Commodities Trading News and Trends
Welcome to issue 2 of Commodities Trading News and Trends, aiming to help commodity market participants identify and adapt to the market news and legal developments that impact their commodity trading. Each issue will feature summaries and insights into current topics, ranging from developments in renewable energy to recently enacted federal and state laws and federal, state and more local regulatory activities. Our goal is to help you successfully navigate the shifting currents while remaining competitive. Please enjoy this issue.
- Oil and gas companies commit to transparency on methane emissions reporting. An agreement entered into by the 62 companies that comprise the Oil and Gas Methane Partnership (OGMP) may herald increasing transparency among oil and gas companies in their methane emission reporting. In late 2020, the OGMP’s member companies agreed to a target of 45 percent methane emission reductions by 2025, and a 60-75 percent reduction by 2030. These companies represent some 30 percent of the world’s oil and gas production. Their commitment is being seen as an approach to addressing regulatory concerns over climate change in a low-cost way, and it may also be a commercial decision. As companies increasingly compete through ESG policies, the OGMP’s reporting goals may allow the public to more accurately track and compare performance across companies in ways that not only allow the public to hold these companies accountable for their emissions but ultimately affect a company’s ability to compete for limited capital. Some observers posit that the next step would likely be to establish a uniform framework for emissions reports; indeed, such models already exist.
- EPA misses key deadline, pushing US renewable fuel credits to three-year high. In early January, the US Environmental Protection Agency (EPA) missed a second deadline to propose Renewable Volume Obligations (RVOs) for 2021. Accordingly, traders noted, credits used by refiners and importers of gasoline and diesel fuel to comply with the EPA’s Renewable Fuel Standard (RFS) rose to a three-year high. The RFS requires refiners and importers to retire a certain amount of credits each year based on the percentage of gasoline and diesel fuel that they are expected to introduce into the United States during the coming year. These credits, called Renewable Identification Numbers (RINs), are generated by renewable fuel producers, but they can be separated from the underlying product and sold to and by other market participants. Without an RVO, parties that comply with the RFS by purchasing RINs remain uncertain of how many credits they may be required to buy, leading to price uncertainty. This uncertainty reaches farther than just the oil and gas market; biofuel producers are also affected. Although the debate around how high to set the RVO has historically pitted the oil industry, which argues for a lower percentage so the cost of RFS compliance does not increase consumers’ cost for fuel, against farmers and biofuel producers, who support a higher RVO because this creates more demand for their products, the missed RVO proposal for 2021 seems to have impacted both. Indeed, EPA’s January 19, 2021 news release declared that the four actions EPA sought to pursue would “help Farmers and Refiners.” These actions include to (1) propose changes to E15 fuel pump labeling requirements; (2) propose to modify underground storage tank (UST) regulations to accommodate the safe storage of E15 and higher ethanol blends at retail stations’ existing tank systems; (3) propose extensions of compliance for certain obligated parties subject to the 2019 RVO and all obligated parties subject to the 2020 RVO given ongoing economic disruptions as a result of the COVID-19 pandemic; and (4) seek comments on several waiver petitions from state governors and refinery groups pertaining to “severe economic harm,” as well as a letter from the National Wildlife Federation pertaining to “severe environmental harm”’ requesting general waiver relief for the 2019 and 2020 RVOs. For more information on RINs and the cost of RFS compliance, please see our article here.
- BSEE and BOEM agree to framework for coordinating renewable energy regulations on Outer Continental Shelf. A memorandum of understanding between the US Department of the Interior’s Bureau of Safety and Environmental Enforcement (BSEE) and Bureau of Ocean Energy Management (BOEM) clarifies the agencies’ roles and responsibilities with respect to their coordination of regulating renewable energy activities on the Outer Continental Shelf (OCS). Announced on January 20, 2021, the MOU aims to promote the efficient use of resources to enhance the nation’s renewable energy production. It is being seen as an important step in the transfer of safety and environmental compliance regulations from BOEM to BSEE, with the ultimate goal of streamlining the permitting process for offshore wind developers. This transfer may affect offshore wind developers seeking to establish projects on the Outer Continental Shelf, because jurisdiction over these waters remains subject to federal regulation. Still, the Energy Policy Act of 2005, which authorized the BOEM to issue leases, easements and rights of way for renewable energy development, also requires BOEM to coordinate with affected state and local governments. Accordingly, the transfer of certain regulations may involve more than shifting responsibilities within the federal agencies. As states increasingly promote offshore wind as a means to accomplish their clean energy targets, the transfer from BOEM to BSEE can help with this development by eliminating ambiguities around safety and environmental consideration. Ultimately, the more transparent process could attract additional investment. Furthermore, the federal government has also shown additional encouragement to the offshore wind industry by recently making a 30 percent stand-alone federal investment tax credit (ITC) available for offshore wind projects that begin construction before 2026. These acts – the transfer of regulations to the BSEE and the ITC – seem to underline a federal policy supportive of the offshore wind industry. However, these acts also demonstrate that the regulatory environment is changing quickly. Companies are encouraged to review their policies and procedures to ensure they are compliant with new or amended regulations, as well as ensuring that these procedures also alert them to new or amended benefits.
