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Domestic market overview
What is the extent of oil and gas production in your jurisdiction?
According to an Energy Information Administration (EIA) report, in 2015 the United States produced approximately 27.19 trillion cubic feet (Tcf) of dry natural gas and approximately 12.68 million barrels a day of petroleum and other liquids.
How does domestic energy consumption break down with respect to oil and gas, as well as imports and exports?
According to the EIA report, in 2015 the United States consumed approximately 27.47Tcf of dry natural gas domestically, as follows:
- 4.62Tcf by the residential sector;
- 3.22Tcf by the commercial sector;
- 7.51Tcf by the industrial sector;
- 9.61Tcf by electricity generation; and
- 2.51Tcf by other sectors, including lease, plant and pipeline fuel, fuel consumed in natural gas vehicles and fuel consumed in liquefaction for export.
In 2015 the United States was a net importer of dry natural gas, net importing approximately:
- 0.95Tcf of dry natural gas;
- 0.89 Tcf by pipeline; and
- 0.06 Tcf by liquefied natural gas.
The EIA report details that the United States consumed domestically approximately 19.42 million barrels a day of petroleum and other liquids in 2015. In addition, the United States was a net importer of petroleum and other liquids, net importing approximately:
- 4.64 million barrels a day of petroleum and other liquids;
- 6.88 million barrels a day of net imported crude oil; and
- 2.24 million barrels a day of net exported petroleum products.
What are the current trends and future prospects for oil and gas supply and demand in your jurisdiction, and what policies has the government adopted to address these?
The existing oil and gas trends in the United States have largely resulted from the shale gas revolution, which has been ongoing for more than a decade. Developers of downstream projects that use hydrocarbons as feedstock continue to explore the opportunities created by plentiful, inexpensive crude oil and natural gas, while the midstream industry is still catching up with the need to move hydrocarbons from supply source to their point of use. The plunge in oil prices at the end of 2014, the volatility of oil prices and sustained low natural gas prices have caused a string of bankruptcies and restructurings among independent upstream producers, requiring the industry to re-evaluate which basins will be economic. M&A activity in basins judged to be economic has increased substantially, backed by private equity investors, with per-acre prices in some cases even exceeding pre-2014 levels.
From a regulatory perspective, federal and state authorities are still making adjustments to deal with the influx of oil and gas into the domestic market, while determining the extent to which the more environmentally invasive activities associated with shale production should be regulated. At the end of 2015 the US Congress removed decades-old restrictions on the export of crude oil, while the Obama administration has continued to use its executive authority to impose stricter environmental standards. Meanwhile, regulations promulgated by the Bureau of Land Management governing hydraulic fracturing on federal lands in 2015 were recently struck down by a US federal trial (district) court. However, President-Elect Trump has indicated that his energy plan will include opening more federal lands to oil and gas development and rolling back executive actions regulating oil and gas development.
Recent increases in seismic activity that have been linked to wastewater disposal activities for oil and gas development have led to stricter regulation and oversight, even in states with a long history of oil and gas activity that are generally less restrictive, such as Oklahoma.
What are the primary laws and regulations governing the oil and gas industry in your jurisdiction?
The primary laws governing the oil and gas industry on federal lands are:
- The Mineral Leasing Act of 1920, as revised by the Federal Onshore Oil and Gas Leasing Reform Act of 1987, as codified under Title 30, Chapter 3A of the US Code;
- the Outer Continental Shelf Lands Act of 1953, as codified under Title 43, Chapter 29 of the US Code;
- the Multiple Mineral Development Act of 1954;
- the National Environmental Policy Act of 1969;
- the Federal Land Policy and Management Act of 1976; and
- the Federal Oil and Gas Royalty Management Act of 1962, as amended by the Federal Oil and Gas Royalty Simplification and Fairness Act of 1996.
Much of the oil and gas industry is governed on a state level. The ownership of oil and gas rights is frequently governed by the common law of the applicable state (or, in the case of Louisiana, the civil law), while the regulation of oil and gas development (including on private lands) is governed by the law and regulation of the state where the applicable lands are located.
What government bodies are charged with regulating the oil and gas industry and what are the extent of their powers?
The authority to grant oil and gas rights and to regulate oil and gas development on federal lands rests with the Department of Interior. The Department of Interior’s Bureau of Land Management has authority over the development of oil and gas on onshore federal lands and, in conjunction with the Bureau of Indian Affairs, on American Indian lands. Regulatory authority within the Department of Interior covering oil and gas development on offshore federal lands is mainly divided between:
- the Bureau of Ocean Energy Management, which oversees the commercial aspects; and
- the Bureau of Safety and Environmental Enforcement, which is in charge of enforcing environmental and safety regulations.
The Department of Interior’s Office of Natural Resources Revenue is responsible for the collection and management of all revenues, including royalties, generated by oil and gas development on federal land.
