The Better Way’s Border Adjustment Tax

Energy Matters

One of the most discussed aspects of the tax reform proposal authored by Chairman Brady and advocated by the Speaker is converting the U.S. international tax code to more of a territorial plan. The border adjustment tax (BAT) would completely change the way a lot of corporations pay taxes by making the location of a business no longer important. Instead, only the final destination of a good would really matter. For example, if a U.S. company exported a product, service, or intangible anywhere outside the country, it would receive a rebate that would essentially exempt it from taxation. However, that same product, service, or intangible imported into the U.S. would be hit with an import levy (estimated at 20%) that would make them more expensive. In computing the tax, the cost of goods/services provided from the U.S. would be deductible, but goods/services provided from outside the U.S. would not be deductible. Combined, they create the “border adjustment.” It is similar to a value added tax (VAT) used widely around the world because it permits the deduction of certain costs (such as wages paid in the U.S.), but it is not the same indirect tax as currently contemplated by WTO rules. It is unlike any other system. Dividends from active foreign subsidiaries would be exempt from tax. However, offshore profits currently deferred from U.S. taxation would be deemed repatriated in the year of enactment. This, in turn, would mean the current $2.5 trillion in cash being held in overseas markets would likely come back to the U.S., supplying our economy with potentially fresh investment capital.

The big concern raised regarding this proposal is that a tax on imported goods would likely increase the price U.S. consumers have to pay for certain products. It is argued that such a proposal will bring manufacturing back to the U.S. It could also mean that the foreign manufacturers might absorb the tax and continue to offer lower prices to compete in the U.S. Those most concerned are retailers (like Walmart), oil refiners that import crude oil, and car and technology importers. Also, there are some products that just cannot be grown in the U.S., like bananas, etc. that will still have to be imported.

Economists also believe that implementing a BAT would lead to a pretty sizable increase in the value of the U.S. dollar. If imported goods go up in price, U.S. consumers would be expected to buy less, leading to fewer U.S. dollars in foreign markets. This reduced supply of U.S. dollars would work to increase the value of the dollar. Proponents of the BAT argue this increase will offset the cost of the BAT on imports for American retailers and others. Conversely, having a tax rebate in place on exports allows U.S. goods to be more price-competitive in foreign markets, meaning consumers will need more U.S. dollars, thus driving up the price of the dollar. So, a big part of the calculation here is a bet on currency markets.

The Ways and Means Committee has been in talks with the White House on their proposal and Chairman Brady has stated he believes they are close to alignment. In fact, there was a bit of tweeting recently about how the BAT could actually offset the cost of wall between the U.S. and Mexico. However the Senate remains unconvinced yet, with Majority Whip Cornyn expressing concerns over refinery impacts and Senator Perdue, a former CEO of major retailers expressing opposition. Perdue says If economists are correct when they argue retailers (facing huge tax increases under the plan) will be made whole by a stronger dollar, that stronger dollar will hurt retirement plans that include overseas investments.

If the President and the Speaker (both who are committed to tax reform) want to keep that promise, it is likely we will start to see some action in March. Stay tuned.


TRANSITION NEWS

AmericanFlag

Pruitt Faces Open Records Lawsuit Over Emails Oklahoma Attorney General Scott Pruitt, President Trump’s nominee for U.S. EPA administrator, is facing litigation over his emails. The Center for Media and Democracy, a liberal-leaning watchdog group, is planning to file a complaint against Pruitt in state court for failing to turn over documents in response to the group’s open records requests. CMD has filed nine requests with Pruitt’s office since January 2015, many dealing with communications between him and oil and gas companies, as well as the Republican Attorneys General Association. Pruitt’s office has acknowledged that it is reviewing 3,000 emails that are relevant to CMD’s first request made more than two years ago, the group said. A spokesman for the Oklahoma attorney general’s office, said that it has not received a copy of the group’s lawsuit yet but plans to review the complaint once it does. He called the litigation “political theatre” considering the attorney general’s office was about to respond to CMD’s request. Pruitt’s confirmation vote has been delayed until at least next week as Democratic senators have stalled several of Trump’s picks from advancing. Read more on E&E

Senate Advances Sessions; Zinke, Perry Votes May be Next Week The Senate this week voted 52-47 to launch debate on President Trump’s attorney general nominee, Sen. Jeff Sessions (R-Ala.). With Democrats working to stall several Cabinet picks, the chamber may engage in up to 30 hours of debate following this afternoon’s cloture vote, which started at around 12:30 p.m. Senate Minority Leader Chuck Schumer today called for rejecting Sessions. “He is probably the most anti-immigrant member,” the New York Democrat said. After Sessions, the Senate is set to take up debate over Steve Mnuchin for Treasury secretary and Rep. Tom Price (R-Ga.) for secretary of Health and Human Services. Senate Majority Whip John Cornyn (R-Texas) said the chamber may act on the nominations of former Texas Gov. Rick Perry (R) to lead the Department of Energy and Rep. Ryan Zinke (R-Mont.) as the secretary of the Interior next week — the last before the weeklong Presidents Day recess. The Senate narrowly confirmed Betsy DeVos to be secretary of Education, but only after Vice President Mike Pence cast the tie-breaking vote. The Senate has also been set to consider resolutions against Obama administration regulations, but so far this week, the chamber has focused on the nominations backlog. Environment and Public Works Chairman John Barrasso (R-Wyo.) said the Senate could take up three resolutions next week. Read more on E&E