- Financing structures reward green and sustainable investments; prudent investors seek to understand the framework. Green, social, and sustainability linked bonds and loans are financing opportunities that are predicted to become increasingly used during 2021. While investors’ expanding interest in these debt instruments may have many explanations, the instruments are increasingly attractive to borrowers in part because they can offer potentially better financial terms and give borrowers access to new markets. Green, social, and sustainability linked bonds and loans are generally structured to incentivize borrowers to use proceeds for certain projects or to achieve certain development goals. If the goals are achieved, the borrowers may then be rewarded through decreasing interest rates or other incentives. However, these instruments also face their own hurdles, such as there being no globally agreed standard for which debt instruments ultimately qualify as “green” or “sustainable.” This lack of clarity may lead to greenwashing or sustainability-washing – intentionally conveying the false impression of being environmentally friendly – which produces its own consequences. Borrowers, and even investors, who face accusations of greenwashing may find themselves exposed to liability depending on how they discuss these instruments – particularly, for example, in filings made with the Securities and Exchange Commission. As investors become increasingly interested in companies’ ESG activities, how these instruments are described will become increasingly important. This increased interest further underscores the importance for interested parties to develop a comprehensive understanding of each of these instruments and the frameworks used to evaluate them. We will continue to monitor how these frameworks develop; please see the materials from our webinar on these instruments for further background.
- House and Senate consider Clean Energy and Sustainability Accelerator bills. Congress is advancing bills in both chambers to create a national Clean Energy and Sustainability Accelerator to foster innovation and encourage investment and procurements in renewables, storage, transportation, transmission, resiliency, efficiency, reforestation, agriculture, and industrial de-carbonization. Some congressional observers speculate that the idea may be incorporated into the Biden Administration’s massive infrastructure bill, a key Biden campaign promise. The Accelerator is based on the so-called Green Bank Model – indeed, several states, among them New York and Michigan, use green banks to develop green energy, pairing each public dollar with multiple private dollars.
Power, oil and gas
- Force majeure provisions and the ISDA Power Annex. In the midst of the most severe weather crisis in Texas since 1895, many are taking a fresh look at the force majeure provisions under the International Swaps and Derivatives Association (ISDA) to determine whether performance under existing contracts may be excused. In this alert, DLA Piper analyzes the force majeure clauses in financially settled power transactions which are governed by an ISDA North American Power Annex as incorporated into either the 1992 Master Agreement (Multicurrency – Cross Border) or the 2002 ISDA Master Agreement (any such ISDA Master Agreement, as modified by the incorporation of the Power Annex, and ISDA Master Agreement).Among the points raised in our alert: the Power Annex does not call for a termination of the affected transaction upon the occurrence of a force majeure. Instead, the party’s performance is stayed until performance is no longer prevented by the force majeure. The claiming party has an affirmative obligation to remedy the force majeure in a manner that would minimize the lasting effects that such event has on the parties’ reasonable expectations. As climate change generates ever more severe weather events, market participants will likely need to assess the applicability of their force majeure claims under the Power Annex.
- US oil and natural gas production will fall in 2021, rise in 2022. In its January 2021 Short-Term Energy Outlook, the US Energy Information Administration forecast that annual US crude oil production will decline by 0.2 million b/d in 2021 but increase by 0.4 million b/d in 2022. COVID-19 has disrupted supply and demand of crude oil, but increased drilling, driven by prices remaining around $50 per barrel, is expected to lead to production increases in 2022.
