The CFTC Issues a Strong Advisory Letter to Several of Their Divisions

DOMESTIC ENERGY PRODUCERS ALLIANCE May 2020 

DEPA REPORT ON INDUSTRY, LEADERSHIP, LEGISLATION AND ENERGY REGULATION

he U.S. Commodity Futures Trading Commission smaller and less sophisticated customers and that the Com- (CFTC) issued a stern advisory to the Designated Con- mission’s warning will likely cause more brokers to limit tracts Markets (DCMs), The Futures Commission Mer- trading by smaller customer accounts in WTI contracts near chants (FCMs) and the Derivatives Clearing Organizations expiry. (DCOs) on May 13, 2020 using the subject line “Staff Ad- "The sanctity and trust in the oil and all commodity fu- visory on Risk Management and Market Integrity under tures markets are at issue as the system failed miserably, Current Market Conditions” and an immediate investigation is requested and, we sub- DEPA applauds this unusually forthright communica- mit, is required," DEPA Chairman Harold Hamm said in an tion which was a reminder of the obligation to ensure or- April letter to the CFTC in which he detailed the unprece- derly trading and commodity pricing after April 20’s high dented activity. volatility and negative prices in the light sweet crude oil futures contract (WTI) for delivery in May. This public warning to the Chicago Mercan- tile Exchange (CME) appears to underscore the Commissions concern about the events April 20, and its determination it will not be allowed to happen again. The very detailed letter, printed in full beginning on page 3, reminds the Designated Contract Markets (DCM) of their obligations to prevent market disruption, adopt position limits and protect market participants. Telling them, “it is critical that DCMs remain Hamm's Continental Resources filed the first complaint mindful of their obligations under the Core Principles es- with the CFTC. They ask that an investigation of West tablished in the Commodity Exchange Act.” Texas Intermediate crude oil futures traded on the Chicago The advisory reminds the Futures Commission Mer- Mercantile Exchange be investigated for possible market chants (FCMs) “During periods of extreme market volatili- manipulation, failed systems, possible misconduct or failure ty, it is imperative that FCMs engage in robust risk man- to follow their own rules by the CME, or computer pro- agement to manage effectively their activities of operating gramming failures in the WTI prompt month May (20), and as FCMs and to protect customer funds.” oil futures contracts on the CME. DEPA followed with a John Kemp, a Reuters columnist stated “Since last letter to CFTC Chairman Heath Talbert. (Read the full let- month’s upsurge in volatility, some futures commission ter on page 2.) Other state oil and gas organizations and merchants have already prohibited smaller customers from companies of every size sent their comments and demand opening new positions in June and July WTI futures.” for an investigation at the beginning of May as well. Kemp felt the decision to restrict trading to the liquidation The agency's chairman Heath Tarbert told Reuters the of existing positions reflects a concern that risks arising volatility in oil prices is due to fundamental supply and de- from congestion at Cushing have become unmanageable for mand issues, not a financial markets issue. DEPA’s Letter Requesting an Investigation of the Chicago Mercantile Exchange Sent to CFTC Chairman Heath Talbert April 30

I am writing to request the Commodity Futures Trad- • The issuance of new products on WTI trading the day ing Commission (CFTC) initiate an investigation of West after April 20. Texas Intermediate (WTI) crude oil futures traded on the Clearly there are market forces contributing to the de- Chicago Mercantile Exchange (CME) for possible market cline in oil prices. However, given the unprecedented manipulation, failed systems, possible misconduct or fail- event of negative valuation of WTI futures, the highly ure to follow their own rules by the CME, or computer unusual steps taken by the CME in the lead-up to May programming failures in the WTI prompt month May (20) WTI futures trading designed to facilitate negative (20), and oil futures contracts on the CME. value trading, and comments made by the CME during On April 20, 2020, the WTI prompt month May (20) trading hours on April 20, 2020 that sent a clear signal to crude oil contracts closed down $55.90. This marked a markets that WTI futures could trade in negative territory 306 percent drop in price from the April 17, 2020 closing and which appear to have triggered a concentrated period price of $18.27 resulting in a negative value of $37.63 per of high volume trading that drove prices into negative val- barrel. This is the first time in history that WTI fuel oil ue in the final minutes of trading, an examination of these futures have traded at negative levels. The CME issued a events is warranted. release on April 8, 2020 setting forth a plan to address possible negative pricing and then failed to follow or im- Free markets depend upon trust. This is especially true plement that plan. Given the extraordinary nature of this during difficult economic times. As such it is absolutely event and associated activities I am asking you to examine critical to investigate any evidence that points to potential several developments surrounding trading activity leading market manipulation or systems failures that undermine up to and on the day of April 20, 2020, including but not market integrity. limited to: I thank you in advance for your consideration and action • The sudden change in computer models used by the on this matter. CME during a time of increased volatility. Letter signed by DEPA Executive Director Jerry Simmons • The $40.00 drop in the last 22 minutes, including a $25.00 drop in a 3-minute span just before trading closed to settle.

