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General

Development

Describe the areas of energy development in the country.

The United States has a diverse portfolio of energy development, including oil, natural gas, coal, nuclear, wind, geothermal and solar. Fossil fuel development is predominant in the United States, although federal and state governments are beginning to encourage increased development of renewable energy. Shale gas production has grown rapidly due to technological advances in hydraulic fracturing.

Role of government

Describe the government’s role in the ownership and development of energy resources. Outline the current energy policy.

The United States strongly emphasises private ownership and development of energy resources. Still, there is some government involvement. At the federal level, the Department of the Interior largely oversees the management of natural resources under federal and Indian lands, and includes several departments such as the Bureau of Land Management, which is responsible for domestic production from federal onshore oil and gas wells, as well as coal leasing, the Office of Surface Mining Reclamation and Enforcement, which regulates surface coal mining, the Bureau of Ocean Energy Management, which manages offshore conventional and renewable energy and marine mineral resources, and the Bureau of Safety and Environmental Enforcement, which oversees offshore resource conservation and protection related to energy exploration and development.

The federal government also regulates energy development through a general energy policy to promote domestic exploration and production of energy while also protecting the environment. The Environmental Protection Agency (EPA) serves to protect human health and the environment by creating and enforcing regulations based on US legislation, such as the Clean Water Act (CWA), the Safe Drinking Water Act, the Clean Air Act (CAA), and the Resource Conservation and Recovery Act.

However, state regulation is the primary method of oversight for development of private energy resources. Accordingly, a state may have its own agency that regulates the ownership and development of energy resources. For example, the Texas Railroad Commission and the Oklahoma Corporation Commission govern oil and gas development in their respective states. Most states also have an agency parallel to EPA, which oversees the protection of the state’s natural resources.

Commercial/civil law – substantive

Rules and industry standards

Describe any industry-standard form contracts used in the energy sector in your jurisdiction.

Common standard-form contracts include joint operating agreements (JOAs), oil and gas leases, farmout agreements, assignments and surface use agreements, although the terms may be negotiated. The most commonly used JOAs are based on the American Association of Professional Landmen (AAPL) Form 610, the Association of International Petroleum Negotiators (AIPN) International Model (2012), AAPL Form 710 and the AIPN International Model (2014).

Other commonly used model contracts are created by the American Petroleum Institute, the International Association of Drilling Contractors, an industry group including producers, manufacturers and suppliers of oilfield equipment and services, and the North American Energy Standards Board (NAESB). Commodity transactions are often conducted using forms promulgated by the International Swaps and Derivatives Association (ISDA).

What rules govern contractual interpretation in (non-consumer) contracts in general? Do these rules apply to energy contracts?

Generally, there is no federal contract law; instead, states determine rules of contract interpretation. Some states have adopted the Uniform Commercial Code (UCC) for disputes related to the sale of goods, while others follow general common law contract rules. All states generally follow common law rules for other contracts such as JOAs or contracts in manuscript form.

Under both rules, contractual terms are given their plain and ordinary meaning, interpreted as a reasonable person would understand them. In most states, the parol evidence rule prevents parties to a written contract from using extrinsic evidence to aid in the interpretation of the contract. If the language of the contract is unambiguous, courts will enforce the contract as written. If the contract’s terms are ambiguous, they are construed against the parties who draft the contracts. Accordingly, in disputes among landowner-lessors and energy-­company-lessees, ambiguous contracts are often construed against lessees as the scriveners of the contract.

Under common law, other considerations may be relevant, such as previous dealings between parties, the course of performance of the contract, and industry norms. However, under the UCC, these considerations may only explain or supplement, not contradict, contractual terms.

Describe any commonly recognised industry standards for establishing liability.

Subsurface oil and gas are subject to the common law rule of capture: a landowner has the right to oil and gas under his or her property, even if the oil and gas migrated from adjacent tracts of land. The first person to extract oil and gas from the land is its owner. A landowner who extracts hydrocarbons from a well on his or her land will not be liable for draining adjacent tracts of land. However, this right of appropriation does not cover negligence and waste (eg, letting gas escape). In some states, the common law rule of capture is modified by regulatory rules such as well-spacing requirements, forced pooling and unitisation.

As for production matters, oil and gas lessees are held to a reasonably prudent operator standard, rather than a fiduciary standard. They must consider both their own interests and those of their lessors.

Lessees may also be subject to implied contractual covenants, which vary from state to state. The most common implied covenants are to reasonably develop the leasehold; to protect the leasehold against drainage; to market oil and gas as a reasonable and prudent operator; and to manage and administer the lease.

