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Fight over oil, gas methane oversight continues, even after court ruling

A recent federal court ruling against a Trump administration rule on oil and gas methane emissions may revive a long-paused fight over the regulation's Obama-era predecessor.

The U.S. District Court for the Northern District of California recently vacated the 2018 U.S. Bureau of Land Management's rule limiting methane emissions from oil and gas operations on federal lands. That regulation had effectively rescinded much of a more restrictive Obama administration 2016 rule, the Methane and Waste Prevention Rule. The federal judge said that leaving the Trump administration's methane regulation in place would cause more environmental harm than removing it and opted to re-implement the Obama-era rule. The 2018 rule's removal and 2016 rule's reinstatement will become effective 90 days after the July 15 order.

The Obama-era regulation had also been challenged in federal court, but that challenge got put on hold pending the California federal court's decision. Now, several western states — North Dakota, Texas, Wyoming and Montana — have filed a motion to resume the industry's challenge to the Obama-era rule in the U.S. District Court for the District of Wyoming.

In the July 20 motion, the states wrote that counsel for the Western Energy Alliance and the Independent Petroleum Association of America supported the motion, while counsel for the federal government did not offer a response to their inquiry.

Should the court lift the stay on the case, the Trump administration may be called on to defend the Obama administration's 2016 rule after seeking to replace it with weaker regulations on the industry.

Fate of the 2018 methane rule

Following the California federal court's order vacating the 2018 rule, the Bureau of Land Management, or BLM, did not provide any information on its plans to address the ruling.

The ruling is unlikely to be the final stop for the regulation in the legal process, according to John Thieroff, a Moody's analyst focused on environmental, social and governance issues.

"Certainly the administration has given every indication that they look to fight these battles as long as they can," Thieroff said.

Kathleen Sgamma, president of the Western Energy Alliance, a trade group that challenged the 2016 rule, said her organization would make its next move "very soon."

"This decision looks very good on appeal, and we have options in the District Court of Wyoming as well," Sgamma said.

The administration could appeal the ruling, but the July 15 decision was a "really strong rejection" of the Trump administration's attempts to delay or eliminate protections in the 2016 rule, according to Rosalie Winn, senior attorney with the Environmental Defense Fund who worked on the California case.

"What we saw in the court decision was a wholesale rejection of all of the justifications that the Trump administration had attempted to give for what is really a 180-degree about-face from the 2016 rule," Winn said. "We saw the court reject the statutory arguments made by BLM and further find that the decision-making and process that led to the repeal of the waste prevention rule was arbitrary and capricious and not based in the facts."

In addition to a potential appeal, the Trump administration could also begin a new administrative rulemaking to address the issues the court found in the 2018 rule, but such a time-consuming move is unlikely, Winn said.

"There's no easy route for the agency to address those issues quickly through a rulemaking," she said.

Sector certainty

Near-term, the recent ruling is unlikely to have a significant impact on the sector, especially compared with issues stemming from decreased fuel demand as the coronavirus pandemic wages on, according to Moody's Thieroff.

"We don't think that there's one regulatory change that's imminent that's going to change the industry, but as these things pile up, it is going to become more and more difficult to operate, and you're really going to see it at the state level," he said.

Height Securities LLC analysts noted that the "entire process is entangled in a knot of repeals, appeals, and rollbacks." As a result, the capital market firm expects the ruling to primarily "raise the profile for the issue for the administration in 2021," they said in a July 16 note.

"Overall, we expect increasing regulation of methane regulations for the oil and gas industry on federal and private land," the analysts wrote. "Several large operators support, to some degree, greater regulations to capture methane and improve natural gas' profile as a [greenhouse gas] reduction tool. Regulation could further help rationalize supply while adding logistical and compliance requirements that benefit operators with scale."

The oil and gas sector has worked to reduce its methane emissions the last several years, launching initiatives focused on the effort and partnering with universities and environmental groups to study methane and emission reduction technology.

The ruling could threaten the sector's regulatory and investment certainty, said Lem Smith, vice president for upstream policy and industry operations for the American Petroleum Institute.

"This decision creates regulatory uncertainty that could chill investment, hinder economic growth and sacrifice jobs at a time when Americans need an economic recovery," Smith said. "The 2016 rule is beyond BLM's authority and doesn't improve on the success of existing state and federal regulations."