Biden’s methane rules could face a decade of delays

Two things to start:

  • An activist investor is calling for commodities trading giant Glencore to divest its thermal coal business.

  • The global energy crunch is very good news for one of the companies at the centre of it, Russia’s Gazprom. Profits are surging.

Welcome back to another Energy Source.

First up today is Joe Biden’s plan to cut the oil and gas sector’s methane pollution, a central and urgent element of his federal climate strategy. But as Myles McCormick reports, the strategy is susceptible to legal and constitutional challenges. It could be years before the methane crackdown actually happens.

Our second note is on oil and Opec+. Last week ended with a crash. Prices recovered a bit yesterday, but remain about 15 per cent below their highs from the days before news of the Omicron variant sparked renewed concerns about lockdowns and another hit to oil demand, sending traders — and their algorithms — into a tizzy. What will Saudi Arabia and the other producers do in response?

And do read Rob Armstrong’s column from yesterday, over at Unhedged, about Omicron, equity markets, and why this could be different from the Delta flare-up.

Data Drill looks at Asian demand for liquefied natural gas.

Thanks for reading.

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Biden’s methane crackdown slog

Clamping down on methane leaks from the oil and gas industry is at the heart of Joe Biden’s plans to slash US greenhouse gas emissions over the next decade.

But the crackdown faces up to a decade of potential delays amid opposition in the fossil fuel-rich states that will be responsible for its implementation.

New rules put forward by the Environmental Protection Agency this month would force fossil fuel companies to find and plug leaks of the potent greenhouse gas.

At the COP26 talks in Glasgow, the president touted these rules as a key US climate achievement, critical to efforts to halve greenhouse gas emissions by the end of the decade.

But the proposals have come under fire from some industry groups and local regulators who say they would place an excessive burden on smaller producers. This has set up a stand-off that could prompt authorities in fossil fuel-reliant states to delay the process for years, analysts said.

“States that don’t want to co-operate can drag their heels,” said David Bookbinder, the Niskanen Center’s chief counsel, who previously led the landmark 2007 lawsuit that established the EPA’s authority to regulate greenhouse gas emissions.

“By the time you’re done with the whole thing it may take close to a decade to get these standards enforced on the books in some states,” he said.

Methane has 80 times the warming potential of carbon dioxide over a 20-year period. That makes tackling leaks essential to near-term efforts to cut emissions.

Congress has already reimposed rules on some methane emissions that were scrapped by the Trump administration. The new regulations would strengthen and extend those rules to include existing as well as new operations.

Many larger oil and gas companies such as BP, ExxonMobil, and Shell, under pressure from investors have voiced support for tighter restrictions on methane. But some smaller operators say the new rules will impose unbearable costs.

Industry groups in Texas and North Dakota — the biggest oil-producing states — have called for the process to be slowed down. Wayne Christian, chair of the Texas Railroad Commission, the state’s oil and gas regulator, said the White House was engaged in “efforts to tax and regulate the oil and gas industry out of existence”. 

Ron Ness, president of the North Dakota Petroleum Council, an industry group whose members include Continental Resources, ConocoPhillips, Hess and other drillers and oilfield services providers, told ES the new measures were “somewhat draconian”.

“I do think rushing these significant rules — [which impose] substantial changes, additional costs, punitive application — I think those things are going to meet resistance. So I would suspect that this will be slowed down to some extent, and there’ll be hopefully another look,” Ness said.

The proposed regulations were published in the federal register last Monday, opening a 60-day comment period. Smaller operators are pushing for an exemption for so-called “stripper wells”, which produce less than 15 barrels a day and account for around 10 per cent of US oil and gas production. They have also raised concerns over restrictions on venting and requirements to install expensive new equipment.

An EPA spokesperson said it would “carefully consider comments on all aspects of the agency’s proposal”. It expects to publish a final rule by the end of next year. 

For new facilities this would establish requirements that take effect two months later. But for existing facilities the new regulations would merely establish guidelines for states to create their own requirements — which is where the lengthy back and forth with local authorities may emerge. 

All of this underlines the challenges of using EPA regulation under the 50-year old Clean Air Act to cut greenhouse gas emissions.

And doing so may be about to become even more difficult: a case currently before the Supreme Court is likely to curtail the agency’s authority over carbon emissions from power plants.

But the court — significantly more conservative leaning than it has been for years — may go further and strip the EPA of its authority over greenhouse gases altogether by overturning EPA vs Massachusetts, lawyers say.