On state-owned and private lands located in a particular state, the regulation of oil and gas development is primarily conducted by the applicable state agency vested with such authority; the commercial and the regulatory functions are frequently divided between agencies.
Exploration and production
Who holds the rights to oil and gas reserves in your jurisdiction?
The ownership of oil and gas rights in the United States differs from most international jurisdictions in that a significant portion of oil and gas rights are privately held by individuals (or corporations or trusts) and can freely be transferred between individuals.
The federal government owns and controls oil and gas rights on lands owned by the United States, which cover large portions of the country and include land located within individual states’ geographic boundaries. On certain historical American Indian lands, oil and gas rights are owned or operated by the federal government on behalf of or for the benefit of certain American Indian individuals or tribal authorities. On state-owned lands within the geographic boundaries of the applicable state, oil and gas rights are owned by the individual states. States with a coastline own the oil and gas rights to any submerged lands up to three nautical miles from their coastlines (except Texas and Florida, which own the rights up to three marine leagues from the coastline). The federal government owns the oil and gas rights to any US submerged lands beyond such state-controlled lands, including on the outer continental shelf.
Is there a distinction between surface and subsurface rights?
Yes. Although the concept of fee simple ownership of a tract of land entitles the owner to both the surface and sub-surface, ownership of the surface and sub-surface estates can be severed by grant or reservation. A party that owns the mineral estate on a tract of land is entitled to develop and produce oil and gas from that tract, even if it does not own the surface estate covering such tract. A party that owns only the surface of a tract of land (not the sub-surface) has no right to develop the oil and gas reserves associated with such tract. Further, the mineral estate is ‘dominant’ over the surface estate, meaning that the owner of the mineral estate has the right to enter or make use of the surface estate to the extent reasonably necessary to develop the mineral estate. Property law is generally governed by state law, so this concept varies in its implementation, with states requiring that the mineral estate owner accommodate the surface estate owner to varying degrees.
Although the concept of the severance of the mineral estate does apply to federal lands and state-owned lands, it is less likely that the mineral and surface estates will be severed on such lands, and in practice, this issue rarely arises.
What rules and procedures govern the grant of rights for exploration and production purposes (eg, through licences, leases, concessions, service contracts, production sharing agreements)?
The main way of granting oil and gas rights in the United States – on federal, state and private lands – is the oil and gas lease, which is granted by the holder of mineral rights covering oil and gas (the lessor) to the party that wants to develop the oil and gas on the applicable tract (the lessee). Use of the oil and gas lease on federal and state lands is implemented by regulation, whereas use of the oil and gas lease on private lands is due to historical custom and industry practice. In most states, an oil and gas lease is regarded as a grant of a real property interest, while in practice an oil and gas lease is often treated as a hybrid of real property rights and contract rights. The holder of mineral rights covering oil and gas on a particular tract need not grant an oil and gas lease in order to develop the oil and gas reserves on the applicable tract, but rather can choose to develop the reserves itself.
Compared to international oil and gas practice, the US oil and gas lease is probably most analogous to a concession containing a fixed exploration term, with an option for an extended production term if oil and gas are discovered in commercial quantities. If the lessee manages to produce oil and gas in commercial quantities, the lease will extend past a primary term for as long as the lessee continues to produce oil and gas in commercial quantities. The lessee has the right to take and sell freely the oil and gas produced from the applicable tract, subject only to the lessor’s entitlement to the royalty stream. The historical standard royalty was one-eighth of production, but modern leases contain a wide range of royalties, such as:
- up to one-fourth of production;
- sliding scale royalties; or
- different royalties for different types of hydrocarbon.
What criteria are considered in awarding exploration and production rights (eg, are there any restrictions on the participation of foreign investors/companies)?
Other than generally applicable restrictions on foreign investment in the United States (including the review of foreign investment in the United States by the Committee on Foreign Investment in the United States) or on property ownership, there are no material regulatory criteria for the ownership of oil and gas rights on private lands. Oil and gas leases are generally granted based on commercial factors such as the highest royalty or the grantee most likely to develop the asset.
Federal and state oil and gas leases are generally awarded according to a public bid system that requires bidders to provide a deposit and submit sealed bids to the applicable Department of Interior agency. If there are multiple bidders, the lease is awarded to the qualified bidder submitting the highest acceptable bid.
Certain restrictions are imposed on granting oil and gas leases on federal lands. A foreign citizen may not own an interest in a federal oil and gas lease, except through stock ownership in a US corporation, and provided that the foreign citizen’s country of origin grants reciprocal ownership rights to US citizens. There are also certain qualification and financial security requirements to own or operate, as applicable, federal oil and gas leases, with the requirements varying based on the type of lease.
Are there any special legal provisions applicable to joint ventures?
