Garcia Sanchez on North American Energy Conflict

A North American energy trade war may be on the horizon, according to Texas A&M Associate Professor Guillermo Garcia Sanchez, an expert on international investment and energy law. Under President Lopez Obrador (AMLO) Mexico has begun to reverse its prior policy of opening its energy markets, and foreign investors are alleging unfair and discriminatory treatment. The Canadian and U.S. governments began consultation procedures with AMLO’s administration but, after seventy-five days, failed to settle the dispute. The exhaustion of the consultation period triggers the first step in the dispute resolution mechanism of the new United States-Mexico-Canada Agreement (USMCA), which could lead to the establishment of arbitral panels and the suspension of trade benefits to Mexico.

Canada and the United States’ objections mark the first time foreign powers have challenged Mexico’s energy policies since 1938, when Mexico expropriated foreign oil and gas companies. They also may mark the beginning of a regional trade conflict—in the midst of the Russian-Ukraine conflict, unsettled energy markets, and global inflation that has reached its highest levels since the 1970s. Professor Garcia Sanchez’s article, In the Name of Energy Sovereignty, is one of the first to unpack the USMCA’s energy-related provisions and its dispute resolution mechanisms, as well as its place in the global debate around energy transition and security. The article will be published in a forthcoming issue of the Boston College Law Review and the abstract is below.

Throughout history, the phrase “In the name of the King” justified actions that trumped the rights of citizens in order to safeguard the interests of the Crown. Today, in the name of energy sovereignty, States deploy the government apparatus to access oil and gas in other parts of the world, build pipelines on private lands, subsidize renewable energy, and nationalize their oil and power industries. States justify each of these actions by noting that they create a sense of energy independence, ensure security, or achieve other social and economic goals. Energy, however, cannot be trapped in one “realm.” Its nature is to move across human-created jurisdictions and settle, at least in the cases of oil and gas, in specific geological formations where extraction is not always economically feasible. Additionally, energy evolves with technology advancements and its production must adapt to new challenges, like that posed by the global climate crisis. Thus, an efficient and reliable energy sector that “secures” the State requires engagement with other foreign powers to regulate the trade and investment of energy and its sources. States, however, have created a web of often inconsistent treaties, reflecting competing and frequently contradictory energy policy goals. When disputes inevitably arise, arbitrators or committees must balance the parties competing energy goals.

This Article introduces the concept of energy sovereignty as a novel analytical framework to explain the fragmentation and inconsistencies in international energy governance. By introducing archetypical energy sovereignties, this Article provides a framework for interpreters of trade and investment agreements to balance the competing energy goals that are attached to the agreements. In doing so, this Article demonstrates how ignoring the complexities in the way States exercise their energy sovereignties can undermine integrated regional efforts to deal effectively with energy challenges like reducing carbon emissions or building a cost-effective and resilient energy matrix. This Article uses the United States-Mexico-Canada Agreement (USMCA), the latest North American international trade and investment agreement, to show how the archetypical energy sovereignties conflict with each other and how its dispute resolution mechanisms may balance them.

Can Weak Manchin Permitting Bill Be Strengthened?

After authorizing $370 billion in new funding for new, cleaner energy sources, Congress is turning to permitting reform: All the money in the world will not help if projects don’t have permission to build. Wednesday evening, Senator Manchin released proposed text for his permitting bill, which he apparently negotiated in return for his vote to authorize the energy funding. Unfortunately, the bill is not well-designed to speed up construction of new energy sources. But with a few strategic additions it could go a long way toward speeding up permitting to secure a cleaner, more reliable, and affordable energy future for the United States.

The biggest roadblock to energy sources is not financial; it is receiving permission to build. And many of the projects that we most need for a clean energy transition face particular permitting difficulties because they need permits from multiple states or local communities and the federal government. Our traditional energy commodities, oil and coal, are less dependent on building long-distance infrastructure because they can rely on existing railroads and pipelines, and they are easier to ship by multiple pathways using rail, road, and water transport. By contrast, cleaner energy products such as renewable electricity, natural gas, and hydrogen can only be shipped by new long-distance infrastructure.