“It would be extremely odd if they did that,” said Bookbinder. “But I wouldn’t put anything past these guys.” (Myles McCormick)

What will Opec+ do this week?

The smart money now expects the group to agree a suspension of its scheduled oil supply increases when it meets on Thursday.

To recap: Saudi Arabia, Russia and the other oil producing countries that slashed production after last year’s crash by a record 10m barrels a day (about 10 per cent of pre-pandemic global production) are restoring output in scheduled increments of 400,000 b/d.

The US under Trump had pleaded with Saudi Arabia and Russia to make those cuts. But in recent weeks it has urged the group to speed up those supply increases in a bid to soften oil prices that have more than doubled in the past 12 months.

Opec resisted. It does not want to imperil the higher prices. It also takes a cautious view of the oil-demand recovery and “the [global economic] uncertainties related to the spread of Covid-19 variants”, as the Secretariat’s monthly oil report noted in mid-November. Saudi Arabia also knows that Iranian oil supplies could increase next year, if a new nuclear deal ends sanctions. That would be bearish too.

And anyway, the International Energy Agency, the US’s Energy Information Administration, a host of private consultancies, and Opec itself all said the same thing about the first quarter of 2022. That after months of oil demand rising faster than supply — allowing crude stockpiles around the world to shrink rapidly — the market would flip to surplus as consumption dipped during the off-season. (Not all Wall Street forecasters agree. But Opec tends to rely on its own numbers, not the Street’s.)

Last week seems to have confirmed the group’s fears. First came Joe Biden’s decision to release oil stored in the US’s emergency stockpile — an unusual intervention designed to push down prices.

Then came last week’s Omicron news — exactly the kind of Covid variant Opec had feared — and a 13 per cent drop in the price of US oil.

And yesterday, the first reports out of the Iran negotiations suggested the talks were off to a promising start. US oil prices, above $80 a barrel last week, settled below $70 again yesterday.

Still, even after the SPR release, a decision by Riyadh to pause the supply increases would have been awkward for Saudi Arabia. I spoke to several people familiar with the Saudi position and Opec’s stance last week, who acknowledged that the US SPR move had “complicated” the group’s decision. Some analysts said that if Opec tried to negate the SPR oil by holding back supply, the US could escalate, releasing more SPR oil next year or launching antitrust legislation targeting Opec.

“Certainly any move to curtail planned production increases would likely revive efforts to pass Nopec legislation in Congress,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.

The question now is whether the Omicron sell-off has given Opec enough cover to do what it wanted to do already — suspend the production increases — without angering Washington.

One well-connected oil market consultant thinks Saudi Arabia could avoid provoking the US by slowing down or lessening the size of the additions, without actually pausing them. This would satisfy the urges of some Opec members (such as the UAE) to keep increasing production, while reassuring group price hawks that don’t want to risk another sell-off.

On the other hand, Morgan Stanley analysts said they expected the group not only to “shelve its target to increase output in January and keep its quota flat” but reduce output increase in the second half of the year to 200,000 b/d a month — half the guided rate.

Bill Farren-Price, a veteran Opec watcher at consultancy Enverus, agrees. “Friday’s oil market carnage means adding more supply now would be high risk,” he said.

“A pause at bare minimum has to be central expectation. Whether Omicron is dangerous or not, the public health responses are already slowing activity. We are once again riding the Covid see-saw,” Farren-Price said. (Derek Brower)

Data Drill

Growing gas demand amid dwindling production in Asia is raising concern among analysts. New research from Wood Mackenzie expects Asia’s gas demand to continue to grow through 2050, even when countries keep global warming to 2C. Whether Asian countries can meet this demand is uncertain.

Commercial gas output in the continent’s main production hubs in China, southern Asia, and south-east Asia is expected to fall at least 40 per cent by 2040, according to Wood Mackenzie. In southern Asia, production is expected to fall 94 per cent by 2040 as exploration activity declines across the continent.

This growing gap in demand and supply will force Asian countries to increasingly rely on the market for liquefied natural gas imports, where they are more vulnerable to price fluctuations and outages.

“Governments should consider incentives to spur increased activity levels and help develop indigenous resources where control of price, supply, taxation and revenues is far greater, versus importing energy,” wrote Angus Rodger, director at Wood Mackenzie in his analysis. (Amanda Chu)

Line chart of Bcf/day showing Asian gas demand is expected to rise steadily even when global temperature rise is limited to 2C
Line chart of Bcf/day showing Asian commerical gas production expected to fall significantly by 2040

Power Points

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.

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