United States: 2022 - A Tumultuous Year In Energy

EDITORS: Partner - Jonathan Bobinger; Associates - Talha Chaudry, Michael Donnellan, Johnathan Walker
CONTRIBUTORS: Partners - Jim Barkley, Leslie Barrett, Preston Bernhisel, Jonathan Bobinger, Michelle Boudreaux, Mike Bresson, Anne Carpenter, Lily Chinn, Nadira Clarke, Barbara De Marigny, Alexandra Dunn, Liz Flannery, Eli Hinckley, Derek Jones, Lewis Jones, Matthew Levitt, Juliana Sersen, Andrea Stover, Michael Torosian, Jeff Wood, Jamie Yarbrough; Senior Counsel - Aileen Hooks; Senior Associates - Thomas Carter, Garrett Hughey, Patrick Leahy, Landon Lill, Jeffrey Wettengel; Associates - Tala Esmaili, Collin Hunt, Meher Kairon, Christina Mouktari, Evan Neustater, Jimmy Skipton; Senior Advisor - Leigh Hancher

EDITOR'S NOTE:

To our clients and friends,

Each year we take the opportunity to review significant developments in the worldwide energy industry for the previous year and offer our views on what these developments may mean for the coming year.

As we reflect on 2022, we look back on a tumultuous year in energy, with geopolitical strife and legal developments disrupting markets for both traditional and developing energy sources. 2022 began with Russia's invasion of Ukraine, and the ongoing war was a major driver of supply concerns in energy markets throughout 2022. At its offset, the price of natural gas spiked, particularly in Western European markets, as Russia began to slow and ultimately halt the transmission of its gas through both Nord Stream Pipelines. Ultimately, the price of natural gas leveled off to a pre-war norm, but the spike resulted in Western Europe being far more reliant on U.S. LNG. In fact, exports of U.S. LNG to Europe more than doubled between 2021 and 2022. The war is also thought to have some degree of inflationary impact on the price of oil and gasoline. Russia's actions deepened the political divide between it and Western Democracies, which led to the imposition of an EU ban, and a G7 price cap, on Russian oil imports. The impact of these tactics on Russia's oil exports and its broader economy remains to be seen, but neither has substantially disrupted global oil markets to date.

2022 was also marked by continued momentum in energy transition. Companies continue to face pressure to reduce their carbon emissions and align with carbon neutral goals. Further, the market saw continued growth of environmental, social and governance ("ESG") practices and disclosures, as well as investor demand for ESG-focused investments. However, pushback to ESG investing began to prominently emerge in 2022. Certain states decried the use of public funds for ESG-related investments, generally arguing that funds should be allocated solely in such a way to maximize returns and that ESG-investments produce suboptimal returns. Major institutional investors began to reconsider their commitment to ESG or its prevalence among their offerings. Further, in March, Securities and Exchange Commission ("SEC") announced proposed climate disclosure rules that, if adopted would represent a dramatic increase in a public companies' ESG-reporting obligations, including the Companies Scope 1 and 2 emissions, various scenario analyses, transition plans, short, medium and long-term risks and effects on such company's strategy. Although the rules are still being commented upon and have yet to be adopted, they signal that ESG-related information is becoming a focus of the SEC.

2022 also saw Congress and the Biden administration pass a signature piece of infrastructure legislation, the Inflation Reduction Act (the "Act"), in August 2022. The Act was a pared-down version of 2021's Build Back Better Act, yet still carried with it a price tag of roughly $737 billion. The Act authorized around $370 billion of clean energy and decarbonization expenditures over the next ten years, making it the largest investment in clean energy in the nation's history. The Act advances these goals through a medley of policy levers such as new and expanded tax credits, incentives and public-private partnerships. Further, the Act aims to spur robust domestic energy production and storage.

We expect the demand for ESG-focused investments and clean energy to continue to grow in 2023, but see greater headwinds as government's role in their development is beginning to reemerge as a political talking point. On the flip side, we see traditional, publicly traded fossil fuel energy companies are increasingly trying to straddle an ever shifting line of carbon-based profitability (particularly after many oil majors saw record profits in 2022) versus investment into clean energy and related technologies, which bring the promise of political goodwill, carbon reduction and the allure of long-term revenue. One natural result of this tension is the transfer of carbon-intensive assets from public to private hands, whether through take-private transactions, acquisitions or dispositions, a trend which we expect to continue in 2023.

We appreciate the trust that you place in us to handle your legal matters and wish you further success in 2023.

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We appreciate the trust that you place in us to handle your legal matters and wish you further success in 2023.

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