By John Auers and John Mayes
Everybody’s been issuing their report cards for the first 100 days of the Trump Administration and by and large, we’re not seeing a lot of A’s. In fact, the classic Stones tune from the mid-60’s could be a theme song for not only Trump detractors, but even many of his supporters as they haven’t gotten a lot of satisfaction during these first three months. Maybe the easiest graders on the Donald’s early performance should be the energy industry. In this arena, some real and positive results have already been seen, and optimism for even better policy developments to come is high. Stalled pipeline projects have been approved, Obama era regulations are being reversed or at least revisited, prospects for new areas to explore/drill are being discussed and the recently proposed tax plan could be the cherry on the top (assuming it can get through Congress). Last week we went into detail about Corporate Average Fuel Economy (CAFE) standards and how the Trump’s EPA has already taken steps to potentially modify them to the benefit of domestic refiners. In today’s blog, we examine other energy policy initiatives that the Trump Administration has put forth in these first 100 days and whether the oil industry can expect to get more satisfaction from Trump’s government as his term moves on.
“And a Man Comes on and Tell Me” – Trump’s America First Energy Plan
In an earlier blog (January 24, 2017), we detailed what President Trump coined his “America First Energy Plan.” The Donald had unveiled this pro-hydrocarbon policy outline during his campaign and discussed it often prior to the election to differentiate his views on energy from both President Obama and Hillary Clinton. This plan, which has and continues to be promoted as a cornerstone for “making America great again,” is composed of the following key policy objectives:
- Eliminating “harmful and unnecessary policies such as the Climate Action Plan and the Waters of the U.S. rule,“ which would increase American wages by more than $30 billion over the next seven years, according to the Administration;
- Embracing U.S. shale and gas and taking advantage of “the estimated $50 trillion in untapped shale, oil, and natural gas reserves”;
- Having a commitment to clean coal technology;
- Eliminating U.S. dependence on “the OPEC cartel and any nations hostile to our interests”; and
- Protecting our environment.
As in all policies, the devil is in the details and in many cases implementing those details requires legislation. This is a time-consuming and sometimes very difficult task, considering the sharply divided views on energy, both between the parties and even within the Republican Party itself; however, Trump has already taken several specific steps to push forward some goals outlined in his energy plan in areas where administrative actions are possible and new legislation is not needed.
“Hey, Hey, Hey, That’s What I Say” – Trump Reverses Obama Actions With a Regulation Freeze
Among President Trump’s first and most widely publicized actions as the President was ordering a mandatory freeze on a wide range of pending Obama administration rules. The most significant impact on the petroleum industry was a stay on the announced 2017 RFS Renewable Volume Obligation (RVO). The freeze ended in March with no change in the RVO.
Of all the regulatory rollbacks Trump has pushed forward, the most significant and far reaching was the elimination of the Climate Action Plan (CAP). The CAP was established at the very beginning of Obama’s first term in 2008 and updated every two years since. The CAP was what the U.S. brought to the Paris climate conference in December 2015 and ranked right up there with Obamacare and the Iran Nuclear Treaty as Obama’s proudest legacy achievements. While he has run more obstacles in attempting to cancel out the first two, the Donald wasted no time in driving a stake into the CAP, cancelling it in his very first day in office, stating it as harmful and unnecessary.
“He’s Tellin’ Me More and More” – Trump Pushes Pipeline Approvals Denied by Obama
The Dakota Access Pipeline is already fading from the public limelight. After being approved by the Army Corps of Engineers, oil began to flow in late March. This does not mean the legal challenges are over, however, as the courts have yet to rule on a suit brought by the Cheyenne River Sioux tribes claiming the Corps violated “environmental, historic preservation, and religious-freedom laws” in granting its approval. Earlier attempts by the tribes to obtain restraining orders failed.
After its lengthy delay, the Keystone XL line approval process restarted in February with TransCanada’s filing of a new application with the Nebraska Public Service Commission (PSC). This is considered that final obstacle for the pipeline in that the U.S. government has already announced its tacit approval. The PSC must render a decision by November 23, 2017. TransCanada claims to have already secured 90% of the required easements.