DEPA believes in seeking common ground, through common sense solutions, to the challenges facing Executive Board of Directors DEPA Staff our industry. Our biparti- Harold Hamm Dan Boren Jerry Simmons san approach provides a Executive Director Chairman Director uniquely powerful voice Peter Regan Mike McDonald Ed Cross Congressional and for our members at the Alliance Liaison President Director state and national level. John Schmitz David Crane Don Montgomery Lobbyist Vice President Director Cynthia Simonds Bill Stevens Marketing and Berry Mullennix Communications Dir. Our work is critical. Secretary/Treasurer Director Sarah Reece Your support is vital. Executive Assistant

PO Box 33190  Tulsa, OK 74153  405-669-6646  [email protected]

The Full Advisory Letter

I. Introduction The onset of the COVID-19 pandemic in late 2019 has adversely affected the economies of the United States and other major countries. Global markets, including those regulated by the Commodity Futures Trading Commission (the Commission), have been affected by both fundamental and technical factors this year as economies and industries have slowed dramatically or shut down completely—resulting in unprecedented market impacts. This economic downturn has coincided with substantially increased market volatility in key agricultural, energy, and financial sectors, including the futures and options on futures markets regulated by the Commis- II. DCM Obligations to Prevent Market sion. The impact of fundamental and technical factors Disruption, Adopt Position Limits and has been particularly acute for contracts that call for Protect Market Participants physical delivery of the underlying commodity as demonstrated by the unprecedented price moves in cer- In periods of market volatility such as those recently tain contracts. experienced, it is critical that DCMs remain mindful of their obligations under the Core Principles estab- The Divisions of Market Oversight (DMO), Swap Deal- lished in the Commodity Exchange Act.2 In particular, er and Intermediary Oversight (DSIO), and Clearing and we remind DCMs that Core Principle 43 requires them Risk (DCR) (collectively, the Divisions) issue this advi- to have the capacity and responsibility to prevent ma- sory to remind DCMs, FCMs, and DCOs that they are nipulation, price distortion, and disruptions of the de- expected to prepare for the possibility that certain con- livery or cash-settlement process through market sur- tracts may continue to experience extreme market vola- veillance, compliance, and enforcement practices and tility, low liquidity and possibly negative pricing. procedures. To this end, with respect to physically- We note that we are issuing this advisory in the wake of delivered contracts, Commission regulation 38.2524 unusually high volatility and negative pricing experi- requires each DCM, among other things, to: (a) moni- enced in the May 2020 West Texas Intermediate (WTI), tor the convergence between the contract price and the Light Sweet Crude Oil Futures contract on April 20 (the price of the underlying commodity; and (b) monitor penultimate day of trading and expiration of the con- the supply of the commodity and its adequacy to satis- tract). The Divisions wish to emphasize that the subject fy the delivery requirements and make a good-faith of this notice applies equally to trading in other com- effort to resolve conditions that threaten the adequacy modities, and registrants should remain vigilant and pre- of supplies or the delivery process. pare accordingly.1 In addition to considering risk con- 1 For the sake of clarity, this Advisory is issued as a prophylactic measure. This Advisory is designed to remind registrants and market participants trols and related issues, DCMs, FCMs, and DCOs are that continued assessment, preparation and planning is warranted in times encouraged to ensure their customers and members have of market volatility occasioned by COVID 19. This Advisory does not sug- appropriate information on the risks and technical ele- gest any element of compliance, or lack thereof, by any registrant. Similar- ly, this Advisory is not intended to suggest that any particular markets or ments of contracts and trading around upcoming expira- contracts will experience fundamental or technical issues going forward. 2 tions. 7 U.S.C. §7(d). 3 7 U.S.C. §7(d)(4). 4 17 CFR 38.252; see also 17 CFR 38, app. B. In light of these considerations, the Divisions remind DCMs, FCMs, and DCOs of their obligations to assess With respect to cash-settled contracts, Commission changing market conditions and take appropriate regulation 38.2535 requires the DCM, among other measures in response as contracts approach expiration. things, to demonstrate that it monitors the pricing of Given current market conditions, DCMs, FCMs and the index to which the contracts will be settled and DCOs are encouraged to regularly assess whether their also the continued appropriateness of the methodology risk controls and related mechanisms are reasonably de- for deriving the index. Commission regulation signed, fit for purpose, and appropriately implemented.