Industry contracts in the commodity marketing and trading sector from the ISDA, the NAESB and other organisations regularly limit liability for incidental, consequential, indirect or punitive damages, or for lost profits. Indemnity agreements may also offset liabilities between parties.

Performance mitigation

Are concepts of force majeure, commercial impracticability or frustration, or other concepts that would excuse performance during periods of commodity price or supply volatility, recognised in your jurisdiction?

US contract law is generally hostile to concepts excusing performance during periods of commodity price or supply volatility. Under common law and the UCC, unless otherwise agreed, price increases and supply volatility are considered foreseeable risks and do not excuse contract performance.

Force majeure clauses are common in energy contracts but they only excuse contract obligations when performance is prevented by unforeseeable events. Force majeure generally will not excuse performance due to predictable risks. Absent contrary language in an oil and gas lease, some states recognise the temporary cessation of production doctrine, which provides that circumstances causing a well to cease production temporarily will not automatically terminate a lease. While generally not applicable to strictly economic circumstances, courts have applied this doctrine to a wide variety of reasons for stoppage.

Nuisance

What are the rules on claims of nuisance to obstruct energy development? May operators be subject to nuisance and negligence claims from third parties?

Energy companies confront US nuisance suits with varied success. Common law, as interpreted and developed in each state, governs private nuisance claims. Generally, an activity is a nuisance if it unreasonably interferes with the enjoyment and use of one’s property. Because this question focuses on reasonableness, outcomes in nuisance suits are largely determined by the trier of fact on a case-by-case basis. For example, in Crosstex North Texas Pipeline, LP v Gardiner, the plaintiffs brought a nuisance suit under Texas law alleging that the defendant’s pipeline activities, specifically operation of a compressor near the plaintiffs’ land, caused noise pollution. The jury found for the plaintiffs, but the appellate court reversed and remanded, citing factual insufficiency in light of the care shown by the defendant in building and maintaining the compressor. Contrastingly, in Parr v Aruba Petroleum, plaintiffs won a US$3 million dollar jury verdict for a private nuisance claim that alleged the plaintiffs were affected by the defendant’s emissions and spills. However, on appeal the court reversed and rendered a take-nothing judgment upon a finding that the plaintiff failed to establish that the defendant actually intended or desired to create the alleged interference.

In the United States, there is no privity requirement to bring nuisance or negligence lawsuits. Anyone affected by energy development activities, such as homeowners, may have standing to bring such lawsuits if they allege damages caused by these activities.

Liability and limitations

How may parties limit remedies by agreement?

Parties have wide latitude to limit their remedies by contract. Although the limitation of remedies must adhere to a standard of conscionability, and exclusive contractual remedies must not fail their essential purpose, parties may limit remedies to liquidated damages, replacement or refund, or exclusion of or caps on some damages (eg, consequential).

The definition of certain kinds of damages is often subject to dispute. For example, consequential damages often denote damages unaccounted for by contract that result naturally but not necessarily from a breach of contract. However, parties often dispute whether their contracts contemplate naturally resulting damages, a prerequisite for recovery. If the damages are contemplated, they are recoverable. See McKinney & Moore, Inc v City of Longview.

Is strict liability applicable for damage resulting from any activities in the energy sector?

Courts apply strict liability standards to activities that are deemed abnormally dangerous or ultra-hazardous. In deciding whether an activity is abnormally dangerous, most courts apply a balancing test based on the following factors:

  • the existence of a high degree of risk of some harm to the person, land, or chattels of others;
  • the likelihood that the harm that results will be great;
  • the inability to eliminate the risk by exercise of reasonable care;
  • the extent to which the activity is not a matter of common usage;
  • the inappropriateness of the activity to the place; and
  • the extent to which its value to the community is outweighed by its dangerous attributes.

Generally, US courts find that traditional activities in the energy industry are not abnormally dangerous, and strict liability standards are seldom used. However, some pockets of strict liability exist. The Oil Pollution Act imposes strict liability for oil pollution on owners and operators of vessels. The Trans-Alaska Authorization Act imposes strict liability on owners of the Trans-Alaska Pipeline right of way for all damages resulting from activities along or near the right of way. Moreover, oil tankers carrying Alaskan oil transported through the pipeline are also strictly liable for pollution damage. Some states also impose strict liability on oil and gas operators for any surface damage caused (eg, New Mexico’s Surface Owner Protection Act).