“And I’m Doin’ This … and I’m Tryin’” to Do That – Renewable Fuel Confusion
Perhaps the most difficult Trump Administration energy policy action to predict relates to the Renewable Fuel Standard (RFS) Program. Early statements from Trump advisors indicated the Administration was considering a change in the downstream “point of obligation.” This defines which companies are subject to the RVO. After subsequent conflicting statements by various groups, the White House has only responded by saying it was evaluating this initiative but gave no timeline for a final decision. Furthermore, it is our understanding that a change in the point of obligation requires legislative action.
“I Try and I Try and I Try T-T-T-T-Try Try” – Ambitious Tax Reform Faces Major Obstacles
The Trump team just came in under the wire in proposing a tax reform program within the first 100 days. This was probably his most important campaign promise and boy was the proposal a doozy. By proposing to lower corporate taxes from 35% to 15% and both reducing rates and drastically simplifying personal taxes, the Trump proposal would be, by almost any measure, the largest tax rate decrease in history. But therein lies the rub, will it or anything resembling it ever make it through a bitterly divided Congress.
The Trump tax reform would provide not only direct tax benefits to oil companies, but by providing a major stimulus to economic growth it would provide a huge boost to product demand. One major item impacting the oil industry that has been discussed, the Border Adjustment Tax (BAT), was missing from the Trump proposal. While most refiners probably cheered this, domestic producers were likely disappointed.
And “When I’m Ridin’ Round the World” – Trade Policy
Not all of the Donald’s prospective policies are favorable for the oil industry and perhaps the scariest is his widespread talk of moving in a protectionist direction. Considering that oil, both on the import and export side of the ledger, has become one of the biggest parts of the U.S. foreign trade portfolio, any move which interferes or restricts these flows is anathema to all segments of the industry. Among the first and potentially most impactful steps President Trump has taken, during these first 100 days, is his announcement that he plans to renegotiate the North American Free Trade Agreement (NAFTA). NAFTA has led to a dramatic increase in trade between the U.S. and its North American neighbors since it went into force in 1994, and oil has been a major part of that growth. Canada is far and away the biggest foreign supplier of crude oil to U.S. refineries while at the same time it has also been the biggest recipient of crude from the U.S. and a major supplier of gasoline to the East Coast. The major refining region of the U.S. (the Gulf Coast) is especially dependent on trade with Mexico. It is both the biggest source of heavy crude to for USGC refineries and the largest destination for product exports from the region.
Finally, it appears that the prospects of an immediate termination of NAFTA, something that candidate Trump had mentioned, will not take place. Instead, after consultations with leaders from both Canada and Mexico, President Trump recently stated that he prefers to “renegotiate” the pact to make it “fairer to American workers’”. What this means, and whether our partners in the deal will be amenable to any changes, is yet to be seen. What gives us some confidence that outcomes to NAFTA and trade policy (in general) will be reasonable, is the presence of key Cabinet appointees such as Rex Tillerson and Rick Perry. Both of these men certainly understand the importance of free and open markets to the petroleum industry and will surely work to maintain those principles; however, there are other voices in the Administration who are not so oriented, and this will certainly be an issue upon which the oil industry will have to keep a wary eye.
Turner, Mason & Company is continually monitoring developments in the global petroleum markets and assessing how they will impact the industry. Considering the uniqueness of the new Administration and the importance it has placed on energy, following these developments over the next few weeks and months will be as important as it ever was. We utilize this analysis to assist both individual clients and also to develop reports and studies, which we provide on a multi-client basis. The most comprehensive of these reports is our biannual Crude and Refined Products Outlook, the latest version of which we released in February. Our Mid-Year Update of this report is scheduled to come out at the end of July. For more information on this and other TM&C products, call Shanda Thomas at 214-754-0898 or visit our website at turnermason.com.