- Pausing oil and gas leasing on public land and water. In an effort to slow climate change, President Joe Biden has signed an executive order that suspends new oil and gas leasing on federal lands and water. Tribal lands are not affected by the executive order. Some are concerned that the move might lead to the elimination of jobs. It is expected that the move will face challenges in court.
- Taskforce on Scaling Voluntary Carbon Markets report. In late January, the Taskforce on Scaling Voluntary Carbon Markets issued its final report setting forth its findings and recommendations for developing a large-scale and transparent carbon-credit trading market. The Taskforce is a private sector-led initiative working to scale an effective and efficient voluntary carbon market to help meet the goals of the Paris Agreement. In the coming months, the Taskforce will take stock of existing voluntary carbon markets and efforts to grow these markets, identify key challenges and impediments, build consensus on how best to scale up voluntary carbon markets, and, finally, present a blueprint of actionable solutions.
- Calculating the social cost of carbon. On January 21, President Joe Biden signed an executive order asking a cross-government team to figure out the “social cost of carbon” – the estimated cost to society of releasing a ton of carbon dioxide into the atmosphere. This figure will have broad impacts on federal agency rules, since it affects how regulators weigh the benefits and the costs of proposed rules. The executive order directs the team to publish an interim social cost of carbon within 30 days. Environmentalists and climate scientists agree that undoing the Trump Administration’s changes to how the social cost of carbon is calculated will play a big role in federal policy, as well as in states that take their lead from the federal government.
- President supports effective carbon pricing, Yellen says. During her confirmation process, soon to be confirmed Treasury Secretary Janet Yellen responded to questions from the Senate Finance Committee by stating, among other things, that she and President Biden are “fully supportive” of creating an effective pricing scheme for carbon, a step many climate experts say is essential to halting the worst effects of climate change.
- Previous administration’s Affordable Clean Energy Rule struck down; new rule expected. On January 18, the US Court of Appeals for the District of Columbia overturned the Trump Administration’s Affordable Clean Energy Rule, calling it arbitrary and capricious and stating that it rested on a misinterpretation of the Clean Air Act. Former EPA Administrator Andrew Wheeler signed the rule after the prior rule, the Obama Administration’s Clean Power Plan (CPP), was challenged in court. The ruling effectively reinstated the CPP, which the Supreme Court had stayed in 2016. In a memorandum issued February 12, 2021, the EPA announced its intent to abandon the CPP, stating that, “[a]s a practical matter, the reinstatement of the CPP would not make sense. The deadline for states to submit State Plans under the CPP has already passed and, in any event, ongoing changes in electricity generation mean that the emission reduction goals that the CPP set for 2030 have already been achieved.” The Biden Administration is now expected to begin work on a new regulatory response to climate pollution.
Commodity Futures Trading Commission
- CFTC final position rule limits enter into effect March 15. Bringing to an end a decade-long journey, the CFTC in October adopted final position limit rules (the Final Rules) which aim to “prevent excessive speculation” and thus implement one of the remaining key provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Before these limits were adopted, federal position limits (established by the CFTC) had been imposed on nine futures contracts and options on futures contracts in agricultural commodities. The Final Rules amend these limits and establish federal limits for the first time on 16 additional futures contracts on agricultural, metals, and energy contracts. Futures contracts linked to these contracts, as well as economically equivalent swaps, are also subject to these limits. The market participant can apply to the CFTC and separately to the relevant exchanges. Read more.
- CFTC GC steps down. On January 11, 2021, Daniel J. Davis, the CFTC’s General Counsel and head of its Legal Division, announced he would depart the agency. Davis’s departure follows the CFTC’s latest annual report, which showed that the federal agency had set records for the size of enforcement orders, their number, and types of enforcement actions pursued in 2020. CFTC Chairman Heath P. Tarbert applauded Mr. Davis’s performance with the agency, which he joined in March 2017. Following Mr. Davis’s departure, Rob Schwartz, currently Deputy General Counsel for Litigation, Enforcement, and Adjudication, was appointed Acting General Counsel. Despite this leadership change, the CFTC expects to continue to emphasize its efforts in four key areas: preserving market integrity; protecting customers; promoting individual accountability; and coordinating with other regulators and criminal authorities on parallel matters. See our overview of the CFTC’s latest annual report.