The recent boom in hydraulic fracturing has spurred litigation on whether such activities are abnormally dangerous. Though the applicability of strict liability is a question of law to be decided by judges, recent litigation suggests that judges are unwilling to decide this issue without a developed record of facts. See Ely v Cabot Oil & Gas Corp (after initially declining to decide the issue without a more developed record, holding after further discovery that (i) ‘natural gas drilling operations and hydraulic fracturing are not abnormally dangerous activities’; and (ii) claims for property damage and injury resulting from such operations ‘should continue to be limited to, and considered against, the standards governing negligence’ rather than strict liability); and Kamuck v Shell Energy Holdings GP, LLC (refusing to decide on the pleadings whether fracking is abnormally dangerous, but rather deciding to wait until the close of discovery).

Commercial/civil law – procedural

Enforcement

How do courts in your jurisdiction resolve competing clauses in multiple contracts relating to a single transaction, lease, licence or concession, with respect to choice of forum, choice of law or mode of dispute resolution?

US courts look to the reasonableness of the venue when comparing conflicting choice-of-forum clauses. Jurisdiction must be met for the specified venues, and then the court considers whether the venue selected by the plaintiff is reasonable, based on factors such as costs, witness location, and segregation of claims into multiple venues. Some jurisdictions, such as Texas, follow the ‘dominant jurisdiction doctrine’, which applies when a suit involving identical subject matter is filed in different courts. The court where the suit was first filed retains the dominant jurisdiction.

If a conflict between choice-of-law provisions arises, courts generally apply the conflicts of law principles of the forum court. Still, the false conflict doctrine allows for a court to avoid the choice-of-law inquiry where the laws of the involved states would result in the same decision. Some jurisdictions require that the presumptive local law apply, whereas others apply the law of the interested state.

When the mode of dispute is at issue, courts examine provisions regarding alternative dispute resolution. If language is broad enough to encompass the issue in dispute, the courts will generally find that the clause is enforceable.

If an arbitration clause conflicts with the applicable forum laws, a court may invalidate an arbitration provision that allows for arbitration in another state when the contract performance occurred in the forum state. See Keystone v Triad Sys Corp (holding that California arbitration provision violated public policy because Montana had greater interest in dispute); but cf Cahill v Alt Wines, Inc; Allen v World Inspection Network Int’l, Inc (holding that the Federal Arbitration Act pre-empted state legislation, nullifying certain choice-of-forum provisions).

When there is a conflict between agreements and their choice-of-law or choice-of-forum clauses, some jurisdictions follow the most recent contract if there is no language therein referencing the first contract. Other jurisdictions may rescind both contracts if there is a mutual mistake by the parties drafting the conflicting provisions. If the conflicting provisions can be defined by scope, the court may try to enforce the provision by the subject it covers, such as when one contract’s choice-of-law provision governs torts and the other’s applies to breach of contract.

Are stepped and split dispute clauses common? Are they enforceable under the law of your jurisdiction?

While both split and stepped up dispute clauses are used in the United States, the stepped up dispute clause is standard in energy disputes. A stepped up dispute clause requires a single issue to travel through various steps, such as an internal company reporting system or mediation, prior to litigation. A split dispute resolution clause involves an agreement to have separate issues resolved through separate means; for instance, contracting parties may agree that a dispute arising from an event of default should be referred to arbitration and all other disputes subject to litigation.

These clauses are generally enforced when clear and drafted as a condition precedent to subsequent procedures in the dispute-solving scheme. These clauses will not likely be enforced if ambiguous, vague or used for delay.

How is expert evidence used in your courts? What are the rules on engagement and use of experts?

Federal Rule of Evidence 702 governs the admissibility of expert-witness testimony. A qualified expert may offer opinion testimony if it is reliable and relevant, meaning the testimony must be helpful, based on adequate data or facts, supported by trustworthy methods and principles and based on a reliable application of the methods and principles to the specific facts at issue.

The leading US Supreme Court case Daubert v Merrell Dow Pharmaceuticals, Inc, places judges in the role of gatekeepers to determine whether expert evidence meets Rule 702 before testimony is introduced to a jury.

Federal Rule of Evidence 403 works in conjunction with Rule 702 to safeguard against evidence that is irrelevant, prejudicial, confusing or causes delay. This Rule may exclude expert evidence when the testimony falls within the common understanding of the jury, when expert testimony would complicate an issue, or when the evidence is otherwise unduly prejudicial.