DEPA Report on Industry, Leadership, Legislation, and Energy Regulation May 2020 3

38.2556 requires that a DCM establish and maintain ruptive trading practices, whether the need for inter- risk control mechanisms to prevent and reduce the po- vention arises exclusively from the DCM’s market or tential risk of price distortions and market disruptions, as part of a coordinated, cross-market intervention.”15 including (but not limited to) market restrictions that 5 17 CFR 38.253. 6 17 CFR 38.255. 7 17 CFR 38.258. 8 As to Core Princi- pause or halt trading in market conditions prescribed by ple 4, Appendix B provides that risk controls must be adapted to the unique the DCM. Commission regulation 38.2587 refers characteristics of the markets to which they apply and must be designed to avoid disruptions without unduly interfering with that market’s price dis- DCMs to the guidance and acceptable practices in Ap- covery function. 9 7 U.S.C. §7(d)(4). 10 7 U.S.C. §7(d)(12). 11 17 CFR pendix B of Part 38 to demonstrate compliance with the 38.651. 12 7 U.S.C. §7(d)(5). requirements of Core Principle 4.8 III. Risk Management Program for FCMs Furthermore, Core Principle 59 During periods of extreme mar- requires each DCM to adopt for ket volatility, it is imperative each contract of the board of “We are issuing this advisory that FCMs engage in robust risk trade, as is necessary and appro- in the wake of unusually high management to manage effec- priate, position limitations or tively their activities of operat- position account-ability for volatility and negative pricing ing as FCMs and to pro-tect speculators in order to reduce experienced in the May 2020 customer funds. DSIO reminds the potential threat of market FCMs of their obligations to manipulation or congestion— physically-delivered WTI maintain effective risk manage- especially for outrights or contract, and related ment programs. Commission spread trades involving the de- reference contracts, regulation 1.1116 requires each livery month. Additionally, FCM carrying customer ac- Core Principle 1210 requires on April 20. “ counts to establish, maintain each DCM to establish and en- and enforce a system of risk force rules to, among other management policies and pro- things, promote fair and equita- cedures designed to monitor and manage the risks as- ble trading on the contract market. In particular, Com- sociated with the activities of the FCM. Regulation mission regulation 38.65111 requires, among other 1.11 further provides an FCM’s risk management pro- things, that a DCM have and enforce rules that are de- gram must take into account market, credit, foreign signed to protect the market and market participants currency, liquidity, legal, operational, settlement, seg- from abusive practices including fraudulent, noncom- regation, technology, capital, and any other applicable petitive or unfair actions, committed by any party. risks to the FCM. Moreover, DCMs are reminded of their obligations un- As part of its risk management responsibilities, an der Core Principle 612 to adopt and maintain rules to FCM must monitor its customer ac-counts to ensure provide for the exercise of emergency authority, as is that the FCM is collecting appropriate levels of initial necessary and appropriate, including the authority to margin to protect against a customer becoming under- liquidate or transfer open positions in any contract; to margined or defaulting on its positions. An FCM also suspend or curtail trading in any contract; and to re- must monitor the amount of residual interest that the quire market participants in any one contract to meet firm maintains in customer segregated accounts to en- special margin requirements. A DCM that adopts a rule sure that it holds sufficient funds in such accounts at all or rule amendment in response to an emergency must times to meet its total obligation to all customers. file such rule or amendment with the Commission prior to implementation or, if not practicable, at the earliest Each FCM that is a clearing member of a derivatives possible time after implementation, but in no event clearing organization (Clearing FCM) is required by more than twenty-four hours after implementation in Commission regulation 1.7317 to establish risk-based accordance with Commission regulation 40.6 (a)(6).13 limits in proprietary and customer accounts based on position size, order size, margin requirements, or simi- Appendix B’s guidance, referenced in Commission reg- lar factors. Regulation 1.73 further