As a general rule, parties need not enter into any particular form of joint venture in order to own or develop oil and gas rights. The large majority of joint ventures formed to pursue upstream oil and gas development operations are not ‘true’ joint ventures where co-venturers form a jointly held entity (ie, a company) to own and operate the applicable asset, but are undertaken with each co-venturer owning an undivided interest in the applicable real property asset (ie, a joint tenancy), with the interactions between the parties governed by contract.
It is more common for midstream operations to be conducted by a true entity-type joint venture.
Can exploration and production rights be transferred to third parties?
Yes. The restrictions on transfer of exploration and productions rights are generally the same as the restrictions on the grant or ownership of oil and gas rights, as discussed above.
Is hydraulic fracturing (‘fracking’) permitted in your jurisdiction?
Aspects of hydraulic fracturing or fracking are regulated by federal law, but federal law does not prohibit fracking. The Safe Drinking Water Act’s underground injection programme regulates fracking if diesel fuel is used in the fluid or injected underground. Federal and state environmental laws may require a project to obtain permits for:
- the storage and discharge of liquids generated during fracking and well development; and
- air emissions from the wells and equipment at the wells.
State and local governments have established regulations, bans or moratoriums on activities associated with fracking. For example, California does not have a state-wide prohibition against fracking, but several counties and cities in California do.
Transport and storage
What is the general legal framework governing the transportation and storage of oil and gas resources in your jurisdiction?
In the United States, interstate transportation and storage of natural gas are almost entirely regulated by the Federal Energy Regulatory Commission (FERC). Specifically, FERC regulates:
- certain sales of natural gas for resale in interstate commerce (ie, when gas will cross a boundary between two states or gas is commingled with other gas that will cross a state boundary);
- the transportation (including storage) of natural gas in interstate commerce; and
- natural gas companies engaged in these transactions pursuant to the Natural Gas Act of 1938.
FERC also regulates certain transportation transactions by interstate and intrastate pipelines under the Natural Gas Policy Act of 1978. Sales transactions not subject to FERC’s jurisdiction include first sales and sales of imported natural gas (including imported liquefied natural gas (LNG)), which may fall under state laws and regulations.
FERC has broad powers to regulate transportation and storage of natural gas under the Natural Gas Act and Natural Gas Policy Act. FERC has the authority to:
- conduct investigations, gather information, issue subpoenas and compel testimony;
- issue rules and regulations necessary to implement the Natural Gas Act and the Natural Gas Policy Act;
- recommend and make remedies for violations of the Natural Gas Act, the Natural Gas Policy Act and FERC’s rules, regulations and orders issued under the Natural Gas Act and the Natural Gas Policy Act;
- prohibit the manipulation of natural gas sales and transportation markets to ensure transparency in natural gas markets; and
- regulate the siting, construction, operation and abandonment of natural gas transportation and storage facilities, including to LNG import and export terminals.
FERC also regulates the rates offered by interstate pipeline companies and, through its regulations, the terms and conditions of services offered by interstate pipelines. In addition, FERC imposes specific requirements on interstate pipelines and their shippers to promote open and non-discriminatory access and transparency.
- various federal agencies may potentially be involved in the permitting process for natural gas facilities construction projects;
- the Department of Transportation regulates all interstate pipeline safety issues; and
- the Department of Energy regulates imports and exports.
Finally, the Natural Gas Act allows state and local authorities to exercise regulation rights under the federal Clean Air Act, the Clean Water Act and the Coastal Zone Management Act, but these laws remain subject to federal agency review. FERC sets the schedule for all federal and state agencies acting under federal delegated authority to reach a final decision on requests for federal authorisations for natural gas construction projects.
Crude oil FERC’s regulation of crude oil and petroleum product pipelines and shippers is generally more limited. FERC’s authority over interstate oil pipelines derives from the Interstate Commerce Act, which regulates only pipeline rates (not market entry or exit). Specifically, FERC ensures that oil pipeline rates and other charges are just and reasonable and that the terms of service are not discriminatory.
Depending on location, these activities and services may be regulated by applicable state laws and local agencies. Importantly, FERC cannot compel the construction of new pipeline connections. However, FERC has authority over the cancellation of tariffs when the line would remain in operation under another pipeline company’s tariffs. FERC cannot prevent partial discontinuation of a service, but may investigate whether the discontinuation would cause remaining services to violate the Interstate Commerce Act.
In addition to FERC’s regulatory oversight for crude oil and liquids pipeline industry participants, the Department of Transportation regulates all interstate pipeline safety issues. Regulatory authority over oil pipelines located in the US outer continental shelf is primarily exercised by the secretary of the interior and the Bureau of Ocean Energy Management.
How is cross-border transportation of oil and gas resources regulated?
The Natural Gas Act gives FERC jurisdiction over certain wholesale sales of natural gas in interstate commerce. Imports and exports of natural gas as a commodity, where title passes and delivery occur at the international border, are in foreign commerce and regulated by the Department of Energy.