Think of a long-distance power-line designed to bring renewable energy to market, a pipeline shipping natural gas to communities hoping to move away from coal, or a hydrogen pipeline designed to help replace fossil fuels. These linear infrastructure projects often need approvals from each state they cross and may also need approval from the federal government as well whenever they cross federal lands, borders, or streams.

There are two huge legal permitting challenges for these new cleaner energy projects.

So if we want to clean up our energy system and address the global energy crisis, which is causing energy shortages and price spikes around the globe, we need to speed up permitting. If the $370 billion authorized by Congress just goes to the few projects that would already have passed the permitting gauntlet, it will be money wasted. So we’ve seen a growing chorus of voices demanding reform to the permitting process to ensure this money isn’t squandered and that we can build a cleaner energy future.

The federal and state permitting challenges are linked because perhaps the most common proposal to speed permitting is to replace state and local siting processes with federal processes. For example, in 2005, the U.S. Congress gave the federal Department of Energy the power to designate areas that particularly needed more electricity transmission and gave the Federal Energy Regulatory Commission power to, in some circumstances, permit power-lines that hadn’t been approved by the states in those areas. Senator Manchin’s bill leans heavily on this method of speeding permitting: it gives federal government more power over permitting new power-lines and hydrogen pipelines.

The problem is that this is not an improvement at all when federally-approved projects are facing Kafkaesque challenges when they seek approval to actually build their projects. The energy sector where federal permitting is most common is in interstate natural gas permitting and these projects are routinely stopped by local objections even when they have federal approval. In fact, the two highest-profile recent gas pipeline projects—the Atlantic Coast Pipeline and the PennEast Pipeline—eventually had to give up on building their projects after years of expense and struggle, even though the federal government repeatedly backed both pipelines and both pipelines won blockbuster decisions in the U.S. Supreme Court.

If the Manchin bill passes as is, the gas pipeline industry can welcome the power-line and hydrogen industries to national regulation with this unwelcome news: “Even if the federal government backs you on every permit, and even if the Supreme Court backs you in every decision, no matter how long you wait, or how much you spend, states and lower courts will make life so difficult that your proposed project will never be built.”

The dysfunctions of federal permitting under court review are well known in energy policy. Congress’s 2005 grant of power to the Department of Energy and the Federal Energy Regulatory Commission was eviscerated by two federal appeals court decisions over the next six years. This is why the single project that really will be helped by the current Manchin proposal is the Mountain Valley Pipeline. The bill makes special provision for this project, directing that all actions “necessary for the construction and initial operation at full capacity of the Mountain Valley Pipeline shall not be subject to judicial review.”

The Manchin bill does almost nothing to help other energy projects stop endless court demands for further environmental review. The bill does address some less important timing issues so it’s important to keep straight three kinds of time limits:

  1. Time limit for the federal government to complete environmental review. The proposal directs a two year limit for environmental review of major projects and a one year limit for minor projects. Unfortunately, such deadlines are unenforceable—the federal government routinely misses even the statutory deadlines it is trying to meet. The deadlines may even be counterproductive if they encourage courts to stop projects and order further reviews because of concern that review was rushed to meet an artificial deadline.
  2. Time limit for plaintiffs to challenge a project after it receives its permit. This kind of “statute of limitations” is not harmful but of very little use. Smart plaintiffs hoping to stop infrastructure generally sue at the earliest opportunity because the best chance to stop an infrastructure project is before construction begins. So big projects are almost never held up by plaintiffs that waited years after the project was approved to bring their lawsuit.
  3. Time limit for courts to order more review on projects that have already been under review for years. Unfortunately, the Manchin proposal does not put any time limits on courts’ ability to hold up nationally-approved projects other than the Mountain Valley Pipeline. The federal environmental review law, the National Environmental Policy Act (NEPA), is a procedural statute simply intended to ensure the government did sufficient environmental review of a project. If the federal government has been reviewing the environmental consequences of a project for years and has approved it, and the court would still like more review, the court can order the government to do more review. But it is not reasonable to make a nationally-approved project, and all the consumers and producers that depend upon it, wait for the court and government to reach agreement on how much environmental review is enough.