Ala. AG Strange to Fill Sessions Seat Alabama Attorney General Luther Strange (R) will take the Senate seat vacated by Jeff Sessions, who was sworn in as U.S. attorney general last night. Alabama Gov. Robert Bentley (R) formally announced Strange’s appointment this morning, and Strange, 63, will be sworn in this afternoon in the Capitol following a news conference in Montgomery, Ala. One issue Strange took on was Bentley himself. The state Legislature considered impeaching the governor after tawdry details emerged of an affair with a former aide and Bentley’s subsequent decision to fire a state law enforcement secretary. Strange asked the Legislature to stand down because his office was investigating. Accusations of corruption have followed Strange’s appointment, as Bentley will now pick the next attorney general. Strange served as attorney general since 2011, after running unsuccessfully for lieutenant governor in 2006. Strange’s appointment runs through the end of 2018. A special election will be held that November to fill the final two years of Sessions’ term. An election for a six-year Senate term will be held in 2020. Sessions was first elected in 1996. Read more on E&E


 

ENERGY TRANSPORTATION NEWS

Atlantic Sunrise Natural Gas Pipeline Expansion Approved Williams Cos. won U.S. approval to build its $3 billion Atlantic Sunrise natural gas pipeline expansion in the Northeast, ending a review that ran almost two years and forced delays in the project. The 200-mile (322-kilometer) pipeline will expand shipments from shale formations by enough to serve 7 million homes, according to Williams. The Federal Energy Regulatory Commission approved it just hours before the scheduled resignation of commissioner Norman Bay, whose departure will leave the agency without the quorum needed for major decisions. The decision spares Williams further delays after already waiting for more than 670 days for clearance. Last year, the stocks of both Williams and a would-be shipper on the project, Cabot Oil & Gas Corp., plunged on speculation that the expansion would face more regulatory setbacks. The time it takes to approve such pipelines has jumped to 429 days from 359 days just in the past three years as environmental opposition grows. The company said it plans to start construction on the main portion of the project in mid-2017, establishing a path for more gas to flow to markets along the Eastern Seaboard in time for the 2017-2018 winter heating season. Construction on another part of the project known as the Central Penn Line is scheduled to begin in the third quarter, allowing Williams to bring the entire capacity of the expansion into service in mid-2018. Read more on Bloomberg

Pipeline Companies Struggle to Contend with Reinvigorated Protests Pipeline companies are bracing for a new round of volatile protests by environmentalists and other activists in the U.S., a sobering reality that is tempering the industry’s excitement over President Donald Trump’s moves to revive the Keystone XL and Dakota Access projects. Even as they cheer the removal of former President Barack Obama’s regulatory roadblocks, executives at some of the largest U.S. pipeline companies say the industry is struggling with how to confront a potentially bigger obstacle: the reinvigorated protest movement. Some companies have begun shifting strategies, deploying sophisticated government and public-affairs operations that model modern political campaigns. Others continue to pursue their projects more quietly, seeking approval from landowners and regulators and eschewing conspicuous public engagement. Energy Transfer Partners LP, the company behind the Dakota Access oil pipeline, is among those engaged in internal debate over its strategy, according to people familiar with the matter. Mr. Warren remained largely silent as protests ramped up last year. “[O]ur corporate mindset has long been to keep our head down and do our work,” he wrote in a September memo meant to rally employees. “It has not been my preference to engage in a media/PR battle.” Read more on the Wall Street Journal

Pipeline Approvals Surge Cabot Oil & Gas Corp., a would-be shipper on the $3 billion Atlantic Sunrise natural gas pipeline, surged the most in more than five years after the project was approved. Spectra Energy Corp. slipped as regulators failed to issue a permit on a separate line. Last week’s resignation of Norman Bay from the Federal Energy Regulatory Commission lent a new urgency to pipeline approvals, since his departure leaves the agency without the quorum needed to sign off on major projects. At the same time, pipeline developers are seeking to accommodate growing supplies from the Marcellus and Utica shale basins in the eastern U.S., where production has outpaced the capacity to deliver the fuel to markets. Cabot jumped as much as 13 percent, the most on an intraday basis since October 2011, to trade 9.9 percent higher at $23.55 as of 10:31 a.m. in New York. Williams Cos., the developer of Atlantic Sunrise, rose 1.6 percent. Spectra fell 2.2 percent after the commission didn’t issue a certificate for its proposed Nexus pipeline. “This is a pretty big structural moment for most Appalachian producers, Cabot being the most significant,” an analyst at KeyBanc Capital Markets Inc. in New York, said in response to Atlantic Sunrise being cleared. DTE Energy Co., which is partnering with Spectra on the $2 billion Nexus gas pipeline in the Midwest, said in a filing that it’s “fully confident” that the project will get the necessary permit once the agency has a quorum. “DTE Energy and Spectra Energy remain committed to a fourth quarter 2017 in-service date,” it said. The decision spares Williams further delays after already waiting for more than 670 days for clearance. Read more on Bloomberg