Under Section 3 of the Natural Gas Act, FERC also authorises the siting and construction of cross-border facilities. Any border-crossing facilities used to transport natural gas across an international border must first be approved by presidential permit. The presidential permit authority applies to all new border crossings and all substantial modifications of existing crossings at the international border involving natural gas. In practice, the president delegates his authority to receive and approve presidential permits to the secretary of state; thus, the Department of State has effective authority to approve natural gas cross-border facilities.
Unlike interstate oil transport, a state’s role in the permitting process for international cross-border oil pipeline facilities is far more limited. Instead, crude oil border-crossing facilities must be preapproved for construction by presidential permit. Further, FERC does not have construction certificate jurisdiction over international cross-border oil pipeline facilities.
Are there specific provisions governing marine and ground transportation of oil and gas resources?
Federally, the Department of Transportation has various safety-related regulations concerning the ground transportation of hazardous materials, including LNG and crude oil. States may provide concurrent or additional safety-related regulations for intrastate vehicular transportation of these hazardous materials.
Security measures for the waterfront portions of marine terminals and LNG ships are regulated by the US Coast Guard, which prevents other ships from getting near to LNG tankers while in transit or docked at a terminal. FERC also serves as a coordinator with the Coast Guard and other agencies on issues of marine safety and security at LNG import facilities. In 2004 FERC entered into an agreement with the Coast Guard and the Department of Transportation to establish roles and responsibilities for each agency regarding LNG security and to ensure that each agency quickly identifies and addresses problem areas.
The Coast Guard also regulates shipments of crude oil by marine vessel destined to foreign or domestic locations.
Construction and infrastructure
How are the construction and operation of pipelines, storage facilities and related infrastructure regulated?
Under the Natural Gas Act, FERC has the authority to regulate the construction, operation and abandonment of natural gas transportation and storage facilities. Following the enactment of the Energy Policy Act of 2005, under the Natural Gas Act, FERC also has jurisdiction to regulate the siting, construction and operation of LNG import and export terminals.
Construction and blanket certificates Any entity seeking to construct, own or operate an interstate pipeline facility subject to FERC’s jurisdiction must first receive a certificate of public convenience and necessity from FERC authorising that entity to do so. The Natural Gas Act similarly sets out certification requirements applicable to entities seeking to modify or abandon pipeline facilities subject to FERC’s jurisdiction.
There are three phases to the FERC certification process:
- the planning process;
- the pre-filing and FERC application process; and
- the construction process.
In many instances, the period between an applicant’s filing of a certificate application and FERC’s issuance of an order approving or denying that application turns on the environmental review required by FERC under the National Environmental Policy Act. Under that act’s review process, a number of federal and state agencies are responsible for approving various environmental permits related to construction of the interstate natural gas facilities. FERC acts as the lead agency to guide cooperation between all federal and state agencies acting under federal delegated authority responsible for permitting and sets the schedule to reach a final decision on requests for federal authorisations for natural gas construction projects. Under the National Environmental Policy Act, FERC’s environmental-impact review of a proposed pipeline project results in FERC’s issuance of either an environmental assessment or an environmental impact statement. Projects that need a close environmental review necessitate preparation of an environmental impact statement, and generally take longer to receive FERC orders approving or denying the projects.
In addition, FERC routinely grants blanket construction certificates to interstate pipelines authorising them to engage in certain routine construction and abandonment activities without first obtaining a certificate for each individual project. Blanket certificates provide two paths for authorisation based on the type of project: automatic and prior notice.
Abandonment Pipelines must receive authorisation from FERC before abandoning facilities or other FERC-authorised services. Abandonment is not limited to instances where facilities are no longer in use; rather, the abandonment of facilities by sale also triggers the prior authorisation requirement.
Crude oil The construction and abandonment of oil pipeline facilities for use in interstate and intrastate transmission are not within FERC’s jurisdiction under the Interstate Commerce Act, and no federal law pre-empts state and local siting requirements. State approvals may be required before the construction of an oil or liquid pipeline, and each state may have different certificate procedures. The construction of oil and liquid pipelines must also comply with federal environmental approvals such as the Clean Water Act, the Clean Air Act and the National Historic Preservation Act.
What rules govern third-party access to pipelines and related infrastructure?
Pipeline companies must provide non-discriminatory access for similarly situated shippers; pipelines are prohibited from:
- showing any undue preference to any shipper;
- subjecting any shipper to undue prejudice; or
- maintaining any unreasonable difference in rates, charges, services or facilities, or in any other respect, between localities or classes of service.
In addition, the terms and conditions of interstate gas transportation services must be memorialised in the natural gas pipeline’s tariff, which must be publicly available on the pipeline company’s website.