The crucial importance of a time limit on judicial delay of projects is well explained in the Institute for Progress’s excellent recent report on “How to Stop Environmental Review from Harming the Environment“:

The time limit that would likely have a major impact on outcomes is restricting the ability of the courts to issue injunctions against projects that have undergone extensive environmental review under NEPA. This change would provide developers the certainty they need to invest in large-scale build outs of solar, wind, transmission and other clean energy infrastructure. Without a time limit on judicial injunctions, developers have a sword of Damocles perpetually hanging over their head, threatening the entirety of the project.

As it stands, the Manchin permitting proposal would be a serious lost opportunity that would be unlikely to significantly speed up construction of new energy projects. The focus on federalizing review of clean energy projects is particularly unhelpful when the proposal doesn’t address the problems that are making federal review the bane of energy project developers.

The good news is that the Manchin proposal could be improved relatively simply if it added limits on federal court and state delays on federal projects. Speeding up permits for nationally-approved projects would accelerate construction of all the new energy projects that it designates for federal review.

Oyewunmi on Permitting Offshore Wind Farms

In the aftermath of the new law funding clean energy sources, Tade Oyewunmi of the University of North Dakota sends in a timely new paper on some of the challenges facing companies looking to build offshore wind energy, and some of his suggestions for streamlining.

Here is the abstract for his paper, which is titled “The Regulatory State and the Emerging Offshore Wind Energy Market,” and is forthcoming in in the Arizona Journal of Environmental Law and Policy:

Offshore wind energy systems are generally regarded as variable baseload technologies and can therefore serve a crucial role in a net-zero or carbon-neutral electricity supply grid. With the spate of growing commercial and government-policy interests in offshore wind, it is important to examine how and to what extent the framework for assessing and reviewing project plans, as well as the process of engaging with impacted stakeholders, or alternative users of the outer continental shelf, can become more efficient and less controversial. Thus, this paper discusses the emerging offshore wind energy market in the U.S. and highlights the role of the regulatory state in facilitating a more efficient leasing and permitting process for projects without compromising the protections afforded under applicable laws and regulations. Adopting a compressive and standardized review of relevant project plans and proactive stakeholder engagement processes is recommended at an early or appropriate time during the permitting process. Understanding the opportunity costs of delayed and canceled projects, addressing misperception of risks, and standardizing best practice measures for addressing common issues identified from review processes could go a long way in making a project’s impact assessment and permitting framework more efficient while protecting the environment and legitimate interests of other users in the outer continental shelf.

The new paper can be found here on SSRN.

Making the Most of a New Era of American Energy

This year, the United States emerged from history’s biggest oil boom—this boom was more than an order of magnitude bigger than previous U.S. commodity booms and seven times bigger than the world’s biggest previous oil boom, which occurred in Saudi Arabia in the 1970s.

As a result, even with the 2020 oil bust, the U.S. produces more oil than any other nation. In 2019, America produced 65% more oil than #2 Saudi Arabia. And the U.S. is also the world’s biggest producer of natural gas and may soon be the world’s biggest exporter of liquefied natural gas. America is at the dawn of a new era as the world’s #1 energy producer.

My new line of research shows that, to maximize the benefit from this new bounty, oil & gas regulators should slightly slow production. Counterintuitively, slower production will benefit oil & gas companies by marginally increasing their cash flow and significantly increasing the long-term expected value of their assets. And slower production will also limit the environmental downsides of oil & gas and maximize the environmental benefits of natural gas.

Slower production counterintuitively helps oil & gas companies for two reasons.

First, although no individual company wants its production slowed, if companies were allowed to freely negotiate with each other, they would agree to cut back production simultaneously because slower production means higher prices and higher profits. As Adam Smith put it, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in some contrivance to raise prices.” Antitrust law forbids them to negotiate a production slow down, because we usually prefer lower consumer prices. But oil & gas prices have been so low following the boom, sometimes even negative, that gas is just being wasted—flared off at thousands of wells across Texas and North Dakota. Regulators can stop this waste, which just harms consumers, by cutting back oil production. Modest production limits would also raise prices enough to increase overall cash flow to oil & gas companies immediately.