Lipinski Introduces Bill Requiring Disclosures of “Buy American” Purchases House Democrat Dan Lipinski introduced a bill that would require agencies to disclose waivers issued related to “Buy American” purchases in the Federal Register and expand domestic content requirements to some federal grant-making programs that do not currently have them. The bill would also create an annual report on the total amount and dollar value of waivers granted “to give businesses a better opportunity to identify products that are in demand and how to work with the federal government,” according to a statement. Earlier today, American Petroleum Institute president Jack Gerard said Trump’s plan to require pipeline developers to use U.S. iron and steel needs scrutiny to ensure there is sufficient domestic capacity to provide those materials. “To continue to be globally competitive,” the U.S. needs to build more oil and gas pipelines, “so issues like assessments of can we source that steel at home or not, we need to take a look at to make sure we can provide the product necessary,” Gerard said. Read more on Bloomberg

Trump Administration Gives Final Approval for Dakota Access Pipeline The Trump administration has given a final green light to the controversial Dakota Access Pipeline, according to a court filing issued Tuesday, fulfilling a campaign pledge to boost energy projects but infuriating activists fighting the project. The U.S. Army Corps of Engineers, an agency of the Department of the Army, said in court filings that the department was planning to issue an outstanding easement under a river in North Dakota that was holding up construction of the oil pipeline. The department also notified Congress of its intent in a separate letter. The project, which has faced intense opposition from Native American tribes and environmental groups, would cross nearly 1,200 miles and carry as many as 570,000 barrels of oil a day from North Dakota to Illinois. Mr. Trump’s backing of the Dakota and Keystone pipelines offer the earliest and clearest examples of the new administration’s energy policy, which stands in contrast to that of Mr. Obama, whose administration worked to incorporate more environmental focus in project reviews. In court documents Tuesday, the Army said it was terminating that review, citing Mr. Trump’s presidential directive. North Dakota Gov. Doug Burgum welcomed the announcement. Read more on the Wall Street Journal

Jewell Says Army Corps ‘Reneging’ on Promises Former Interior Secretary Sally Jewell said the Army Corps of Engineers was “reneging” on its commitment to tribal leaders and federal agencies by granting an easement to the Dakota Access oil pipeline project. Jewell, who has mostly refrained from clashing with the new administration, said she felt the need to speak out because the corps is violating legal obligations. A formal environmental impact statement that was promised in December would have given tribes an opportunity to air their concerns, Jewell said. “So the decision to not do any of that is reneging on a commitment they made [in December], and I think it’s fair to say that I’m profoundly disappointed with the corps’s reversal of its decision to conduct an environmental impact statement and consider alternative routes,” she said. “This is a clear reversal of a commitment on the part of the U.S. Army Corps of Engineers on something they gave thoughtful consideration to when they decided to do an environmental review.” Corps officials did not comment on Jewell’s remarks. Read more on E&E 


 

ENERGY TAXATION NEWS

Proposed Plan Would Tax Carbon Dioxide in Exchange for Lifting of Environmental Regulations A group of prominent Republicans and business leaders, including former Treasury Secretaries Hank Paulson and James Baker, are backing a plan to tax carbon dioxide in exchange for lifting a slew of environmental regulations. Baker and others are set to pitch the idea to some of President Donald Trump’s top advisers at the White House on Wednesday, according to a statement from the Climate Leadership Council. The proponents are set to formally announce their proposal Wednesday at an event at the National Press Club, lending their stature to an approach for addressing climate change that mirrors an idea already advanced by Exxon Mobil Corp. The blueprint involves a $40 tax on every metric ton of carbon dioxide released by burning fossil fuels, with the price climbing over time. To avoid an undue burden on the poor from the higher energy bills that would result, the projected $200 billion to $300 billion in annual revenue would be redistributed to households in the form of quarterly checks from the Social Security Administration. Families of four would see an average annual payout of $2,000 under the plan. Read more on Bloomberg

Jordan Expresses Concerns Over Board Adjustment Tax Rep. Jim Jordan, a founder of the House Freedom Caucus who has urged focus on reducing deficits, says U.S. border security spending is important, but money to boost it — including President Trump’s promised border wall — should be offset. “We’re gonna run a big deficit this year”; ‘‘You can’t just keep spending money”; ‘‘Let’s do what we have to do to secure the border,’’ but let’s offset costs with cuts elsewhere. Jordan went on to say tax code on personal side is ‘‘broken’’ and on corporate side is ‘‘stupid.” He and House Freedom Caucus members have some concerns with border adjustment tax. “It’s a brand new tax”; says there’s real potential for abuse of any new revenue stream; group has heard from people who like it, will also hear from those who don’t. On infrastructure spending, says he has no problem with boosting it, but it too needs to be offset. On health care, says he doesn’t support efforts by Sens. Bill Cassidy and Susan Collins to allow states to keep Obamacare if they like it, saying would force states that don’t opt in to pay for those that do. Read more on Bloomberg