requires each Clear- ulation 38.35114 under Core Principle 6, provides that ing FCM to screen orders for compliance with the risk- a DCM, “[i]n consultation and cooperation with the based limits, and monitor for the adherence to the risk- Commission… should have the authority to intervene based limits on an intra-day and overnight basis. Each as necessary to maintain markets with fair and orderly Clearing FCM also is required to conduct stress tests trading and to prevent or address manipulation or dis- 4 Domestic Energy Producers Alliance under “extreme but plausible conditions” at least once familiarize customers with this part of the required risk each week on positions in its proprietary account and disclosure, especially the warning that customers may on positions in each customer account that could pose incur losses beyond amounts deposited with the FCM material risk to the FCM.18 Lastly, regulation 1.73 and that this may occur in the event of negative con- requires each Clearing FCM to evaluate its ability to tract prices. DSIO believes it may also be prudent to meet initial and variation margin obligations in cash at ensure that customers understand the mechanics of least once per week, and to evaluate its ability to liqui- contract settlement at negative prices. date the positions in its proprietary accounts and cus- 18 17 CFR 1.73(a)(4). tomer accounts in an orderly manner at least quarterly. V. Risk Management Program for DCOs Given the market volatility over the last several months, FCMs should assess the effectiveness of the Commission regulation 39.13 requires a DCO to have performance of their risk management programs, in- the ability to manage the risks as-sociated with dis- cluding the risk management requirements under regu- charging its responsibilities through the use of appro- lations 1.11 and 1.73, and make any revisions that are priate tools and procedures. In particular, Commission necessary to help ensure that risks are appropriately regulation 39.13(g)(2)(ii) requires that a DCO use addressed and customer funds are properly safeguard- models that generate initial margin requirements suffi- ed. cient to cover the DCO's potential future exposures to clearing members based on price movements in the 13 17 CFR 40.6(a)(6). 14 17 CFR 38.351. 15 17 CFR 38, app. B. 16 17 interval between the last collection of variation margin CFR 1.11. 17 17 CFR 1.73. and the time within which the DCO estimates that it In light of recent events, DSIO reminds FCMs to be would be able to liquidate a defaulting clearing mem- particularly diligent in monitoring and assessing risks. ber's positions. FCMs should prepare for the potential that certain contracts may experience significant price volatility and, possibly, negative pricing. An FCM with proprietary or customer positions in such a futures contract or options on such contract should carefully monitor the contract as it gets closer to the expiration date to ensure that the FCM and its customers can meet their respective financial obligations and ful- fill their obligations to make or take delivery on the futures contract. IV. Risk Disclosures by FCMs Commission regulation 1.55 generally requires FCMs to provide each customer with the risk disclosure specified in paragraph (b) of such regulation prior to opening a futures trading account for such customer. Paragraph (1) of such risk disclosure states: You may sustain a total loss of the funds that you deposit with your broker to establish or maintain a position in the commodity futures market, A DCO is required by regulation 39.13(g)(7)(i) to con- and you may incur losses beyond these amounts. If the duct back tests on a daily basis with respect to products market moves against your position, you may be called that are experiencing significant market volatility— upon by your broker to deposit a substantial amount of especially in con-tracts that call for the actual delivery additional margin funds, on short notice, in or-der to of the underlying physical commodity—to test the ade- maintain your position. If you do not provide the required funds within the time required by your broker, quacy of its initial margin requirements. In light of re- your position may be liquidated at a loss, and you will cent events, DCOs should pre-pare for the potential be liable for any resulting deficit in your account. that certain contracts may experience significant price volatility, and that negative pricing is a possibility. DSIO advises each FCM that it may be prudent to re-