Conversely, state courts vary on the stringency of admitting expert testimony. The majority, including Texas and Oklahoma, follow Daubert. The minority follow a ‘general acceptance’ test from Frye v US. The Frye test sets a lower bar for expert-testimony admissibility, requiring that the expert witness’ methods are ‘generally accepted’ by the relevant scientific community. In practice, a jurisdiction following Frye may allow expert testimony based solely on the expert’s education, even regarding a specialised matter. A jurisdiction following Daubert would require more, such as experience in a specialised field, as well as the additional criteria discussed above.

For example, a court applying Daubert excluded testimony about the operation of a specialised computer program used to track well casing when an expert witness had years of experience in the field, but no specialised knowledge about the program (see Express Energy Servs Operating v Hall Drilling). Conversely, under the same Daubert test, a court allowed expert testimony on an oil rig’s defective design when the expert was a licensed mechanical engineer with almost two decades of experience and worked with similar rigs (see Smith v Central Mine Equip). Notably, an expert may be qualified under Daubert to testify in one area and prohibited from addressing others, even within the same trial (see In re Laurel Valley Oil Co).

What interim and emergency relief may a court in your jurisdiction grant for energy disputes?

Writs of mandamus, interim orders, temporary restraining orders, and injunctions are available options for interim and emergency relief. A writ of mandamus may be sought by a party before final judgment has been entered, when the party disagrees with the judge’s ruling regarding a matter of law. The party appeals to the appellate court to issue an order to correct the lower court judge’s decision; however, granting a writ of mandamus may be authorised only under exceptional circumstances. Temporary restraining orders, temporary injunctions, and permanent injunctions prevent an entity or individual from acting in a certain manner for a designated period of time.

For example, an injunction can be used in some states to access another’s land or receive revenue payments while a mineral dispute is pending. See Cason v Chesapeake Operating; Genesis Producing Co v Smith Big Oil Corp. A writ of mandamus may be used in some states to request that an agency issue a drilling permit (see Devon Corp v Miller).

An emerging trend in energy disputes involves requests for emergency arbitration, which may be filed with the arbitral tribunal even before a request for arbitration is filed. This mechanism is sometimes used when there is a need for immediate interim relief for emergency situations, such as an interruption of gas supplies needed for energy creation or the withdrawal of a licence by the state.

What is the enforcement process for foreign judgments and foreign arbitral awards in energy disputes in your jurisdiction?

Foreign arbitral awards are governed by the New York Convention, also known as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The enforcement of an arbitral award issued under the New York Convention is governed by the Federal Arbitration Act, and applies only to the signatories. Enforcement depends on reciprocity, requiring that the jurisdiction of the foreign arbitral award be a party to the New York Convention.

The United States also ratified the 2005 Hague Convention on Choice of Court Agreements in 2009, whose purpose is to promote security in international business transactions through the cooperation of enforcing foreign judgments and to unify jurisdictional rules on international transactions and enforce foreign judgments for those who have ratified the agreement.

Federal courts will follow state law in recognising and enforcing foreign judgments and awards. Thirty-two states, including Texas, Oklahoma and Pennsylvania, follow the Uniform Foreign Money-Judgments Recognition Act (UFMJRA), agreeing to enforce foreign money judgments. This enables enforcement by extending the Full Faith and Credit Clause of the US Constitution to specific foreign judgments protected under the UFMJRA.

Other states follow the Restatement (Third) of Foreign Relations of the US - as do states with foreign judgments that are not recognised under UFMJRA - which permits enforcement of foreign judgments that involve money, a person’s status or a property interest. Although only in a minority of states, reciprocity may play a factor in enforcement. Some courts require reciprocity between its court and the foreign jurisdiction where the judgment was issued.

To enforce a judgment or arbitral award, the party seeking enforcement must file in a court with proper jurisdiction. Typically, little evidence is required in support. The party bringing the action must present proof of a final foreign judgment against a US defendant, or a certified copy of the arbitration agreement and award for an arbitral award. A jury and trial are not required and resolution typically occurs within weeks or months.

Alternative dispute resolution

Are there any arbitration institutions that specifically administer energy disputes in your jurisdiction?

There are no energy-specific arbitration institutions; however, there are several institutions - national, regional and local - that support US energy disputes. Notably, the American Arbitration Association, International Institute for Conflict Prevention and Resolution and JAMS provide administrative support structures to host mediation and arbitration. States that focus on energy have some energy-specific centres, such as the Center for American and International Law in Texas, but most arbitration centres provide a wide array of mediators or arbitrators qualified in various fields.

Is there any general preference for litigation over arbitration or vice versa in the energy sector in your jurisdiction?