Global Gas Prices May be Impacted by BTA Tax Rep. Jim The destination-based border-adjusted corporate tax that’s being discussed by the U.S. Congress may depress global gas prices if implemented, Goldman Sachs says . Provided the Chinese yuan depreciates in line with other currencies, adoption of the tax known as BTA would result in lower coal prices and increased competition with global gas, analysts include in note. The BTA will likely leave U.S. gas prices unchanged, the bank writes in a note. The global gas industry would also benefit from lower costs in U.S. dollar terms, but the change in LNG prices would be limited at first because of the likely modest initial impact of the BTA on U.S. swing suppliers. Global gas prices would fall by a smaller margin than coal, and the resulting loss of competitiveness in the fuel mix would cause a decline in demand that would come at expense of U.S. LNG producers. BTA would have negligible impact on U.S. coal and gas producers and domestic prices. Canadian gas prices are forecasted to decline 20% relative to U.S. prices under the tax. Read more on Bloomberg


 

ENERGY REGULATORY NEWS

FERC Cancels All Future Commission Sessions (For Now) FERC announced this week that it would cancel its February monthly meeting next week and all future commission sessions at least until its leadership quorum is restored.“The Federal Energy Regulatory Commission has canceled its February 16, 2017 agenda meeting, Acting Chairman Cheryl LaFleur and Commissioner Colette Honorable announced today,” FERC said in a statement. “Acting Chairman LaFleur and Commissioner Honorable also have decided, in view of the lack of a quorum, to suspend subsequent monthly agenda meetings until further notice.” Still, the agency will continue to schedule technical conferences and stick with a previously scheduled joint meeting with the Nuclear Regulatory Commission later this month, and a hydropower workshop in March. The agency also hasn’t issued any notational votes since former Chairman Norman Bay resigned Friday. In a separate notice, the agency announced that its headquarters were closed today “due to a water emergency. Read more on Politico

White House Releases Guidance on Trump Order The White House released interim guidance for implementing President Trump’s recent executive order requiring federal agencies to trash two regulations for every new one. The order also established a regulatory budget, by which the president determines how much agencies can spend on new rules each year. The budget for 2017 is zero dollars. All new rules must be offset by repealing old ones. The guidance, issued by Dominic Mancini, acting administrator of the Office of Information and Regulatory Affairs in the Office of Management and Budget, clarifies that the order applies only to significant rules. Federal spending rules, such as those associated with Pell grants and Medicare, are considered “transfer rules” and are not included in the order. However, in cases where transfer rules direct nonfederal entities, such as reporting or record keeping, agencies would need to account for these costs, according to the guidance. The guidance also clarifies that the order applies only to agencies that are required to submit major rules to OIRA for reviews. Independent agencies are exempt from this requirement and, therefore, the executive order. Guidances and interpretive documents that pertain to rules and could incur costs, but are not regulations themselves, will be reviewed on a case-by-case basis. Additionally, the guidance specifies that costs should be measured as the opportunity cost to society. This concept is defined by an existing document known as OMB Circular A-4. The guidance stipulates that agencies are not allowed to calculate costs from existing regulatory impact analyses when determining which rules to eliminate. Agencies are permitted to bundle a new regulatory action with two deregulatory actions in some cases. Read more on E&E

G.O.P. Hurries to Slash Oil and Gas Rules, Ending Industries’ 8-Year Wait The document carried the title “A Roadmap to Repeal,” a concise list of Obama administration environmental regulations that a Koch brothers-backed group was pressing President Trump and Congress to quickly reverse after Inauguration Day. It was a tally of rules that energy industry executives and lobbyists had waged a futile fight against for eight years, donating millions of dollars to lawmakers who vowed to help block them, filing lawsuits to try to overturn them and hiring experts to generate reports that questioned the need for them. But in a flurry of activity this past week, Congress did what Charles G. and David H. Koch — who own a conglomerate that sells hundreds of products, including gasoline, jet fuel and coal — and other industry leaders had been asking for. Using a rarely invoked law, the Republican-controlled Congress nullified a measure intended to curb the venting of gas wells on federal lands, and began the process of rolling back other regulations, including one enacted to limit damage that coal mines cause to streams — each items on the “Roadmap to Repeal.” On Friday, with his own executive orders, Mr. Trump took up two more items on the list, including a call to rewrite major provisions of the Dodd-Frank Act, legislation crafted by the Obama administration and passed by Congress in response to the 2008 financial meltdown. Read more on Washington Post

Agency Issues Order Granting Staff Expanded Authority The Federal Energy Regulatory Commission took the rare step of granting staff more authority to address complex energy matters after Norman Bay, the agency’s former chairman, leaves his post later today. Bay’s departure will leave the commission without enough members to make high-profile decisions on pipelines, mergers and other matters — a situation that has ratcheted up pressure on the Trump administration to quickly fill three Republican vacancies at FERC. Trump has tapped Cheryl LaFleur to serve as FERC’s acting chairwoman, and Colette Honorable, also a Democrat, is the only other commission member. But the White House has made no announcement about FERC, and some industry insiders have said it could be months before names are floated. Read more on E&E


 