DEPA Report on Industry, Leadership, Legislation, and Energy Regulation May 2020 5

Who Wrote The Advisory Letter? The Opening In this role, Joshua Sterling Statement is in charge of overseeing the of Chairman financial services firms that Tarbert before participate in our derivatives markets by applying DSIO’s the Energy and extensive resources in a Environmental smart, effective, and practi- Markets cal manner. He is responsible Advisory for the performance of Health Talbert DSIO’s examination, report- Committee CFTC Chairman ing, guidance, referral, and rulemaking programs, which Delivered May 7, 2020 Joshua B. Sterling serve the goal of ensuring Director Division of that those firms play by the Position limits are not a silver bullet, but they can reduce volatility caused by excessive levels of speculative trad- Swap Dealer and CFTC’s rules. Mr. Sterling is Intermediary Oversight ing. Position limits can also help prevent corners and also responsible for coordi- squeezes, as well as disruptions in delivery under futures nating the CFTC’s relation- contracts.

ship with the National At the same time, speculative position limits by their very Futures Association, with nature can limit market activity. Derivatives markets need which DSIO shares frontline speculative traders to provide liquidity for the producers and end-users using the markets to hedge. Without market mak- responsibility for regulating ers and other speculative traders, these markets will become registered firms, and for illiquid. The producers, intermediaries, refiners, and end- liaising with the Chicago users that rely on derivatives markets to hedge their com- Mercantile Exchange in its modity price risk will find hedging that risk to be more ex- pensive in illiquid markets. oversight of clearing firms. So the Commission needs to be mindful of the balance we must strike. First, our limits should be high enough to per- mit liquidity provision and a healthy level of speculative trading. But second, the limits should be low enough to In her role, Dorothy DeWitt prevent that speculative trading from disrupting delivery, is responsible for the over- effecting a corner or squeeze, or otherwise causing exces- Dorothy DeWitt sive volatility. Director Division of sight of derivatives platforms Market Oversight and swap data repositories, I applaud Commissioner Berkovitz in calling this meeting to and the CFTC’s market intel- discuss both the levels to be set and the scope of the bona fide hedge exemption. We at the Commission all under- ligence initiatives. stand the importance of getting the bona fide hedge exemption right so that this rule does not inadvertently harm the

ability of producers, intermediaries, and end-users to hedge their risks on physical commodity positions. Given the complexity of supply chains, this is especially pertinent to In his role, Clark Hutchison our energy markets. manages a team of roughly Recent Volatility in the Energy Futures Markets 80 employees at the CFTC’s Of course, we should also look at position limits through the Washington, DC and prism of recent price moves, particularly in energy mar- Chicago offices that are kets. In the May WTI physically delivered contract, we have just witnessed one of the fastest and sharpest changes responsible for the agency’s in supply and demand for any major commodity. supervision of derivatives clearinghouses and their The market saw two periods in particular—mid-March and members, including over- April 20—where prices for crude oil futures moved dramati- Clark Hutchison cally downward. In mid-March, that movement was across Director Division of sight of clearing processes the curve and included two days with downward moves of Clearing and Risk through risk assessment and over 20% in the front month. The movement in relative and surveillance.