FERC has no open access rules for crude oil pipelines; rather, crude oil pipelines are subject to the same common carriage principles as common carriers.
Trading and distribution
How are oil and gas resources traded in your jurisdiction and what (if any) regulations and procedures apply to oil and gas sales, distribution and marketing activities, both nationally and internationally?
Domestic wholesale sales and marketing The Natural Gas Act of 1938 gives the Federal Energy Regulatory Commission (FERC) jurisdiction over certain wholesale sales of natural gas in interstate commerce when gas will cross a state border or is commingled with gas that will cross a state border. FERC jurisdictional sales are subject to a code of conduct that addresses price reporting and record retention requirements.
Price reporting is not mandatory for marketers or sellers of natural gas. To the extent that a marketer reports transactions to publishers of natural gas indices, it must provide accurate and factual information in accordance with procedures set out in FERC’s Policy Statement on Natural Gas and Electric Prices Indices. In the event that an entity elects to change its reporting status, that entity must indicate the change in an annual report submitted to FERC through Form 552.
FERC’s jurisdiction also includes the regulation of capacity releases from one shipper to another. An interstate pipeline that offer transportation service on a firm basis under Parts 284B or 284G of the FERC regulations must have a mechanism in place within its tariff that allows firm shippers to release firm capacity to the pipeline for resale by the pipeline.
Market manipulation Under the Natural Gas Act, FERC’s core responsibility has been to ensure just and reasonable rates for transmission or sale of electric energy and transportation or sale of natural gas at wholesale in interstate commerce. That core responsibility has been unaltered by subsequent regulatory changes that set rates for jurisdictional sales through market mechanisms rather than through cost-of-service ratemaking.
In 2005 Congress altered FERC’s authority to regulate certain manipulative activities in the Energy Policy Act of 2005. That legislation provided for significant civil penalties for violations of all sections of the Natural Gas Act, and augmented FERC’s existing anti-manipulation authority by expressly prohibiting manipulative acts in connection with jurisdictional transactions by “any entity”. Specifically, the Energy Policy Act created Section 4A of the Natural Gas Act, which broadly prohibited the use or employment of “any manipulative or deceptive device or contrivance” in connection with jurisdictional transactions in the natural gas markets. It also created Section 22 of the Natural Gas Act, which provided for maximum civil penalties of $1 million per day, per violation, for any violation of the Natural Gas Act or a rule or order thereunder.
International sales of natural gas and crude oil As described on the Department of Energy website, the Natural Gas Act requires that any person wishing to import or export natural gas from or to a foreign country must first obtain an authorisation from the department. The authorisations are granted by the Department of Energy Office of Regulation and International Engagement, Division of Natural Gas Regulation.
The Department of Energy grants two types of authorisation:
- a short-term (blanket) authorisation, which enables a company to import or export natural gas on a short term or spot-market basis for up to two years; and
- a long-term authorisation, which is generally used when a company has a signed gas purchase or sales agreement or contract, tolling agreement or other agreement resulting in the import or export of natural gas, for longer than two years.
Is oil and gas pricing regulated in your jurisdiction?
The price for natural gas sold in interstate commerce is not subject to federal regulation. The regulation of retail sales of natural gas varies by state.
Because crude oil is a global commodity, its prices are determined by international economic supply and demand factors. Crude oil prices are not regulated by the US federal government.
Occupational health and safety and labour issues
Health and safety
What health and safety regulations and procedures apply to oil and gas operations (upstream, midstream and downstream)?
In general, all aspects of oil and gas operations are covered by the US Occupational Safety and Health Administration (OSHA) general industry regulations (29 CFR § 1910), which outline a wide range of requirements and standards, including:
- proper machine operation protocol;
- personal protective equipment;
- emergency response; and
- hazardous materials.
OSHA’s regulation on recordkeeping (29 CFR §1904) applies to these operations. However, OSHA’s Process Safety Management regulations (applicable to the use and processing of hazardous chemicals) impose a complicated set of requirements that apply only to downstream oil and gas refining operations, so do not apply to oil and gas refining operations upstream (per 29 CFR § 1910.119(a)(2)(ii)). Site preparation in regards to oil and gas operations, considered to be construction activity, is covered by OSHA’s construction regulations (29 CFR § 1926). There is also a general obligation under OSHA’s General Duty Clause to provide a safe workplace in regard to all oil and gas operations.
Midstream and downstream operation employers must also comply with certain requirements for pipelines under the Department of Transportation’s regulations and, depending on the type of shipment method, OSHA’s hazard communication standards on labelling and communicating hazards (29 CFR § 1910.1200).
Are there any labour law provisions with specific relevance to the oil and gas industry (eg, with regard to use of native and foreign personnel)?
No National Labour Relations Act provisions have specific relevance to the oil and gas industry.
What is the state of collective bargaining/organised labour in your jurisdiction’s oil and gas industry?