ENVIRONMENTAL REGULATORY NEWS

Republicans Say They Want to Make the Agency Great Again The House Science, Space and Technology Committee will be back on familiar turf tomorrow as it takes another look at how U.S. EPA uses science in the process of crafting regulations. But the session will play out in a charged political environment that has changed dramatically since the panel last revisited the subject in June. The hearing, titled “Making EPA Great Again,” is billed as an examination of the agency’s process “for evaluating and using science during its regulatory decision making activities,” according to a committee summary. While a spokeswoman for Chairman Lamar Smith (R-Texas) said that no bill introduction is planned, critics suspect that he will use the hearing to lay the groundwork for reviving the “Secret Science Reform Act,” a piece of legislation that could get a lift in the Trump administration. As introduced in the past, the measure would require EPA to base new regulations on “transparent or reproducible” science, with the underlying research data posted online. “EPA has long been on a path of regulatory overreach, and the committee will use the tools necessary to put EPA back on track,” Smith said in a news release last week putting the legislation atop the committee’s to-do list in the 115th Congress. Read more on E&E

Groups File Suit Against Administration Over Regulation Requirement NRDC, Communications Workers of America and Public Citizen have filed suit against President Trump’s administration over order requiring agencies to repeal two existing regulations for each new one issued. “New efforts to stop pollution don’t automatically make old ones unnecessary,” said the president of the Natural Resources Defense Council. The lawsuit was filed in federal district court in D.C. Read more on Bloomberg

House Panel to Consider ‘Modernizing’ Clean Air Act, Environmental Laws A House committee next week will consider how to “modernize” environmental laws like the Clean Air Act, the panel announced. The House Energy and Commerce Committee’s environmental subpanel will meet on Feb. 16 to consider environmental laws and “challenges and opportunities for expanding infrastructure and promoting development and manufacturing,” the committee announced. That means looking at the Clean Air Act, the Brownfields program for environmental cleanup and other laws, according to the announcement. The hearing comes as the GOP mulls changes to environmental regulations under President Trump. Republicans and fossil fuel groups have criticized the Environmental Protection Agency (EPA) for its regulatory approach to clean air issues during the Obama administration, especially its landmark climate regulation, the Clean Power Plan. That rule looks to limit carbon emissions from power plants, and it hinges on Clean Air Act interpretations that opponents say are invalid. The plan is likely to die under Trump and his EPA nominee, Scott Pruitt, who sued against it as Oklahoma’s attorney general. But next Thursday’s hearing — combined with Pruitt’s nomination and this week’s Science Committee hearing on EPA rulemaking — could signal a broader GOP push to reform environmental laws. Read more on The Hill


 

ENERGY MARKET NEWS

Oil Slips as Increase in Drilling Reported Oil prices were little changed Monday as reports of increased drilling in the U.S. dampened appetite among investors following last week’s 2% uptick. The April contract for global crude benchmark Brent was down 0.14% to $56.72 while its U.S. counterpart West Texas Intermediate edged up 0.03% to $53.86 for March deliveries. Oil-field services company Baker Hughes reported that shale oil rigs in the U.S. grew by 17 last week to total 583. This led many analysts and market observers to predict that 2017 will be the comeback year for shale oil after two years of cost-cutting and bankruptcies. Spending on U.S. onshore oil exploration and production is expected to rise by 30%-40% in 2017 and the rig-count could be higher than 1,000 by 2019. Higher U.S. domestic production could undermine the effect of current production cuts from the Organization of the Petroleum Exporting Countries and other major producers, particularly if the exports from the world’s largest consumer start to have an impact on key markets in Asia. However, the market is still buoyed by the OPEC-led cuts and the positive sentiment shows no signs of ending despite Brent being down slightly. Read more on Wall Street Journal

Oil and Gas Prices May Suffer from Energy Regulation Reversals President Trump’s vow to “unleash an energy revolution” by reversing regulations may send oil and natural gas prices tumbling in 2018, according to Bank of America Merrill Lynch. Domestic oil and gas prices will likely suffer as the U.S. continues to increase its output, analysts including head of commodities research, wrote in a note. Though U.S. oil and natural gas producers could see a surge in investment under Donald Trump’s numerous proposals from a likely reform of the corporate tax code to a possible border tax, prices may suffer from the resulting increase in output. “The industry has high hopes for less red tape, a more pragmatic approach to regulation and lower costs of having to comply with climate change rules,” the analysts said. The impact of Trump’s policies will take months if not years to play out. The implementation of such a tax would be a net positive for WTI versus Brent, but a net negative for refined petroleum product prices, the analysts wrote. Mexico exports 600,000 barrels a day of crude oil to the U.S. and buys large amounts of gasoline and diesel. The jump in natural gas production combined with relaxing the Clean Power Plan will likely send prices lower through 2018. If Mexico reciprocates with its own border tax and sparks a trade war, natural gas exports and prices would be severely hurt at the Henry Hub, as the U.S. currently sends five percent of its annual gas to Mexico via pipelines. American companies are sending record amounts of gas south of the border, with exports touching 4 billion cubic feet per day. However, many of Trump’s policies are unknown at this point and yet to be formed in detail, so it is perhaps too early to draw strong conclusions on how they may impact investment decisions and energy prices, the analysts said in the note. Read more on Bloomberg