There is a mildly growing preference for domestic arbitration in the energy sector, rather than cross-border and international arbitration. Domestically, there is still a preference for litigation to solve energy disputes; however, some companies are trending towards arbitration first because of its potential cost savings and faster resolutions. Obtaining an arbitrator experienced in energy-specific customs is preferable when resolving complex energy disputes that raise difficult technical questions.

Are statements made in settlement discussions (including mediation) confidential, discoverable or without prejudice?

Federal Rule of Evidence 408 governs compromise offers and negotiations. Settlement and negotiation discussions involving an offer or acceptance of an offer as an attempt to compromise over the claim are confidential, undiscoverable, inadmissible as evidence, and otherwise without prejudice - except in criminal cases - if entered as evidence to prove the validity or amount of a claim in dispute, or to impeach a witness by a prior inconsistent statement or contradiction. A majority of states have enacted a similar rule regarding settlements and offers.

Confidentiality of mediation discussions is less clear. While some states such as California, Texas and Louisiana have enacted statutes to broadly protect communications in mediation, federal courts do not have a mediation-specific statute except Rule 408. This protection does not expand to discussions that may be used to prove bias or prejudice of a witness.

Privacy and privilege

Are there any data protection, trade secret or other privacy issues for the purposes of e-disclosure/e-discovery in a proceeding?

The Uniform Trade Secrets Act provides remedies to help protect trade secrets and confidential data, including seismic data, well logs, fracture designs, and land and lease files. Courts may also grant a protective order for discovery proceedings, conduct in-camera hearings, seal the relevant records, and require court approval before a party can disclose information regarding the trade secret. Such protections have been adopted by all but two states: New York and Massachusetts. They instead use a multi-factor common law test to define trade secrets.

What are the rules in your jurisdiction regarding attorney-client privilege and work product privileges?

The Federal Rules of Evidence, Federal Rules of Civil Procedure, federal and state common law, and American Bar Association Rules all govern the attorney-client and work product privileges.

Federal Rule of Evidence 502 provides that the attorney-client privilege is held by the client and protects confidential communications involving legal advice between the party and his or her attorney. In a business context when the business is the client, communication with employees may also be protected if it is clear the communication was for the primary purpose of securing legal advice. This privilege can be waived (eg, providing privileged information to a testifying expert witness or third parties not affiliated with the client).

Under Rule 502 and Federal Rule of Civil Procedure 26(b)(3), work product privilege protects materials created in preparation for litigation, such as attorney-created documents and tangible items. The party claiming the privilege has an obligation to show the privileged information was prepared in preparation for anticipated discovery and litigation. The work-product privilege is waivable, including by disclosure to a non-party or by court order, when the requesting party shows a substantial need and undue hardship caused by its non-production. Unlike the attorney-client privilege, the ability to waive the work-product privilege belongs to the attorney.

Inadvertent disclosures of privileged material do not qualify as a waiver when the privilege holder reasonably tried to prevent disclosure and took reasonable measures to correct the disclosure. US courts are split on whether waiver requires the disclosure to be intentional and whether inadvertent disclosure waives the privilege for the single communication or the whole subject matter of that communication.

State courts have generally adopted similar rules to the above. For example, in In re ExxonMobil Corp, a Texas court held that Exxon had waived its attorney-client privilege over title-opinion documents when contract landmen from outside the company viewed title opinions drafted by in-house counsel, even though the landmen were subject to confidentiality agreements. Conversely, the court also found that the attorney-client privilege was not waived when in-house attorneys sent drafts of a unit operating agreement to employees to review that were intended to be distributed to outside parties. Instead, the court found that privilege was not waived because the documents were not actually distributed to persons outside the company, even though it was the ultimate intent.

Rule 1.6 of the American Bar Association’s Model Rules of Professional Conduct provides that an attorney will not share information regarding the representation of his or her client without consent or unless an exception applies, such as disclosure to prevent death, commission of a crime, or to establish a defence in a malpractice claim. Such protection also exists at the state level.

Jurisdiction

Must some energy disputes, as a matter of jurisdiction, first be heard before an administrative agency?

Some agencies have exclusive, primary and concurrent jurisdiction over certain energy matters, meaning sole authority, initial priority or joint authority, respectively. For example, the Federal Energy Regulatory Commission (FERC) has exclusive jurisdiction over the transmission of electric energy in interstate commerce and primary jurisdiction when there is some special expertise in the field. A FERC administrative action must be issued before the matter can be taken to either federal or state courts.