6 Domestic Energy Producers Alliance Cont’d on Page 9

2020 on Pause

Still On Postponed Cancelled

June 4-7 August 12-13 • DEPA DC Fly In • Kansas Independent Oil California Independent NAPE Summer & Gas Association • Utah Petroleum Association Petroleum Association Midyear Meeting August 16-18 Award Gala Annual Meeting Kansas Independent Oil & • Michigan Petroleum • Indep. Petroleum Assoc of June 12 Gas Association Annual Conference & PTTC Southeastern Ohio Oil & Convention & Expo New Mexico 2020 Annual Meeting. Rescheduled event • Council of Petroleum Gas Association August 17-19 Spring Clay Shoot will be a FREE day-only Accountants Society The Energy Summit meeting for members in Au- National Spring June 15-17 (Denver) gust or September pending Meeting Montana Petroleum August 21 the reopening of businesses • Tennessee Oil & Gas Assoc. Annual Meeting in New Mexico Southeastern Ohio Oil & Association Annual Gas Association Fall Golf July 16 • PAOGA Ted Cranmer Convention Council of Petroleum Outing Memorial Golf Outing • Association of Energy Accountants Society August 31-Sept 2 rescheduled from June 1 Service Companies Summer Meeting Montana Petroleum Assoc. until October 8. Summer Meeting July 22-24 Fall Annual Meeting • The Alliance Open, • Kentucky Oil & Gas Independent Petroleum September 10 The Petroleum Alliance of Association 2020 Association of New Council of Petroleum Oklahoma until June 29 Annual Conference Mexico Annual Meeting Utah Petroleum Association • National Stripper Well July 27-30 Golf Tournament Association 14th Annual Petrol. Alliance of Ok. September 21-25 Energy Gala until Annual Meeting-with July Council of Petroleum August 28 29 Golf Tournament Accountants Society Fall • Texas Alliance of Energy August 2-4 Meeting Producers Expo & Annual Independent Oil and Gas September 24 2020 Meeting Association of Southeast Ohio Oil & Gas West Virginia Annual Association Annual Trade • 4 Corners Oil & Gas Summer Meeting Conference Show Let us know! • Williston Basin Petroleum Conference until Email csimonds We have an updated September 1-3 @depausa.org Linked-In profile. with your Connect with us! update so we Follow us on your favorite social media platform. stay connected. Share our posts to help us grow!

DEPA Report on Industry, Leadership, Legislation, and Energy Regulation May 2020 7

DEPA Recommendations for Emergency Measures Submitted to Secretary Bernhardt April 28, 2020 The COVID-19 pandemic coupled with the concurrent of production at the wellhead. and resultant global overstock of crude oil and crude oil products has placed a tremendous strain on American energy of IV. Metering Requirements Under New Onshore Order almost historic proportions. Energy companies across the No. 5 - 43 CFR Part 3175 USA are struggling to maintain the American energy renais- 43 CFR Part 3175 requires the operator to install, maintain sance that is crucial to our nation’s security. The Domestic and operate an additional gas meter in their sales stream. The Energy Producers Alliance (DEPA) has compiled the follow- addition of an extra meter coupled with the required increase ing list of strategic emergency measures that would provide a in inspections and calibrations will not necessarily result in degree of relief to the American producer during this period increased revenue for ONRR and may in fact error on the of economic difficulties. Some of these measures are current- side of the operator. The management of these meters has ly under review in the form of proposed rule heretofore been delegated through makings, so that our recommendation or re- private gas contracts. Under this quest is that they be expedited and imple- new scenario, the operator will pay mented. Most measures can be implemented royalties from one meter and re- under the current rules and statutes on an ceive revenue based on another. emergency. Where emergency measures are The rule will further require opera- required, DEPA is requesting relief only dur- tor to add additional personnel as a ing the duration of the emergency. gas metering team to their labor force during these already trying times. DEPA requests that the I. Royalty Bearing Flared Gas and Waste BLM modify this rule by removing Minimization: Pending Sundry Notices the metering requirement, thereby The BLM has a backlog of nearly 8,000 Sun- allowing the operators to continue dry Notices for flaring dating back to 2012 to operate under their existing gas and operators have been carrying these on contracts. their books as a liability during that period with minimal response from the BLM. DEPA requests that the BLM act on these aging Sundry Flaring Notices while V. 25 CFR § 211.44 - Suspension of operations & 43 CFR suspending any rules or policy requiring payment of royalties § 3103.4-4 - Suspension of operations and/or production on gas that was flared (from federal minerals) due to lack of In order to prevent waste in oil and gas production operations adequate pipeline capacity or processing infrastructure. involving Federal minerals, DEPA requests that the BLM grant the industry the ability to suspend production and per- petuate and preserve leases under an emergency where af- II. “Waste Prevention, Production Subject to Royalties, fected under the provisions of both of the above referenced and Resource Conservation; Rescission or Revision of rules. DEPA further requests that the BLM adopt an interim Certain Requirements” 43 CFR Part 3179 policy allowing abbreviated reporting and documentation of This proposed rule supersedes the Flaring Sundries submitted any suspension of operations requests so that operators may under NTL4. DEPA requests that the BLM expedite this rule forego the current costly and time-consuming application and so that the industry may have regulatory certainty going for- review requirement of 25 CFR § 211.44. ward in the treatment of venting and /or flared gas with the assurance that our members can plan and operate accordingly. VI. Stipulations for Preforming Work in Habitat.