·         Big Oil Loses Its Mojo The oil bust is over and producers are spending again to boost output, but the industry’s giants are changing how they replenish their reserves. That might make Big Oil less attractive to investors in the long run. The price of crude has doubled since its cyclical nadir a year ago and world’s two largest oil-field services companies, Schlumberger and Halliburton, both have called the bottom in exploration activity. The turnaround is especially evident in the U.S. where the oil-rig count measure reported by Baker-Hughes is now at its highest since October 2015. But that can’t be seen in the spending plans of large, integrated oil companies. The combined capital expenditure plans of Exxon Mobil Corp, Chevron Corp, Royal Dutch Shell PLC, BP PLC, ENI SpA and Total SA are just over $100 billion in 2017, down by almost 7% compared with 2016 and just half of what those companies spent in 2013. That comes despite a 67%, or $60 billion, rise in projected cash flow from operations at those companies this year, according to FactSet. Many fields now coming on stream were already well along when prices began falling 32 months ago. Those sunk costs meant that even though companies probably assumed higher energy prices when on the drawing board, it made sense to continue. Projects that didn’t make the cut include BP’s deep water project in the Australian Bight and Shell’s ambitious plans in the Arctic.  Read more on the Wall Street Journal

U.S. Paid Less for More Foreign Oil in 2016 The U.S. imported a lot more foreign crude last year but paid a lot less for it, reflecting the crude price plummet in early 2016. The U.S. Census Bureau and the Bureau of Economic Analysis released the latest trade figures yesterday, showing an increase to the overall trade deficit of nearly $2 billion for all of 2016. The monthly trade deficit fell by $1.5 billion in December over the prior month. Full-year trade data show big drops in both imports and exports, according to BEA. Exports fell by a value greater than imports, netting a deficit in overall trade. But the U.S. saved approximately $24.5 billion on imports of crude oil. This despite census data showing the volume of imports rising last year by approximately 145 million barrels compared with 2015. Imports rose as refiners compensated for falling U.S. domestic oil production, a consequence of the crude price drop and evacuation of drilling rigs from U.S. shale oil fields. Oil prices and drilling activity rebounded in the latter half of this year, however, and overall U.S. crude production is believed to be increasing. Rising domestic oil supplies and increases in imports from Canada are seen pushing out ship-borne imports over time.The value of U.S. natural gas exports also fell last year as gas prices sank lower. But liquefied natural gas (LNG) exports more than doubled in value despite the softer gas price. From about $370.5 million in 2015, LNG sales grew to approximately $962 million last year. Though natural gas exports via pipeline are rising, weaker pricing saw the value of pipeline exports fall by nearly $900 million. Government researchers think it’s possible that the U.S. will switch from being a net energy importer today to a net energy exporter by at last 2030 or sooner.Read more on E&E

·         American Association of Railroads Pushes Back on Changes to Renewable Fuel Standard U.S. railroads, including Warren Buffett’s BNSF, are joining a corporate brawl over ethanol mandates that pits American corn farmers and fuel distributors against independent oil refiners like billionaire Carl Icahn. The American Association of Railroads (AAR), which represents the interests of BNSF, Union Pacific Corp., CSX Corp., Norfolk Southern Corp. and others, is pushing back against calls by Icahn’s CVR Energy Inc. and Valero Energy Corp. for changes to the Renewable Fuel Standard, the law that requires escalating amounts of biofuel to be mixed with petroleum. At issue is who’s responsible for showing compliance with the program. Adherence is tracked by paper credits that have become more expensive in recent years. Refiners argue that the costs are exorbitant and that the Environmental Protection Agency, the regulator that has jurisdiction over the mandate, should move the onus from them to lower down the supply chain, closer to consumers. That would put companies such as BNSF, the carrier owned by Buffett’s Berkshire Hathaway Inc., and Union Pacific, the largest publicly traded U.S. railroad, on the hook for showing compliance with the credits, AAR said. It would also increase fuel prices, the lobbying group said.  Read more on Bloomberg

Crude Futures Continue to Rise on Bullish Gasoline Data Crude futures continued to rise on indications of better-than-expected gasoline demand in the U.S. and as investors anticipate fresh data on OPEC’s compliance with production cuts. Oil prices got a boost from Energy Information Administration data showing gasoline inventories in the U.S. fell by 0.9 million barrels in the most recent week, upending an expectation for an increase and pointing to improving demand of the fuel. Crude futures rose on better-than-expected gasoline demand in the U.S. though a rise in crude inventories was expected to cap further upside. Crude inventories gave a more bearish signal. Data showed that while the latest growth in U.S. crude stocks came below market expectations, it still expanded by 13.8 million barrels, the second largest weekly increase on record, on rising imports and domestic production. Analysts attributed the increase in part to a late 2016 surge in shipments from Saudi Arabia and other countries ahead of the production cuts initiated in January, and many expect that U.S. inventories will begin to drop as those cuts materialize. Goldman Sachs said that data indicated around 85% compliance to the production cuts which were applied from the start of the year. The latest EIA data also showed U.S. crude production increased by 63,000 barrels a day last week to 8.98 million barrels. Read more on the Wall Street Journal


