Oil and Gas Activity on Federal Lands: Vice President Biden supports a ban of new oil and gas permits for public lands and waters. As discussed in our piece from last December, an executive order banning new drilling permits on public lands and waters would probably be challenged in the courts. There would also be implications for federal and state revenues, with billions generated from royalties and other fees paid by oil and gas companies. In the meantime, exploration and production companies are stocking up on permits. As discussed on its 2Q call, EOG Resources (EOG) had 2,500 federal permits approved or in the works, which equates to more than four years of drilling opportunities. If drilling activity on federal lands is curbed, operators are likely to shift to private lands. Ultimately, if new or more severe regulations negatively impact US energy production, it could be beneficial for oil and natural gas prices – a potential silver lining for the industry but possibly negative for consumers. With oil prices (and to a lesser extent, natural gas prices) tending to drive sentiment and stock prices for the energy sector, regulations that appear negative for the industry on the surface could be offset by some derivative positive impacts to oil and natural gas prices.
Tax Implications for MLPs vs. C-Corps: Vice President Biden’s tax proposals would widen the tax advantage of MLPs over corporations if implemented, which could have implications for the ongoing MLP vs. C-Corp structure questions in midstream. See more details on the tax implications here. A higher tax rate would have to be weighed against the perceived benefits of the C-Corp structure, namely the potential for broader index inclusion and access to a wider investor base. A common misconception is that the lowering of the corporate tax rate from 35% to 21% (read more) spurred the consolidations and C-Corp roll-ups of MLPs seen over the last few years, but these transactions were largely motivated by a need for simplification or in response to a FERC policy change (read more). The lower tax rate was not a primary reason for the transactions, which were largely consolidations instead of C-Corp conversions. That said, a higher tax rate would be a deterrent for existing MLPs considering changes to their structure. An MLP to C-Corp conversion is very unlikely before the election, and structure questions could be on the backburner for some time as operations take priority in a challenging macro environment. On their 2Q earnings call, management of Enterprise Products Partners (EPD) indicated that they had not spent time this year on an MLP vs. C-Corp analysis, instead focusing on operational execution.
Clean Energy Transition: A potential Biden administration would be more supportive of clean energy and electric vehicle adoption but would likely require cooperation from Congress to bring about change. Even with supportive government policies, an energy transition is still going to take many years. While the goal of net zero emissions for the US by 2050 may seem negative for energy and midstream, it bears noting that midstream corporation Williams Companies (WMB) is aiming to be net zero for carbon emissions by 2050. Though European energy companies have taken the lead on carbon neutrality targets, US companies could increasingly follow suit. That said, as recent rolling blackouts in California have highlighted, the transition to wind and solar energy can result in reliability issues during periods of peak electricity demand if not managed properly. For more information on the energy transition, please see our recent white paper.
With all that is happening in the US today, it is probably safe to assume that energy regulations are not going to be at the top of the list from a policy perspective for whoever wins the election. A change in administration could have implications for some specific pipelines, but overall, the potential impact appears limited given a lack of newbuild projects currently underway. Executive orders are likely to be challenged in the courts, and more meaningful changes in energy policy likely require Congress to act. Even if increased regulations are implemented for energy production or newbuild pipelines, there could be positive derivative impacts, such as higher commodity prices or an enhanced value proposition for existing pipelines, that help offset potential negatives.