Organised labour remains a vital segment of the oil and gas industry. Approximately 60,000 US workers in the oil and gas industry are covered by collective bargaining agreements. Collective bargaining in the industry is led by the National Oil Bargaining Programme and its policy committee, which sets nationwide bargaining objectives that guide negotiations on the local level. The National Oil Bargaining Programme applies to all workers in the oil and gas industry, including major and private employers. Lead employers in the various trades and enterprises comprising the greater oil and gas industry negotiate with lead unions regarding issues that affect all workers on a national level. The agreements that these lead employers and unions execute are then used as patterns within the various trades and enterprises across the nation.
What preliminary environmental authorisations are required before commencing oil and gas-related activities?
Required environmental authorisations from federal, state and local government agencies for oil and gas-related activities depend on where the activities are occurring and the types of activity. Federal environmental laws will set minimum standards for environmental permits, but the states may impose more restrictive standards and require authorisations to address local interests. There also are multistate commissions with responsibility for protecting river basins that may require a project to obtain authorisation before commencing oil or gas-related activities within their jurisdiction.
The National Environmental Protection Act and similar state laws require federal and state agencies that provide land or permits for oil or gas-related projects to evaluate the environmental effects of that action. State or local government permits will likely be required for drilling and installing wells. Depending on the extent of the project, general or individual permits under the federal Clean Water Act and state laws would be required for crossing jurisdictional waters, including wetlands. The potential impact on species and cultural resources may be assessed in connection with such permits. Additional authorisations may be required if the project is proposed for an area subject to flooding or near a waterbody. Permits and plans for the management of storm water during construction are typically required if at least an acre of land will be disturbed. Often, a project that requires a permit for air emissions from operations will need to have its initial permit before commencing construction. The withdrawal, use and discharge of water for a new project can be subject to significant, time-consuming regulatory authorisations from federal, state and river basin agencies.
What environmental protection requirements apply to the operation of oil and gas facilities?
Discharges of pollutants to water, including from an oil or gas facility, are prohibited unless authorised by a permit. A wastewater treatment plant will require that an oil and gas facility obtain the treatment plant’s authorisation before discharging wastewater to it. Air emissions from the facility will require a permit, depending on the amount of actual or potential emissions.
The storage of hazardous substances, oil and other petroleum products is typically subject to requirements for storage tanks and basins, including plans for protecting against releases of the stored materials and responding to releases. The storage, transportation and disposal of certain waste generated by oil and gas facilities are subject to requirements to ensure that the waste is appropriately managed, including disposal authorisations or generator registrations.
What are the consequences of failure to adhere to the relevant environmental regulations and to what extent can operators be held liable for environmental damage?
Violations of environmental requirements can result in civil penalties, revocations of approvals required for a project and criminal penalties. Violations that occur during the development of a project can result in a regulatory agency halting all development activities until the violation and any resulting harm are cured. Parties responsible for a discharge of a hazardous substance can be required to:
- remediate the discharge;
- reimburse an agency or private party for the costs of responding to the discharge; and
- pay for natural resource damages and the costs of assessing that damage.
Taxes and royalties
What taxes (direct and indirect) and/or royalties apply to oil and gas activities in your jurisdiction (including upstream, midstream and downstream activities)?
State and local taxes, and ‘royalties’ akin to taxes
Each state taxes the production of oil and natural gas differently. Multistate production companies and service providers also face the task of navigating each state’s non-production-related tax schemes (eg, income, sales and property), often triggering traps for the unwary that can increase costs and cause compliance headaches.
For example, Pennsylvania does not impose severance tax; rather, each county has the power to impose an annual impact fee on producers “holding permits to sever natural gas”, which raises more than $200 million annually for the Public Utility Commission. Pennsylvania’s corporate net income tax of 9.99% (the second highest in the country), a sales tax varying from 6% to 8% and additional property tax laws can burden producers with unexpected tax bills, even in the oil and gas ‘tax-friendly’ keystone state.
In contrast, Texas has a high severance tax rate (up to 7.5% for natural gas) which is imposed as soon as a well becomes profitable. While there is no income-based tax in Texas, there is a receipts-based franchise tax. With complicated combined reporting requirements (for any taxable entities that could be considered unitary with one another), joint ventures with other producers, tax partnerships and foreign investors, the franchise tax can cause as many headaches as its income-based predecessor.
Motor fuel taxes (also known as gasoline excise and sometimes referred to internationally as ‘royalties’) are equally, if not more, complicated. In general, the burden of paying these taxes falls on the ultimate consumer of the refined and usable fuel (ie, gasoline or diesel at the pump). However, the liability for remitting these taxes to the state is usually on the distributor or supplier that removes the gasoline at the rack or accepts a bulk barge delivery, unless it enjoys an exemption. Each state has unique licensing and registration requirements and different rules for qualifying for tax exemptions. One misstep in a transaction can result in millions of dollars of assessed state tax at the distributor or supplier level that otherwise would not be due. While these assessments can often be remediated through a state appeals process, this often ends with the state getting its ‘pound of flesh’ via a negotiated settlement.