Second, oil and gas is a long-term asset, oil and gas that is wasted today could be worth a lot in the future. American oil & gas law pushes companies to drill and pump oil more rapidly than they would like—the rule of capture, common lease terms, and covenants implied into leases by the courts all make companies drill for oil when they would rather wait. But it makes no sense to rush to produce natural gas that will simply be flared, or to flood the market with oil at rock-bottom prices, when companies could simply wait to drill until prices recover. Modest production limits would somewhat mitigate the common law’s tendency to push more oil production than a truly free market would provide.

I explain these theoretical reasons for oil & gas production limits in my forthcoming Cardozo Law Review article, State Energy Cartels. I show how oil & gas production limits are actually an idea that came from the United States, and its oil producing states, during the Great Depression. And I show that production limits also have potentially massive environmental benefits: slowing carbon emissions, boosting renewable energy, and creating a counter-intuitive coalition of oil producing countries with a powerful interest in slowing fossil fuel production.

My own state of Texas will have to be a leader in negotiating any new coalition of oil producers to impose production limits. Because of the new oil boom, Texas now produces more oil than 12 of the 13 nations that comprise the Organization of Petroleum Exporting Countries (OPEC).

The Railroad Commission, Texas’s oil and gas regulator, has coordinated oil production limits before, as I explain in this EnergyTradeoffs.com podcast. In the years before and after World War II, Texas alone produced one quarter of the world’s oil and the United States together produced two-thirds. During these years, American oil powered recovery from economic catastrophe, victory in World War II, and the post-war global economic expansion. Texas played a leading role in limiting year-by-year oil production—so much so that when Middle Eastern countries moved to the forefront of oil production and formed OPEC, they described it as “a kind of international Texas Railroad Commission.”

My newest article, published in the Oil, Gas, & Energy Law Journal, shows how the Texas Railroad Commission can reclaim its mantle as the world’s leading oil & gas regulator and take initial steps toward cooperation on restraining production. I propose that it start by phasing in modest cuts in natural gas production to stop economic flaring and marginally raise oil and gas prices.

As I explain in this new Houston Chronicle op-ed, the Commission can improve its data collection to fine-tune its phase-in of new gas limits to ensure they boost industry cash-flow. I explain the economic and environmental benefits of this proposal at greater length in this recent video presentation on why it is the best method of stopping flaring, which is also embedded below.

The United States and Texas find themselves again at the center of global energy production. It is high time for them to carefully consider how they will maximize the economic and environmental benefits of this new bounty.

Energy Tradeoffs Podcast #40 – Doug Kysar

This Thursday’s EnergyTradeoffs.com podcast is our 40th episode! It features Yale Law School’s Doug Kysar talking with University of Colorado’s Sharon Jacobs about his research on “Tort Law & Climate Litigation.”

Sharon and Doug first discuss the different types of climate litigation, including causes of action based on nuisance, arguments that the government holds the climate in trust for future generation, and claims that fossil fuel companies have misled investors and the public about the dangers of climate change. They go on to discuss the challenges of holding companies liable when greenhouse gas emissions were also caused by consumers around the world, and how that may prevent or dissuade judges from allowing these suits to go forward. Finally, they discuss the remedies that the various plaintiffs are looking for to protect them from climate harm.

The conversation builds on a 2017 article that Doug and Henry Weaver published in the Notre Dame Law Review, which was titled “Courting Disaster:  Climate Change and the Adjudication of Catastrophe.”

The Energy Tradeoffs Podcast can be found at the following links: 
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Energy Tradeoffs Podcast #39: Hannah Wiseman

For this week’s EnergyTradeoffs.com podcast interview, we have David Spence interviewing my friend and co-author Hannah Wiseman, now at Penn State Law – University Park, about her research on “Balancing the Local Costs and Wider Benefits of Energy Development.”

Hannah and David discuss her research on how to address energy projects that have concentrated costs in local communities but broader benefits to the economy and energy system—such as natural gas fracking and solar and wind farms. At times, states have responded to local opposition by stripping communities of local control over energy development, but that can leave important externalities unregulated. Hannah suggests that taxation might be a better way to address these externalities.