- CFTC and ESMA signs enhanced MOU on central counterparties. On January 7, 2021, the CFTC and the European Securities and Markets Authority (ESMA) entered into a memorandum of understanding regarding their “willingness to enhance cooperation and information sharing to proportionately fulfill their respective supervisory and monitoring responsibilities.” The MOU concerns certain central counterparties (CCPs) established in the United States that have registered with the CFTC as derivatives clearing organizations (DCOs) and which have applied or may apply to the ESMA for recognition as third-country CCPs under the European Market Infrastructure Regulation (EMIR). While the MOU does not create any legally binding obligations, it is “a statement of intent to consult, cooperate and exchange information” in ways that allow ESMA to monitor regulatory and supervisory developments in the US that affect the CCPs. Indeed, the CFTC and ESMA “will seek to inform each other as soon as practicable of any known material event that could adversely impact the financial or operational stability of a Covered CCP.” The MOU, which builds on a 2016 MOU, suggests an increased deference of regulatory oversight and increased future cooperation between these authorities. Indeed, Klaus Löber, the chair of ESMA’s CCP Supervisory Committee, hailed the MOU as “an important step towards building the risk-based and outcome-focused supervision of CCPs in accordance with the amended European Market Infrastructure Regulation,” while a CFTC press release noted the MOU “reflects ESMA’s and the CFTC’s commitment to strengthening their mutual cooperative relationship.” Accordingly, CCPs are encouraged to review their internal policies and procedures to ensure that they are compliant with applicable rules but also flexible to other regulatory systems.
Federal Energy Regulatory Commission
- FERC opens wholesale grid markets to DERs. Last fall, the Federal Energy Reserve Commission (FERC) passed an order that opens wholesale energy markets in the US to distributed energy resources (DERs). The order has been described as a game-changer for DERs. The next challenge FERC faces is to create market rules that will allow DERS to participate in the bulk energy markets. DERS currently participate in wholesale energy markets, but the traditional rules limit their full effectiveness. While it will take time to work out certain complexities, clean energy groups posit that this move has the potential to lower customer costs, increase electric reliability, and encourage new innovation.
- FERC: BP paid fine, will challenge us in court. After FERC upheld a $24.4 million fine against BP for allegedly manipulating the Texas natural gas market in late 2008, FERC announced that BP had paid the fine. However, FERC added, the oil company still plans to challenge the fine in the US Court of Appeals for the Fifth Circuit. BP maintains that it does not and did not engage in market manipulation.
- With two new commissioners FERC board is full. On December 8, 2020 and January 4, 2021, Allison Clements and Mark C. Christie were sworn in as FERC commissioners, respectively – the first time since December 2018 that FERC has operated with its maximum capacity of five commissioners. Clements, a Democratic pick, is the founder of Goodgrid, LLC, an energy policy and strategy consulting firm; she will serve until 2024. Christie, a Republican pick who most recently chaired the Virginia State Corporation Commission, will serve until 2025. Analysts anticipate the pair’s appointment could bring support for clean energy technologies. Both commissioners drew bipartisan support.
- FERC Commissioner Clements: revamping pipeline policy is a top priority. New FERC Commissioner Allison Clements says the FERC’s policy for certifying natural gas pipeline projects is “broken” and deems revising it one of her top priorities. The policy, which dates back to 1999, antedates the shale revolution and the development of gas generation as an important fuel source It is time, she said, to give more consideration to the climate impacts of gas transportation infrastructure. “What we need to do is to modernize the policy in a manner that considers the reality of large infrastructure investment and considers the interests of individuals and communities affected by those investments, such that when it comes time to consider a new gas pipeline there, there’s some credibility to the need determination,” Clements said. “The public need determination process is part of the policy that needs reform,” Clements said. “I don’t have set views on what those reforms look like. I just think that the record already demonstrates that the current parameters of the public need analysis are not sufficient.”
Enforcement and litigation
- Retiring RINs. The Renewable Fuel Standard (RFS) requires obligated parties to retire a certain amount of Renewable Identification Numbers to evidence their compliance with the RFS. Renewable fuel producers generate renewable identification numbers (RINs), which may also be retired by these produces or traded to and then among market participants. After a commodity firm failed to deliver RINs to an obligated party, that party alleged it paid $10 million more for RINs than it would have if the commodity firm had performed. The commodity firm had petitioned for bankruptcy earlier this year, listing the obligated party as its largest creditor. Accordingly, while trading compliance credits can be profitable, market participants are encouraged to review their policies and procedures to ensure they observe both their regulatory obligations but also contractual obligations. Several lawsuits over application of the RFS have been filed in the last few years, and the Biden Administration recently signaled a reversal of the federal government’s prior position on the RFS. The move followed a recent ruling in which the Tenth Circuit Court of Appeals vacated three EPA decisions under the RFS for the 2016 and 2016 compliance years.
