 1973 after the Arab oil embargo or 1979 after the Iranian Revolution, when oil prices shot through the roof and caused panic, world energy markets have taken Venezuelan chaos in stride.  Thanks in great part to our shale producers, oil is not the economic weapon it was just ten years ago.

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