RENEWABLE ENERGY NEWS

Chairmanship Raises Heller’s Energy Profile Sen. Dean Heller, a strong backer of solar power, is taking over a Senate Finance subcommittee where he’ll be well-positioned to press the case for the renewable energy industry.Panel leaders selected the Nevada Republican as chairman of the Subcommittee on Energy, Natural Resources and Infrastructure, replacing Sen. Dan Coats (R-Ind.), who retired at the end of the last Congress. In the post, Heller will have sway in crafting any energy provisions in a tax overhaul bill and coming up with financing to pay for an infrastructure package. Republican leaders have said both tax and infrastructure legislation are priorities for this Congress. The job could also make Heller a point man for energy industry concerns about a border adjustment tax (BAT), a key feature of a plan being floated by House Republicans, which would raise taxes on imports but eliminate them for exports. Domestic refineries oppose the BAT, saying it would hike the cost of overseas crude. Heller, who faces what’s expected to be a highly competitive re-election in 2018 in a state that backed Democrat Hillary Clinton, said he would use the post to focus on Nevada energy and transportation issues. He has yet to weigh in on the BAT. “I will utilize this important role to advocate on behalf of Nevada and advance policies that promote infrastructure, like Interstate 11, bolster domestic energy and mineral development, and facilitate innovation in the high-tech job sector,” he said in a statement. “Nevada’s continued growth must be matched with an infrastructure system capable to support it.” Read more on E&E

·         Wind Installations See Record Quarter to Close 2016 Wind developers set a record on new construction announcements in the fourth quarter of 2016 in a push to qualify for full federal tax incentives ahead of the tax breaks dropping by 20 percent for projects that break ground this year. The American Wind Energy Association today said developers began building 3,793 megawatts worth of projects in the fourth quarter, more than double the capacity of projects started in the same period of 2015. Lawmakers in December 2015 extended the Production Tax Credit for wind through 2019, with incentives dropping in 20 percent increments annually starting this year. There are now 10,432 megawatts of wind projects under construction and another 7,913 megawatts in advanced development, according to AWEA. Read more on Politico


STATE ENERGY NEWS

LA Delays Vote on Major Cleanup Plan Los Angeles air regulators are set to vote next month on a plan to address the region’s chronically poor air quality, after postponing a decision last week. The South Coast Air Quality Management District, which regulates air pollution in the 17-million-person Los Angeles Basin, is considering a plan that would subject some of the largest sources of pollution — rail yards, ports and warehouses — to voluntary controls. The agency’s board voted 9-3 on Friday to postpone the vote until next month, due to the unexpected absence of one of the 13 board members, who had to attend a relative’s funeral. The air quality management plan, four years in the making, is aimed at meeting 2023 and 2031 deadlines for reducing ozone under the Clean Air Act, as well as a series of earlier deadlines for reducing particulate matter and ozone stretching back to 1979. The plan steers clear of mandatory reductions for rail yards and other transportation hubs because they could be interpreted as limits on mobile sources, which are under the state and federal governments’ jurisdiction. The region must reduce nitrogen oxides 45 percent by 2023 and 55 percent by 2031 to meet federal standards. The board has tipped back to an even partisan split since last year, with the removal of Michael Antonovich, a Republican, from his post representing Los Angeles County. Read more on E&E

·         Okla. Governor Proposes Gas, Diesel, Wind Taxes to Fill Budget Gap Oklahoma Gov. Mary Fallin’s proposed budget would raise gasoline and diesel taxes to fix a chronic revenue shortfall, while eliminating the state’s corporate income tax. The governor’s plan also would provide more revenue for one of the state’s key environmental regulators, but less than the agency asked for. And it would cut subsidies for wind generators and impose new taxes and fees on wind-generated power, electric vehicles and hybrid-electric vehicles. It would leave untouched a 2014 provision that reduced taxes for the oil and gas industry, which was blamed for some of the state’s deficit. Fallin, a Republican serving her second term, proposed spending $7.8 billion and balancing the budget through a series of tax increases in a speech to a joint meeting of the state House and Senate. The Legislature opened its session yesterday and has until May to finalize a budget. Fallin said her budget would alleviate some of the most drastic spending cuts that the state has endured. Some school districts have had to hold classes only four days a week due to the cuts. The state Corporation Commission, which has been coping with a record-setting string of earthquakes linked to oil and gas operations, would get $584,000 in general revenue to continue its work on the issue. A little less than one-fifth of the agency’s $56.4 million budget comes from general state taxes, and the rest comes from fees on the industries that the commission oversees. Fallin also took aim at green-oriented businesses in the fiscal 2018 executive budget. She proposed an annual $100 fee tied to “high speed electric vehicles” and a $50 fee linked to “hybrid electric vehicles.” In turning to the wind industry, Fallin proposed accelerating the sunset of a tax credit and starting a tax on wind energy production at 0.5 cent per kilowatt-hour and bring in $36.6 million in fiscal 2018. “This industry was incentivized sufficiently to now be a major player in the Oklahoma energy industry, and a major winner of now-unnecessary incentives,” Fallin’s budget proposal says. Read more on E&E