- CFTC’s litigation offensive continues in 2021 with new suit against alleged price manipulator. After a blockbuster year of litigation and enforcement in 2020, the CFTC is at it again, now with a suit alleging that a Tokyo-based trader, John Patrick Gorman III, manipulated swap prices to benefit his employer, a global investment bank, to the detriment of a bond issuer. CFTC’s complaint, filed in the United States District Court for the Southern District of New York, further alleges that Gorman sought to conceal his actions after the fact – another basis for liability. Gorman denies all wrongdoing, and his counsel issued a statement that the suspect trades were in accordance with industry best standards.
- Ethanol trading group sues EPA over 2020 biofuel targets. Growth Energy, an ethanol trade organization, and other biofuel industry actors have filed an opening brief with the US Court of Appeals for the District of Columbia to challenge how the EPA set biofuel blending targets for 2020. Current EPA regulations account for small refinery exemptions from the blending targets on a prospective basis only. The biofuel petitioners argue that the agency’s failure to account for past SREs that were granted retroactively destroyed billions of gallons of demand for their product without compensation, amounting to an abuse of EPA’s waiver authority. The case is one of three active litigations regarding EPA’s renewable fuel standings, including one pending before the Supreme Court.
In the news
- President Biden’s first days. During President Biden’s first days in office, he took steps to have the United States rejoin the Paris Agreement, reimpose greenhouse gas emission limits rolled back by the Trump Administration, and rescind the permit for the Keystone XL pipeline, and he directed federal agencies to eliminate subsidies for fossil fuels. The Paris Agreement is an international treaty adopted by 190 of the world’s 195 independent sovereign countries that aims to limit global warming by having these countries enact policies enabling the world to become climate neutral by 2050. President Biden ordered federal agencies to review more than 100 rules emplaced during the Trump Administration and related to the environment. Analysts suggest President Biden is looking to overturn these rules and that his Administration will impose tougher emissions standards, especially those related to power plants, automakers, and the oil and gas industry. The Keystone XL pipeline is an 875-mile pipeline that would carry crude oil from Canada across the United States to Gulf Coast ports in Texas. The Trump Administration granted a permit for the pipeline’s construction and operation on March 29, 2019, but a federal court ordered the project halted as it underwent a full endangered species review. While this ruling, it is reported, does not block construction, it does impose delays. President Biden’s revocation of the permit revokes the authority for the construction, connection, operation, and maintenance of pipeline facilities addressed in the previous permit. President Biden has also expressed his intent to reform oil and gas tax subsidies. Through his executive role, he may ensure that oil and gas companies pay government penalties, rather than allowing penalties to be tax deductible, and may require companies, such as those in the oil and gas sector, to fund all or a portion of the construction and maintenance of shipping lanes. He may also seek to reduce subsidies by asking Congress to reduce the intangible drilling costs deduction, which allows producers to deduct a majority of their costs from drilling new wells, and a percentage depletion tax break, which allows independent producers to recover development costs of declining oil, gas and coal reserves. To learn more on the Biden Administration’s effect on the oil and gas industry, please see our alert here.
- Consequences of volatile markets for agricultural products and metals. Volatility in the markets for several agricultural products and metals may invite additional market participants but may also create compliance and other risks. As an example, in silver futures, the CME Group raised margins by 18 percent, which made it more expensive for traders to hold their positions. Reportedly, the increase went effect February 2. The enthusiasm around these market conditions might inadvertently cause market participants to exceed their position limits. Indeed, in light of the CFTC’s approval of a final rule that amends or adds speculative position limits for 25 physical commodities (see our report on this in the CFTC section above), traders are encouraged to evaluate their internal practices and policies to ensure that their operations anticipate the implementation of this rule, which is scheduled to become effective on March 15, 2021 (with future compliance dates). As these policies and procedures more closely integrate the regulations with which the traders must comply, these traders may be able to leverage opportunities passed over by other traders with less sophisticated systems. For example, one option traders might use to maximize their positions is an ability to seek an exemption from position limits. As seen by agricultural products and even recent spikes in silver prices, commodity prices will continue to fluctuate, placing traders with sound policies and procedures in a position to maximize their ability to trade.