2023 Energy Litigation Outlook

The Baker Botts Energy Litigation team has identified key issues and trends in the energy sector. To read the full Energy Litigation Outlook, please click here.

Please feel free to reach out to the relevant team members if you have any questions about any of the issues and trends discussed below.

• The Battle of State v. Municipal Regulation of Oil and Gas Operations
• Pricing Disputes
• Acquisition Related Disputes
• Loan Financings and Energy Boycotts
• Ongoing effects of the war in Ukraine
• Environmental Reviews & Energy Infrastructure
• BLM Venting & Flaring Rules
• Coal Combustion Residuals Enforcement and Regulation
• Ethylene Oxide (EtO) Litigation
• The Role of Greenhouse Gas Emissions in FERC's Certificate Process
• Public Utilities & Energy Company Considerations for Political Activity
• Preparing for Shareholder, Consumer, and Other Private Litigation over ESG Disclosures
• Accidental Chemical Releases Likely to Receive Increased Scrutiny
• The Uncertain Future of the Energy Charter Treaty
• New Criteria for Transmission Lines in Texas
• Hydrogen
• Ownership of Pore Space
• Federal Power Act Section 203
• Crypto Mining in ERCOT
• Texas Electric Market Redesign
• SEC ESG-Related Enforcement
• Energy Trading Misconduct & CFTC Enforcement
• Off-Channel Communications
• David-Bacon Act Updates
• Helix v. Hewitt
• 88th Texas Legislative Session
• Behind-the-Meter Power Arrangements
• Negotiorum Gestio and The Deduction of Post-Production Costs from Unreleased Mineral Interest Owners
• The Shifting Landscape of Texas Tax Incentives in Energy Development
• Sales Tax Exemption for Mineral Extraction
• Benefits Litigation and Related Issues
• LNG Outlook