Compare this to the concern of concurrent jurisdiction shared by FERC and the US Commodity Futures Trading Commission (CFTC). Unlike FERC’s administrative action, the CFTC can bring criminal and administrative actions against a violator. The entities’ authority overlaps over issues like prohibiting manipulation. While the entities work to share information, there may be conflict over which entity may pursue action first.

For example, in US Commodity Futures Trading Commission v Amaranth Advisors, LLC, FERC and CFTC clashed over FERC’s jurisdiction to challenge the defendant’s activities in commodity markets. CFTC has exclusive jurisdiction to regulate trading of natural gas futures contracts, but FERC brought an administrative action based on the effect the manipulative actions had on FERC-jurisdictional transactions. As recommended by the court, these agencies continue to work together to coordinate investigations and communicate information.

State agencies may also enjoy primary or exclusive jurisdiction. For example, the Oklahoma Corporation Commission has exclusive jurisdiction over issues such as oil and gas conservation, field operations and exploration. It has primary jurisdiction in cost-overrun disputes arising from a pooling order.

Regulatory

Relevant agencies

Identify the principal agencies that regulate the energy sector and briefly describe their general jurisdiction.

At the federal level, the Department of Energy has large responsibilities regarding US policy. Additional regulatory bodies handle specific aspects of the energy industry including safety regulations and enforcement. These include: FERC, the EPA and the Department of Transportation. Many states also have their own agencies like the Texas Railroad Commission, that work with the federal government to regulate the energy sector and may impose supplementary requirements. Additionally, all energy-related operations located on federal and Indian lands must work with the federal Bureau of Land Management.

FERC regulates and oversees markets for natural gas, oil, coal, electric power, interstate pipelines, renewable energy and hydropower projects. Each state has its own public utility commission that works with FERC to regulate energy operations and safety. State public utility commissions regulate the following: retail sales of electricity and natural gas, construction of energy facilities and local pipelines, abandoned oil facilities, local and regional power systems and cooperatives, electric transmission and reliability, nuclear power plants and pipeline safety.

The EPA writes and enforces environmental regulations, sets national standards, and educates states, industry and individuals. The EPA is responsible for regulating a broad range of energy exploration, development and production, as required under federal statutes such as the CAA, the CWA and the Comprehensive Environmental Response Compensation and Liability Act. States also have their own environmental regulatory agencies such as the Texas Commission on Environmental Quality and the Oklahoma Department of Environmental Quality.

Access to infrastructure

Do new entrants to the market have rights to access infrastructure? If so, may the regulator intervene to facilitate access?

New entrants into the US market have rights to access natural gas pipelines. Interstate pipelines must offer access to their transportation infrastructure to all other market players equally, referred to as ‘open access’ to the pipelines. This requirement allows marketers, producers, end users and local distribution companies to contract for transportation of their natural gas via interstate pipeline, on an equal basis. State laws also require open access for those facilities that are constructed under the power of eminent domain. However, there are gathering pipeline systems available for use by non-utilities that are not open access.

Judicial review

What is the mechanism for judicial review of decisions relating to the sector taken by administrative agencies and other public bodies? Are non-judicial procedures to challenge the decisions of the energy regulator available?

Federal and state administrative agencies have the power to make decisions that give or deny benefits, issue licences and impose obligations. Entities wanting to appeal those decisions may request an administrative hearing. At the hearing, an administrative law judge will review the case and make a ruling.

A party may appeal the administrative law judge’s ruling with a court, unless a statute specifically forbids such action. The case will then be heard at an appropriate state or federal court. However, before filing an appeal to the ruling, it is essential to first exhaust all of the available administrative remedies. For example, before a party may file for relief in court in Texas for the denial of a drilling permit, the party must first apply to the Railroad Commission, request and hold a hearing before two examiners (typically one engineer and one attorney) who issue a report to the Commissioners, and, if necessary, request a rehearing.

On appeal, the court will presume that the government agency’s decision was correct. The burden of proof is on the contesting party to show that the agency’s decision is invalid because it is unreasonable, unlawful, arbitrary, unsupported or wrong. The court will use evidence from the administrative record to determine if the agency was acting within its authority, complying with statutes and not acting arbitrarily. New evidence and witnesses are usually precluded.

Upon a showing that the agency acted in violation of its authority or otherwise unlawfully, the reviewing court may reverse, modify, vacate or remand the agency’s action. The court can also issue a mandate requiring the agency to issue a certificate, comply with a statute or regulation, or conduct proceedings.