Federal income taxes The US federal income tax is the main federal-level tax that applies to the oil and gas industry. Planning for this tax is highly specific to the tax profile of the party involved, the segment of the oil and gas industry involved and the particulars of the underlying transaction or commercial arrangement. For example:
- in upstream transactions, land or oil and gas interest owners taxable as natural individuals will focus on maximising the ability of cash payments to be taxed at preferential long-term capital gains rates and to postpone taxation on deferred proceeds until receipt;
- in joint venture upstream transactions, property owners will focus on deferring income tax on proceeds from cash partners used to fund oil and gas development expenses, and cash partners will focus on maximising the ability to currently deduct such expenses that they fund (often disproportionally);
- midstream transactions are dominated by publicly traded master limited partnerships where, as parties to a transaction, careful attention must be paid to their critical tax classification requirement that almost all of their revenues must be classified as ‘qualifying income’ (ie, generally certain oil and gas-service-related income and certain passive income, but notably excluding personal property rental income); and
- the major upstream sector players are large multinational corporations with complicated US corporate income tax consolidated return and cross-border tax planning issues and unique development cost tax deduction deferral issues under the integrated oil company rules.
Whatever the specific context, federal income tax planning for oil and gas transactions is rarely intuitive and requires the involvement of tax advisers with deep industry-specific experience.
Federal excise taxes The federal excise taxes imposed on the oil and gas industry are confined to the downstream sector of the industry. The federal government charges an excise tax of $0.184 a gallon for gasoline and $0.244 a gallon for diesel fuel. Aviation gasoline is taxed at $0.193 a gallon and jet fuel is taxed at $0.218 a gallon (unless it is used for commercial aviation, in which case the excise tax is $0.043 a gallon because such commercial operations are subject to the federal transportation tax).
Imports and exports
What taxes and duties apply to oil and gas imports and exports?
With respect to exports, the federal government applies no duties or export taxes to any products. At one point, the United States began to apply a harbour maintenance fee, also referred to as a harbour maintenance tax, to exports made via ocean vessel. However, on March 31 1998 the Supreme Court declared that the harbour maintenance fee or harbour maintenance tax collected on exports was unconstitutional.
The harbour maintenance fee or harbour maintenance tax now applies only to imports, domestic shipments and foreign trade zone admissions. The harbour maintenance fee or harbour maintenance tax is assessed at the rate of 0.125% of the value of the commercial cargo and is not collected on cargo imported or transported via air. In addition, goods imported into the United States are subject to merchandise processing fees and possibly import duties or tariffs.
Merchandise processing fees collected on imports into the United States vary by type of import entry. For instance, formal import entries valued at or in excess of $2,500 are subject to merchandise processing fees, whereas free trade agreement entries generally are not subject to merchandise processing fees. The merchandise processing fee for formal entries is an ad valorem fee of 0.3464% with a minimum of $25 and a maximum of $485. The merchandise processing fee is based on the value of the merchandise being imported excluding duty, freight and insurance charges.
The duties or tariffs assessed on imports are determined by the Harmonised Tariff Schedule (HTS) number applicable to the product being imported. An HTS number is a 10-digit product code that is harmonised internationally up to and including the sixth digit. The HTS classification for natural gas is 2711.21.0000, while the HTS classification for liquefied natural gas (LNG) is 2711.11.0000. Under the HTS for the United States, imports of natural gas and LNG are dutiable at the rate of 0%. Various HTS classifications apply to oil, depending on the type, consistency and characteristics of the oil. A survey of potential HTS classifications for oil imports indicates that import duty rates for oil range from 0% to $0.84 per barrel depending on the relevant HTS, as identified in HTS headings (the first four digits in the HTS number) 2707, 2709 or 2710.
How is the decommissioning of oil and gas facilities regulated?
The decommissioning of oil and gas facilities is governed by federal or state regulations and applicable lease terms. The applicable regulatory regime depends on the location of the oil and gas facility at issue – onshore federal lands, outer continental shelf (OCS) and OCS waters, and state and private lands and state waters.
For onshore federal lands, Department of Interior Bureau of Land Management regulations govern the decommissioning of oil and gas and require the preparation and approval of a plan for the plugging and abandonment of wells and the posting of a bond before operations commence. The US Fish and Wildlife Service, the National Park Service and the US Forest Service may require the posting of an additional bond. On termination of the lease, the Bureau of Land Management regulations generally require removal of the facility and the reclamation or restoration of the land within a reasonable time.
