Financing
The Biden administration’s energy and fossil-related policies are broadening, as anticipated. An initiative led by special presidential climate envoy John Kerry to utilize the financial sector to bolster the administration’s U.S. carbon emission reduction goals looks to block financing and services to fossil-related energy clients. In response, Republican lawmakers and state treasurers have vocally criticized efforts to “de-bank” conventional energy and fossil fuel companies. Fifteen Republican state treasurers – and possibly more to come – are threatening to pull assets from large financial institutions if they make moves to decarbonize their lending and investment portfolios. To date, those treasurers signed on collectively manage more than $600 billion in assets in state treasuries, pension funds and other government accounts.
We can expect to see more of such moves from the administration: ratcheting up pressure to reduce emissions through direct regulation and broader indirect policies and pressures. To put the implications into context, at the time of this writing, the Baker Hughes rig count shows Utah has nine drill rigs, with eight of those rigs active in the Uintah Basin. (That is currently more than the entire state of Wyoming, weighing in with four rigs). To continue to grow the Basin sustainably and create new crude export markets, access to financing will be critical. This initiative threatens every segment of our industry – from exploration all the way down the value chain to finished fuels.
Upstream
On the upstream side, the regulatory environment has continued to evolve with the passing of a significant new rule, R649-11 Administrative Penalties1. Effective May 27, 2021, the Division of Oil Gas and Mining and the Board of Oil Gas and Mining now can directly levy and collect fines and penalties for various violations, a rule that resulted from SB148 passed during the 2020 legislative session. UPA was actively involved in developing both the legislation and this new rule. We support giving the Division the needed tools to promptly and appropriately address noncompliance while balancing the ability for responsible operators to promptly correct issues without further penalties. Highlights for the Board and Division include:
The authority to impose administrative penalties, not to exceed $5,000 per day for each day of violation when a person violates Utah Code Title 40, Chapter 6, or a permit, rule, or order made thereunder. The penalty cannot exceed $10,000 for each day of violation when the Board determines the violation was willful.
Establishing a standardized violation schedule with penalty adjustments increasing or decreasing based on aggravating and mitigating factors.
Requiring notice that sets forth the actions necessary to cure violations before any penalty is levied and provides a transparent appeals process.
The upstream regulatory march will continue with informal stakeholder discussions with the Division beginning a new bonding rule in June or July. We expect the rule to include significant and broad changes, and UPA is already preparing and coordinating our position. If you have not engaged with us on this issue yet, please contact UPA President Rikki Hrenko-Browning at rhrenko-browning@utahpetroleum.org so we can make sure to include your input.
Downstream
A significant development for our downstream sector and other businesses, both large and small, across the Wasatch Front is the Division of Air Quality’s (DAQ) development of the 179B package as allowed by the Clean Air Act. A 179B(b) demonstration would prevent a bump-up in nonattainment status (currently at marginal) if the state can prove that the area would have met the National Ambient Air Quality Standard and the influence of pollution emanating from international sources. It would also provide the DAQ with more flexibility to pursue targeted strategies more likely to improve air quality, rather than focusing on the limited, strict, and so far unsuccessful controls required by a State Implementation Plan (SIP). You can find the package that the DAQ submitted to the EPA at the end of May at https://documents.deq.utah.gov/air-quality/planning/air-quality-policy/DAQ-2021-005764.pdf
... at the time of this writing, the Baker Hughes rig count shows Utah has nine drill rigs, with eight of those rigs active in the Uintah Basin. (That is currently more than the entire state of Wyoming, weighing in with four rigs).
UPA submitted extensive technical comments on that draft package, including what additional data points would support a technically robust 179B demonstration. We are also appreciative of a joint letter of support for the demonstration from state leadership, including the Governor, Lieutenant Governor, Senate President, and Speaker of the House to EPA Region 8 Acting Regional Administrator Deb Thomas. This joint letter also addressed the issue of ozone levels, stating, in part:
“… average ozone levels have remained virtually unchanged. Therefore, we strongly encourage your support of a data-driven decision not to continue pursuing policy and regulatory decisions based on the very rigid and limited controls that would be required under a State Implementation Plan (SIP) under a Moderate classification, which have shown little indication of actually reducing ozone over the last decade and a half.”
You may have also heard about skyrocketing ethanol costs and growing Renewable Fuel Standard (RFS) challenges. The RFS is a government mandate requiring biofuels, such as corn ethanol and biodiesel, be blended into the gasoline and diesel sold in the United States. Federal law requires refineries turn in renewable identification numbers (RINs) to the EPA. For ethanol, RINs are like a receipt proving the ethanol was purchased and blended into gasoline. Most refineries are not able to blend ethanol, so they buy RINs second-hand on the open market. RINs come with a price and there are only so many of them. As the federally set quotas go well beyond consumer demand, the RFS mandates have become more unrealistic, creating significant problems for American refineries paying for the RFS. Ethanol RIN prices have skyrocketed 1800% since January 2020. To put into today’s perspective, this is comparable to a gallon of milk increasing in price to $64. Many refiners are spending more on compliance costs for the RFS than most other expenses, including payroll and electricity, even resulting in some facilities having to shut down. Throw into the mix disputes and changing legal interpretations of the so-called small refinery exemption (which all five Salt Lake facilities are classified), and the situation gets even more challenging. Expect to hear more about the RFS, its impact on gasoline prices, and hopefully some structural changes ahead.
Legislative
Over this summer and fall, UPA will be closely engaging on several legislative issues addressed through the interim committee meetings. A complete list of watch and action items has been developed with our legislative committee. One highlight includes engaging with the Natural Resources, Agriculture and Environment Committee on the impact of the federal administration’s executive orders and policies regarding the climate crisis and federal leasing review. We also anticipate the opportunity to brief the Public Utilities, Energy and Technology Committee on intentional emissions on the Wasatch Front and the importance of the 179B demonstration (see the Downstream section for details) to continued economic growth and achieving real air quality improvements. Another key issue will be working with stakeholders and briefing the Political Subdivisions Committee on SB129 Real Property Recording Amendments.
We are also thankful to Representative Watkins for her commitment to HB0444 Sales and Use Tax Refund Modifications. This bill was numbered during the 2021 legislative session and will progress through the interim, preparing for a run in the upcoming 2022 session. This bill would provide the upstream sector with similar tax treatment as already enjoyed by the mining and manufacturing industries, including our downstream sector, and remove the double taxation currently in place. Rather than entirely exempting sales tax, the bill would refund only the state portion of sales tax, allowing local municipalities to continue to receive the much-needed sales tax revenue that supports local infrastructure, public safety and government services. This is a win-win for producers and the local community.
1 Docket No. 2020-033, Cause No. RO&G-2020-02