N.D. House Approves Most DAPL Protest Bills North Dakota lawmakers advanced four bills Monday influenced by the high-profile Dakota Access pipeline protests. The Republican-controlled and largely oil-friendly North Dakota Legislature first introduced the laws, which are aimed at giving law enforcement more tools for responding to a protest, last month. Legislators voted 72-19 in support of H.B. 1193, which would create a new Class C felony offense for causing $1,000 or more in damage while committing a misdemeanor. The new charge would apply to protesters who attach themselves to a pipeline to stall its construction. H.B. 1304 would make it a Class A misdemeanor to wear a mask while committing a crime or fleeing from a crime. Many of the Dakota Access protesters donned masks to shield themselves from potential clashes with police. Meanwhile, H.B. 1426 would reclassify offenses such as starting a riot or providing weapons for a riot from Class C felonies to Class B felonies. This would effectively double the maximum penalties for these offenses to 10 years in prison and/or a $20,000 fine. Finally, legislators voted 85-6 to approve H.B. 1293, which would allow law enforcement to issue $250 citations for trespassing. The legislation must still be considered by the North Dakota Senate. Read more on Fargo Forum

·         House to Vote on Red River Dispute Bill Republican legislation aimed at solving a boundary dispute along the Red River is set to hit the House floor next week. The House Rules Committee yesterday approved a closed rule for H.B. 428. That means lawmakers will not be able to consider any amendments. The bill, by Rep. Mac Thornberry (R-Texas), would require the Bureau of Land Management to survey the boundary of property it owns along the river’s southern bank, which forms the border between Oklahoma and Texas, using a surveyor approved by both states. BLM has never completely surveyed the strip of land. And some private landowners who weren’t aware of BLM’s ownership complained when the agency began writing a management plan in 2013. The landowners complained that BLM was staking its boundaries far from the river’s edge, which violates a 1923 Supreme Court ruling that set the boundary between Texas and Oklahoma. A group sued BLM in 2015. Democrats said the bill would strip the Interior secretary of authority over federally owned land and worried about how it would affect Native American tribes who own mineral rights in the area.Rep. Tom Cole, an Oklahoma Republican whose district includes tribal land, said he was comfortable with the bill because it only calls for a survey of the land. He also said it was appropriate for BLM to pay for the survey. “Frankly, the federal government created the issue in the first place,” Cole said.It would be the second floor vote on the bill in just over a year. A version passed the House during the last Congress but didn’t advance in the Senate.Read more on E&E


ENERGY REPUTATION NEWS

With Glitz and Color, API Launches Push to Soften Oil’s Image “This ain’t your daddy’s oil.” The phrase was the centerpiece of the American Petroleum Institute’s first-ever, glitzy Super Bowl ad, which reached more than 100 million people last night — half the nation’s households — as the New England Patriots took on the Atlanta Falcons in downtown Houston. The 30-second spot, featuring graffiti artists, a ballerina, robots and supermodels using oil-based products, is part of API’s “Power Past Impossible” national campaign, aimed at touting the multifaceted uses of oil and gas in everyday life while reducing emissions. API wouldn’t say how much the digital, TV, radio and print campaign is costing, but expect the slogan — and the splashy new visuals — to be around for the next decade. The oil and gas industry is angling to soften its public perception and further capitalize on expected gains under a Trump White House and Republican Congress. API’s “Vote4Energy” campaign was ubiquitous during the elections. Central to the group’s message is an attempt to paint the oil and natural gas industry green by highlighting the nation’s drop in greenhouse gas emissions. The media blitz is occurring alongside API’s behind-the-scenes effort to shape Republican plans for a broad tax overhaul, including a “border adjustment fee,” while cheering congressional efforts to roll back an Obama-era regulation for methane emissions on public lands. Read more on E&E


 

FROM THE CHART ROOM

Wind Surges Into First Place of Renewable Electricity Resources

US

 

The wind industry crossed an important threshold in the United States last year, exceeding the generating capacity of hydroelectric power for the first time, according to the main industry trade group, the American Wind Energy Association. The nation’s fleet of dams has long stood as the top renewable energy source, but there has been little market interest in building more big hydroelectric generating stations. In the meantime, wind has rapidly expanded — more than tripling in capacity since 2008 — with many more installations on the way. According to the Energy Information Administration, conventional hydroelectric generating capacity stood at 78,956 megawatts in 2015, while wind, the industry group says, reached 82,183 megawatts last year, about enough to run 24 million average American homes. (The hydroelectric figure does not include pumped storage, in which water pumped to an elevated reservoir can be released through a turbine to generate electricity when needed.) Technological advances in wind design, including taller turbines with longer blades that can harvest energy from a greater variety of winds, are leading to increased efficiency. According to the Department of Energy, projects built in 2014, for instance, ran at 41.2 percent of their capacity the next year. The main fuel driving the robust spread of wind farms across the country — with a dense cluster sweeping up from Texas through the Great Plains — has been a combination of federal tax incentives and state mandates requiring utilities to buy renewable energy as part of their strategies to reduce carbon dioxide emissions to stem climate change. The federal tax incentive favored by the industry, the production tax credit, was worth 2.3 cents a kilowatt-hour of electricity sent to the grid by projects that began construction in 2015 and 2016, but it is scheduled to phase out by the end of 2019. (In 2015, the average home consumed about 900 kilowatt-hours of electricity a month.) It’s needed — and bolstering manufacturing 8790ioand creating jobs, especially in rural areas. According to the Department of Energy, the wind industry now employs almost 102,000 workers, up 32 percent from 2015, while the Department of Labor projects wind service technician as the nation’s fastest-growing occupation over the next decade. Read more on AWEA


 

Michael Best Strategies

 

Michael Best Strategies’ Energy Team

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