Hannah has a forthcoming paper titled “Taxing Local Energy Externalities” forthcoming in the Notre Dame Law Review. And along with Tara Righetti, we have just published a paper in the Yale Law Journal Forum on “The New Oil & Gas Governance.” Hannah also cites Kristen van de Biezenbos‘s important argument on oil company negotiations with local communities, “Contracted Fracking.

The Energy Tradeoffs Podcast can be found at the following links: Apple | Google

Energy Tradeoffs Podcast #38 – Caroline Cecot

In this Thursday’s EnergyTradeoffs.com podcast episode, I talk with Caroline Cecot of GMU’s Scalia Law School about her research on “Regulating the Risks of Fracking to Water.”

Caroline describes her empirical research on how New York towns approached fracking in the years before it was banned across the State. She finds that towns that were more vulnerable to water pollution and those that were less accustomed to oil and gas development were more likely to ban fracking. As a result, she argues that fracking might win more widespread support if better water contamination regulation could assure local communities of its safety. She also describes some of her ideas for improving insurance and regulation of fracking risks to water.

The discussion builds on two of Caroline’s recent articles: “Regulatory Fracture Plugging: Managing Risks to Water from Shale Development,” which was published in the Texas A&M Law Review in 2018, and “No Fracking Way: An Empirical Investigation of Local Shale Development Bans in New York,”which was published in Environmental Law in 2019.

The Energy Tradeoffs Podcast can be found at the following links: 
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Energy Tradeoffs Podcast #37 – Eric Biber

Another week, another EnergyTradeoffs.com podcast episode. This week, the University of California at Berkeley’s Eric Biber talks with David Spence about his research on “How Law Must Change in the Anthropocene.”

Eric explains his argument that as humans change the global environment, legal doctrines will have to change to accommodate regulatory responses as well as to address wider problems triggered by environmental harm. Eric describes the comprehensive challenges that will arise from climate change and other global environmental challenges and how they are caused by the “full range of human activity.” As a result, he argues that these challenges will require, in David’s words, “fundamental changes in the relationship between governments and individuals.” Eric describes how governments might be forced to rethink traditional approaches to legal rules for tort causation, federalism, and state coercion.

The conversation builds on Eric’s 2017 article on “Law in the Anthropocene Epoch” , which was published in the Georgetown Law Journal.

The Energy Tradeoffs Podcast can be found at the following links: 
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Energy Tradeoffs Podcast #34 – Michael Wara, Part I

This Thursday’s EnergyTradeoffs.com podcast features Stanford University’s Michael Wara talking with David Spence about his research on California’s wildfire policies. This week’s podcast episode is the first part of a two-part series on “PG&E’s Wildfire Liability and Bankruptcy: Who Pays?”

This episode focused on wildfire causes, liability, and victims. David and Michael talk about why Northern California has been so vulnerable to fires in recent years, including how fire prevention practices have differed from those in Southern California. They also discuss why utilities have been shutting off power to avoid fires and how customers have responded to the risk that their power supply will be cut off.

Michael appears frequently in the media as an expert on PG&E, wildfires, and liability. Just last week he released a new NBER working paper on “The Changing Risk and Burden of Wildfire in the US.” If you’d like more background on wildfire law and policy, I can recommend two articles by Karen Bradshaw of Arizona State: a 2010 piece titled “A Modern Overview of Wildfire Law” and a 2015 piece on stakeholder collaborations in wildfire policy.

The Energy Tradeoffs Podcast can be found at the following links: 
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Energy Tradeoffs Podcast #32 – Rossi & Serkin

This Thursday’s EnergyTradeoffs.com podcast episode features features the University of Texas’s David Spence interviewing Vanderbilt Law School’s Jim Rossi and Chris Serkin about their proposal for “Energy Exactions“.

Jim and Chris describe this proposal, which would have local governments impose “a fee on development … that is designed to avoid strains on the energy grid.” It would build on existing negotiations between developers and local governments that often require developers to pay for some of the local services they will require. To comply with an energy exaction, a developer could either pay for the new burden it would place on the energy grid or even pay for energy-saving technologies that would eliminate this burden.

This discussion explores Jim and Chris’s recent paper, which was published in the Cornell Law Review and is also titled “Energy Exactions“.

The Energy Tradeoffs Podcast can be found at the following links: 
Apple | Google

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