Department of Interior Bureau of Safety and Environmental Enforcement regulations generally govern the decommissioning of offshore oil and gas facilities on the federal OCS, although Bureau of Ocean Energy Management regulations establish the bonding requirement for decommissioning activities in OCS waters. The Bureau of Safety and Environmental Enforcement regulations require that the lease, right of way or right of use and easement specify the process for decommissioning, including plugging of the well and removal and disposal of the production equipment. Removal of both the topside and substructure generally are required within one year of termination of the lease (or sooner if the structure is deemed unsafe, obsolete or no longer useful for operations), but the agency may permit a partial structure removal and toppling in place to establish an artificial reef in accordance with the National Artificial Reef Plan if a coastal state with an approved artificial reef plan agrees to accept the structure.
Oil and gas facilities located on state and private lands and in state waters along the coast are subject to state regulations. State regulations typically impose decommissioning and bonding requirements comparable to those in the federal regulations for onshore and offshore facilities.
How are oil and gas disputes typically resolved in your jurisdiction?
There are several avenues that parties can use to resolve disputes concerning natural gas and crude oil regulations ranging from unassisted negotiation (the most common) to court adjudication (the most formal). Between these two extremes are a variety of alternative processes that may be better suited to a particular situation. Certain disputes related to the transportation of natural gas may be resolved by the federal agency with jurisdiction over the asset (eg, the Federal Energy Regulatory Commission (FERC) for pipelines) through an administrative hearing or settlement procedures. FERC describes many of these dispute resolution methods on its website. Similar avenues for dispute resolution may also be available with respect to proceedings before other federal or local agencies.
What regulations and procedures are in place to combat bribery, fraud, collusion and other dishonest practices in the oil and gas sector in your jurisdiction?
The bribery of US officials is covered by the General Federal Bribery Statute (18 USC§ 201). This statute defines the crime of ‘bribery’ in expansive terms: whoever directly or indirectly, corruptly gives, offers or promises anything of value to a public official with intent to influence that person’s official act will be fined. Conviction on even a single count of bribery can result in:
- fines of up to three times the monetary equivalent of the bribe;
- up to 15 years in prison; and
- a penalty disqualifying the defendant from holding public office in the future.
The Foreign Corrupt Practices Act is aimed at bribery of foreign officials. Anti-bribery provisions in the act make it illegal to corruptly give, promise to give or authorise the giving of, whether directly or through another, “anything of value” to a foreign official for the purpose of influencing that foreign official to achieve a business advantage. These provisions apply to:
- the conduct anywhere of any business that issues securities in the United States;
- the conduct anywhere of a non-issuing US business entity or US individual; or
- conduct within the United States by a non-issuing, non-US business or non-US individual.
The anti-bribery provisions of the Foreign Corrupt Practices Act are complemented by accounting provisions requiring companies that issue securities in the United States (issuers) to maintain fair and accurate books and records and implement internal controls to ensure that all corporate acts are duly authorised. The law provides criminal and civil penalties for violations. The Foreign Corrupt Practices Act has been enforced aggressively by both the Department of Justice and the Securities and Exchange Commission (SEC) in recent years, with many investigations and enforcement actions involving oil and gas companies. Many enforcement actions relate to parent companies being held responsible for the behaviour of their agents and intermediaries when performing services on behalf of the parent or local subsidiary.
The Sarbanes-Oxley Act of 2002 imposes certification and reporting requirements on US issuers, including certification by chief executive officers and chief financial offers of the accuracy of company financial statements, mandatory annual assessments of internal controls and required disclosure of any material change in a company’s financial condition or operations. Sarbanes-Oxley requires companies to design, implement and monitor internal controls, including anti-bribery compliance, and increases the role of independent audit committees and boards of directors in corporate compliance matters.
Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act directs the SEC to issue final rules that require all resource extraction issuers to disclose in their annual reports payments made to any non-US government for purposes of the commercial development of oil, natural gas or minerals. Under SEC final rules adopted in June 2016, from 2018 companies must publicly disclose payments made to further the commercial development of oil, natural gas or minerals that total more than $100,000 during a single fiscal year for each of their projects – including payments to the US government, all foreign governments and all subnational governmental bodies, and payments made by subsidiaries and any other controlled entities.
There are also various state laws aimed at curbing fraud, corruption and bribery. The Travel Act (18 USC § 1952) is a federal criminal statute that forbids the use of US mail or interstate or foreign travel for the purpose of engaging in specific criminal acts, including acts that violate the laws of the state in which they are committed. Thus, the Travel Act effectively federalises state laws that do not have analogous provisions at the federal level, including general commercial bribery. These state commercial bribery laws, which tend to be quite broad in scope, can be applied by federal enforcement authorities to commercial bribery. Courts have interpreted the Travel Act broadly and the Department of Justice has used the Travel Act as a complementary statute in the prosecution of some corruption cases under the Foreign Corrupt Practices Act.