If the appeal is unsuccessful, another appeal may be requested. However, further judicial review is discretionary. An appeals court may choose not to hear an appeal when a lower court has already reviewed an administrative agency’s decision.

Fracking

What is the legal and regulatory position on hydraulic fracturing in your jurisdiction?

The United States is open to hydraulic fracturing for natural gas recovery. The EPA works with states to provide oversight, rulemaking and guidance. In some states, energy companies are required to disclose the chemicals used in the hydraulic fracturing process. Specific hydraulic fracturing activities may be challenged in state or federal courts. Some states, such as Vermont and New York, and some municipalities such as Fort Collins, Colorado, have banned or placed moratoriums on the practice. However, the constitutionality of such prohibitions is currently being litigated in both state and federal courts. The Texas legislature, for example, has expressly pre-empted the authority of municipalities and other political subdivisions to regulate hydraulic fracturing.

Other regulatory issues

Describe any statutory or regulatory protection for indigenous groups.

The United States has the following statutes to protect indigenous groups: National Historic Preservation Act, Native American Graves Protection and Repatriation Act, American Indian Religious Freedom Act, National Environmental Policy Act, and Archaeological Resources Protection Act of 1979. These acts may require government agencies to consult with relevant indigenous groups before issuing an approval and set procedures for handling discovered cultural items.

Describe any legal or regulatory barriers to entry for foreign companies looking to participate in energy development in your jurisdiction.

The United States is open to investment and imposes few impediments to foreign ownership in energy development. The United States does not discriminate between nationals and foreign individuals in the operation of private companies and the procedure for establishing an energy business is the same for US and foreign investors.

However, the Committee on Foreign Investment may review any transaction or investment that could result in control of a US business by a foreign company that involves critical infrastructure or national security concerns. For example, in 2012, a Chinese-owned corporation was ordered to remove itself from four small wind farm projects located near a US Navy facility. While the decision to block or permit foreign investment turns on a host of factors - mostly related to national security - a project is unlikely to be blocked as a result.

What criminal, health and safety, and environmental liability do companies in the energy sector most commonly face, and what are the associated penalties?

A company must comply with both state and federal health and safety regulations or face fines. The Occupational Safety and Health Administration is the federal agency that sets out the safety standards and rights and responsibilities of employers and employees. Compliance safety and health officers carry out inspections and assess fines for regulatory violations.

Energy companies must also comply with state and federal environmental laws, violations of which are generally civil offences, resulting in monetary penalties and civil sanctions such as injunctions. For example, for a violation of the Clean Air Act, an administrator may assess a civil penalty up to US$37,500 per day of non-compliance for each violation. Many environmental laws also provide for criminal penalties for egregious violations including those that are wilful, or knowingly committed. A court conviction can result in fines or imprisonment for the owners, employees, directors or officers of a company. Anyone involved in the violation may be held personally liable for civil penalties and under statutes like the Clean Water Act, and could face up to five years in prison.

Other

Sovereign boundary disputes

Describe any actual or anticipated sovereign boundary disputes involving your jurisdiction that could affect the energy sector.

The United States has an exclusive economic zone that extends 200 nautical miles from its territorial sea baseline. Within the zone, the United States has sovereign rights to natural resources. Historically, the United States and Mexico had a moratorium on exploiting resources near the US-Mexico boundary line in the Gulf of Mexico. In 2012, the United States and Mexico signed the US-Mexico Transboundary Hydrocarbons Agreement, which lifted the moratorium and created options for joint development of transboundary resources. The US-Mexico agreement does not, however, resolve disputes between the United States, Mexico and Cuba. After the United States and Cuba formally resumed diplomatic relations in 2015, the United States and Cuba entered into a bilateral treaty in January 2017 that delimited the last remaining section of the US-Cuba maritime boundary that had not previously been agreed. It remains to be seen, however, what effect the Trump Administration’s announcement that it would again close diplomatic relations with Cuba will have on this treaty or other areas of potential dispute with Cuba.

Energy treaties

Is your jurisdiction party to the Energy Charter Treaty or any other energy treaty?

Although the United States is not party to the Energy Charter Treaty, it has observer status to the charter. Until recently, the United States, along with Canada and Mexico, were parties to the North American Free Trade Agreement (NAFTA), which contained a chapter on energy and basic petrochemicals. This NAFTA chapter dictated free trade principles with which the party countries must comply. In October 2018, the United States, Canada and Mexico announced the framework of a new deal that will replace NAFTA called the United States-Mexico-Canada Agreement (USMCA). The USMCA has been largely supported by the energy industry as retaining the free trade principles related to energy from NAFTA while also including protections for investors in foreign countries. In particular, United States energy companies can be eligible for Investor-State Dispute Settlement processes for their investments in Mexico. The United States also entered into the Transit Pipeline Treaty with Canada that reinforces both countries’ commitments to a natural gas pipeline traversing both countries’ territories.