KEY ISSUE

1. The Battle of State v. Municipal Regulation of Oil and Gas Operations. In response to local laws attempting to limit or bar oil and gas development, several states in recent years have adopted laws substantially narrowing the ability of  municipalities to regulate oil and gas operations. For example, Texas adopted Texas  Natural Resource Code § 81.0523, which vests in the state of Texas exclusive  jurisdiction over oil and gas operations and preempts local regulation of oil and gas  operations except for limited circumstances. Similarly, Oklahoma adopted 52  O.S.Supp.2015 § 137.1, which confines local regulation of oil and gas operations to  three specified areas. We have begun to see initial tests of these laws, including in  City of Port Arthur v. Thomas, ---S.W.3.---, No. 09-21-00111-CV, 2022 WL 3868106  (Tex. App.—Beaumont Aug. 31, 2022, no pet.), and Magnum Energy, Inc. v. Bd. of  Adjustment for the City of Norman, 510 P.3d 818 (Okla. 2022). We fully expect the  battle over state v. local regulation of oil and gas operations to continue with  municipalities testing the limits of their authority and oil and gas operators  asserting that the local actions are preempted under these recently adopted state  laws.
2. Pricing Disputes. Fueled by volatile markets, inflation, interest rates, and supply chain disruption, parties across the energy chain are facing pricing changes that depart from original projections and expectations. In 2023, we expect to see an  uptick in parties negotiating (and litigating) pricing provisions in the oil and gas,  power, and renewables sectors. These challenges will be most pressing in the  renewable space as offshore wind projects ramp up and the IRA spurs additional  investment.
3. Acquisition Related Disputes. Companies are buying and selling oil and gas assets with more frequency given a recent spur in the market, but price volatility can result in disputes as buyers get cold feet. In 2023, we expect to see more of these  disputes as prices continue to swing up and down, with buyers using every option  at their disposal to seek a purchase price reduction.
4. Loan Financings and Energy Boycotts. Rising inflation, interest rates, and pressure from regulators are causing banks and other debt providers to tighten requirements for loan extensions, refinancings, and restructuring requests, making  it more difficult for borrowers seeking new loans and other sources of financing. At  the same time, some states are beginning to enact and enforce boycott policies on  lenders who adopt policies that supposedly discriminate against oil and gas  production. We are working with our finance and project lawyers on finding  solutions for our clients on all of these problems, from both the debtor and lender  perspective, and getting prepared to be ready to assist clients who need immediate  help on default, foreclosure, and other critical situations.
5. Public Utilities & Energy Company Considerations for Political Activity. More than a year after First Energy agreed to pay a $230 million fine for its role in a scheme that funneled millions of dollars to state officials, the Ohio utility is still  dealing with increased scrutiny and litigation. While First Energy is an extreme  example, public utilities and other energy companies face unique considerations  when weighing whether and how to engage in a range of political activity at the  federal and state levels. We will identify these unique risks, and ways to mitigate  them, and identify key lessons learned from the First Energy litigation.
6. Hydrogen. As the world catapults toward a clean energy transition, hydrogen as a  fuel source will become increasingly common, with Texas as the frontrunner in that  transition. With hydrogen pipelines already built along the Texas coast, and  hydrogen projects continuing to be announced all over Texas, we expect new  transactions, regulations, and litigation to follow. Texas courts will have to apply  existing case law—such as pore space ownership, storage ownership and liability,  deduction of post-production costs, and leasing arrangements—to this new energy  framework that is sure to present its own challenges and nuances.
7. Ongoing effects of the war in Ukraine. The coming year is likely to see an escalation in legal disputes arising out of Russia's invasion of Ukraine and the resulting geopolitical fallout, especially in the energy sector. Both Uniper  (Germany's largest importer of Russian gas) and Dutch operator RWE have recently  announced that they have initiated commercial arbitrations against Gazprom for its  failure to deliver gas in recent months, in Uniper's case claiming at least €11.6  billion in damages. Eni similarly announced in May 2022 that it was commencing  arbitration against Gazprom in relation to Russia's demand that payment for gas  supplies be made in roubles. Other European energy companies may well follow  suit. Investment treaty claims in relation to foreign-owned energy assets located in  Russia also seem likely: ExxonMobil has reserved the right to bring a treaty claim  against Russia in relation to the forced transfer of its stake in the Sakhalin-1 project  in Russia's Far East to Rosneft, while Shell has also seen its interest in the Sakhalin-2  project transferred to the Russian state. Treaty claims may also be brought by  Ukrainian investors against Russia with respect to assets located inside Russian[1]occupied Ukraine (at least 12 treaty claims have already been brought by Ukrainian  investors since 2014 in relation to assets located in Crimea). Finally, Russian  investors, including Russian-state owned energy companies, could potentially bring  claims in relation to the confiscation of Russian assets by Western governments: the  German state, for example, has recently taken control of Gazprom Germania (now  known as Securing Energy For Europe, or "SEFE") and three German refineries  owned by Rosneft. As the war in Ukraine drags onwards, the legal skirmishes are  likely only getting started.
8. Environmental Reviews & Energy Infrastructure. The National Environmental Policy Act (NEPA) requires federal agencies to assess the environmental impacts of major federal actions. In 2022, the Council on Environmental Quality (CEQ) issued  the "NEPA Phase 1 Rule," which expanded the scope of agency reviews to include  "indirect effects" and "cumulative effects," while also expanding the breadth of the  "purpose and need" statement, which is the critical starting point for NEPA review.  By early 2023, CEQ is expected to propose a "Phase 2 Rule," which will further  reverse Trump-era NEPA changes and likely increase the burdens, delays, and costs  associated with the NEPA process. Separately, congressional efforts to accelerate  federal environmental reviews for energy projects – including some legislative  attempts by Senator Joe Manchin (D-WV) – have not resulted in meaningful new  reforms, at least not yet. As these and other efforts continue into 2022, many  observers note that the Biden Administration's ambitious clean energy goals largely  hinge on the ability of the private sector to reliably and efficiently deploy new  energy infrastructure, creating at least some incentive for federal agencies to try to  find ways to improve environmental permitting and reviews. Separately, the Trump[1]era reforms to the Section 401 water quality certification procedures are likely to  remain in effect far into 2023 (and perhaps beyond) due to a recent Supreme Court  order.   

To read the full Energy Litigation Outlook, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.