The oil and gas industry is heavily regulated by the Environmental Protection Agency (EPA), the Federal Energy Regulatory Commission (FERC), Bureau of Land Management (BLM), and the Department of the Interior (DOI).
As business valuation experts, we have to consider the outlook for the economy, industry, and business in every valuation; therefore, we pay attention to the regulatory environment to assess what it means for our clients. Given the new administration, there is much to consider.
Review of Recent Regulatory Reform
Streamlining Federal Reviews
On August 15, President Trump signed an executive order which aims to speed up the process for federal environmental reviews of energy and other infrastructure projects and holds agencies accountable if they fail to do so. Jack Gerard, President of the American Petroleum Institute (API), praised the order for its focus on speeding up projects, saying “We also look forward to President Trump as he signs an executive order aimed at streamlining the permitting process for infrastructure projects.” The API had previously called for significant improvements to be made to the permitting process.
Federal Energy Regulatory Commissions
In August, the Senate confirmed two appointees to the Federal Energy Regulatory Commission, which is an independent agency that regulates the interstate transmission of electricity, natural gas, and oil, among other things. Prior to the appointments, the commission did not have quorum (the first time in its 40-year history), holding up projects worth $50 billion in private capital according to the Electric Reliability Coordinating Council. FECR is now ready to address the backlog of projects.
North American Free Trade Agreement (NAFTA)
Negotiations of NAFTA began in the third quarter of 2017 and remain unresolved. President Trump has indicated on multiple occasions that the U.S. could simply pull out of the agreement, which worries many in the oil and gas industry. The API, CAPP, and AMEXHI are the top trade groups in the United States, Canada, and Mexico, respectively, and they issued a joint position paper on August 2 hoping to keep current policies intact and “Do No Harm.” As early as 2020, North America could achieve energy self-sufficiency and has made significant strides since the agreement was signed 23 years ago. The paper goes on to claim that a change in trade that reduces investment protections or increases tariffs or trade barriers could have a significant negative impact on the industry and risk tens of millions of jobs that depend on trade in North America.
Tax Reform
Towards the end of the third quarter 2017, Congressional Republicans introduced the outlines of their plans for tax reform. On December 2, the Senate passed the tax reform bill. The next step is for the House and Senate to agree on the same version of the bill. In general the bill has the goal of reducing the corporate tax rate and simplifying the overall tax code. The energy industry will likely see aspects that are both good and bad. A corporate income tax rate decrease from 35% to 20% would be great news for the oil and gas industry. On the other hand simplifying the tax code will likely lead to a decrease in tax exemptions of over $4 billion for the industry. The biggest of these, “intangible drilling costs,” or IDCs, could actually be expanded, with a provision in the reform that allows for the immediate expensing of new investments.
Renewable Fuels Standards Program (RFS)
The Renewable Fuels Standards Program continues to have a significant impact on the refining industry. Each November, the EPA issues rules increasing Renewable Fuel Volume Targets for the next year. Renewable Identification Numbers (RINs) are used to implement the Renewable Fuel Standards. At the end of the year, producers and importers use RINs to demonstrate their compliance with the RFS. Refiners and producers without blending capabilities can either purchase renewable fuels with RINs attached or they can purchase RINs through the EPA's Moderated Transaction System. While large integrated refiners have the capability to blend their own petroleum products with renewable fuels, small and medium sized merchant refiners do not have this capability and are required to purchase RINS, which have significantly increased in price.
The new RFS for 2018, which were released in mid-July, displayed a slight reduction in the volume requirements. A public hearing was held on August 1 and on October 17. The EPA provided a public notice and an opportunity to comment on potential reductions in the 2018/2019 biomass-based diesel, advanced biofuel, and total renewable fuel volumes. The final rule should be available in December. A coalition of independent refiners and marketers has urged President Trump to move forward with this review. According to the November issue of the Oil and Gas Journal, the Fueling American Jobs Coalition (FAJC) said, “The need for significant reform has only grown over the last year as the cost of purchasing Renewable Identification Numbers (RIN) to comply with the RFS has skyrocketed, threatening some refiners’ survival.”
RTR & NSPS
In December of 2015 the Petroleum Refinery Sector Risk and Technology Review (RTR) and the New Source Performance Standards (NSPS) rule was passed in order to control air pollution from refineries and provide the public with information about refineries’ air pollution. These regulations ranged from fence line and storage tank monitoring to more complex requirements for key refinery processing units. The EIA estimates the rule will cost refineries a total of $40 million per year, while the American Petroleum Institute (API) argued that the annual cost would exceed $100 million. The rule was expected to be fully implemented in 2018 however President Trump’s attention to the needs of deregulation of the oil and gas sector makes us to question the future implementation of the rules.
Summary
These are just a few of the regulations that affect the day-to-day operations of companies in the oil and gas industry. Changes in the regulatory environment have led to increased uncertainty in the oil and gas sector. Overall, however, outlooks for the industry appear favorable. While this post mainly outlines domestic oil and gas policy, it is important to remember that the domestic oil and gas market is affected by global oil supply and demand. On Thursday November 30, OPEC decided to extend production cuts through December 2018. This decision came one year after OPEC originally decided to make across the board production cuts in order to realize more stable oil prices around $50 per barrel.
Mercer Capital has significant experience valuing assets and companies in the energy and construction industries. Our valuations have been reviewed and relied on by buyers and sellers and Big 4 Auditors. These valuations have been utilized to support valuations for IRS Estate and Gift Tax, GAAP accounting, and litigation purposes. Contact a Mercer Capital professional today to discuss your valuation needs in confidence.