Additionally, the United States is party to several treaties that involve the nuclear energy sector, including agreements entered into pursuant to section 123 of the US Atomic Energy Act. This act requires the United States to enter into agreements with other countries before any kind of nuclear cooperation may occur. These agreements require other countries to commit themselves to nuclear non-proliferation principles.

Investment protection

Describe any available measures for protecting investors in the energy industry in your jurisdiction.

Federal and state law protects investors from burdensome and unjustified use of governments’ eminent domain and condemnation powers. Under the US Constitution, the federal government cannot take private property for public use without just compensation. States, however, may generally make their own determinations for public use, and just compensation is regularly interpreted to mean fair market value.

Companies that sell their securities on public exchanges, regardless of sector, must regularly disclose information about their financial condition, operations, and various other areas of their business to the public and to the companies’ shareholders. These disclosure regulations are enforced by the US Securities and Exchange Commission, which may bring enforcement actions and punish companies that issue false, incomplete or misleading information. Additionally, the US Clean Energy Loan Guarantee Program authorises the Department of Energy to guarantee loans for projects that employ new and improved energy technologies and avoid or reduce air pollutants or greenhouse gasses. The availability of loan guarantees for clean energy projects fluctuates significantly based on the policies of the current political administration.

Cybersecurity

Describe any legal standards or best practices regarding cybersecurity relevant to the energy industry in your jurisdiction, including those related to the applicable standard of care.

The US energy sector has a strong record of developing cybersecurity best practices. In 2015, the Department of Energy released a guide to help the energy sector establish and align cybersecurity practices to meet the objectives of the National Institutes of Standards and Technology’s voluntary Cybersecurity Framework. This framework was created through industry and government collaboration, and provides high-level, strategic recommendations for managing cybersecurity risks. The Department also provides the Cybersecurity Capability Maturity Model, or C2M2. This model organises cybersecurity competency into 10 domains and provides a structured set of cybersecurity best practices for each domain. The practices recommended are organised in a progressive fashion such that an organisation can begin using the model regardless of its current state of cybersecurity efforts. The Department has also created an industry-specific version of the C2M2 for the electricity subsector and the oil and natural gas subsector. Additionally, the North American Reliability Corporation, an enforcement arm of FERC, promulgates the Critical Infrastructure Protection Guidelines, which detail cybersecurity requirements for the most crucial assets on the energy grid.

Update and trends

Update and trends

List any major developments (case law, statute or regulation) that are anticipated to affect the energy sector in your jurisdiction in the next 12 months, including any developments related to the taxation of energy projects. What is the anticipated impact of climate change regulations, treaties and public opinion on energy disputes?

In the next 12 months, two developments in particular are expected to affect the energy sector in the United States.

The first development is the US midterm elections. On 6 November 2018, Americans voted to have a split government, with Democrats controlling the House of Representatives, and Republicans controlling the Senate the Presidency. This is likely to have an impact on the Trump Administration’s energy policy, which has been generally friendly towards the industry, although many of the key reforms and actions taken have been made solely by Executive Authority, which a Democrat-controlled house would not be able to stop. Further, in the elections in several states, energy-related initiatives were on the ballot. In Colorado, for example, Proposition 112 was at issue. If passed, Proposition 112 would have required that new oil and gas development in Colorado be at least 2,500 feet from occupied buildings and other defined areas. The current setback requirements in Colorado are 500 feet from homes and 1,000 feet from schools and hospitals. Although Proposition 112 was unsuccessful, similar initiatives and related environmental suits are becoming more common and are likely to be placed on ballots in other states and municipalities. The results of the US midterm elections, particularly at the state and local levels of government, will therefore impact for the next year and beyond the direction of US energy policy, specifically whether state and local governments reinforce or attempt to break from the current administration’s pro-energy position.

The second and related development is the Trump administration’s continued presence in office after the midterm elections. Since entering office, Trump has rolled back several of Obama’s key initiatives. With two years until the next presidential election, but voting results fresh from the midterms, the administration faces decisions concerning whether to press forward its pro-energy agenda or focus its attention elsewhere in the second half of its current term. Regardless of the actions the administration or the state and local governments take in the coming year, such measures will remain the topic of contested disputes and public debate.