Wildlife habitat stipulations for blackout periods have been III. Three stream reporting: ONRR 2016 valuation rule adopted as part of the mitigation and habitat conservation implementation process and timeline - 30 CFR Part 1290, measures for species of concern listed under authority of the Subpart B – Marketing Condition Rule Endangered Species Act. These stipulations are based on best This rule has caused operators to add extensive research and available science and may extend for periods of several reporting duties to their already stressed standard business months, during which oil and gas development work may not operations. DEPA requests that the DOI-ONRR suspend this be performed. DEPA request that the DOI-USFW work rule and relieve operators of this added burden during the through their local offices with operators in areas where ex- current economic crisis. “The “marketable condition rule” is tensive blackout periods have been imposed to allow for pro- labor intensive and requires considerable coordination among jects involving infrastructure development, drilling opera- personnel. DEPA suggests that the federal regulations per- tions and facility construction to move forward during these taining to the “marketable condition rule” or otherwise re- blackout periods. After the wells have been drilled and com- quiring royalty valuation of oil or gas based on downstream pleted, the operator would honor the blackout stipulations markets beyond the wellhead be temporarily suspended. DE- and work around them during normal production operations. PA further requests that, Federal royalty payors be permitted This measure will allow projects to be completed and reve- to calculate and pay royalties on the basis of the market value

8 Domestic Energy Producers Alliance

Chairman Tarbert’s Comments nues generated sooner with mini- Cont’d from page 6 mal impact to the habitat. absolute dollar terms was even sharper on April 20. On that day, the sharpest movement—and the only move into negative VII. Mechanical Integrity Testing pricing—occurred in the front month contract. April 20 also (MIT) on Shut in wells happened to be the penultimate day of trading before the fu- Shut in or otherwise idle wells are required to conduct me- tures contract was settled, and after options had settled. chanical integrity testing to assure the integrity of the well bore according to 43 CFR § 3162.4-2 - Samples, tests, and Position Limit Proposal’s Focus on Spot Month surveys. Such testing may require the involvement of per- Trading in Energies sonnel and services from outside the work area or even The most extreme volatility that we saw in energies across state lines and create more opportunities for human occurred during the spot month, which is where the current contact. DEPA requests that this requirement be temporarily proposal is also focused. Spot month trading for physically suspended. delivered futures has always posed unique challenges. If a party is unable to make or take physical deliver and gets stuck holding a position during the delivery period, it can cause dis- VIII. Plug or Produce Notices ruption to the market. Short sellers could get squeezed, driving Regulations at 43 CFR 3162.3-4(a) state that, "The operator up the price of the cash market. Or, as may have been the case shall promptly plug and abandon, in accordance with a plan with WTI, long holders could face difficulty in finding storage first approved in writing or prescribed by the Authorized for delivered goods. This could put downward pressure on the Officer, each newly completed or recompleted well in which cash markets. These issues had not occurred in non-spot oil or gas is not encountered in paying quantities or which, month contracts or in purely financially-settled contracts. For after being completed as a producing well, is demonstrated instance, the cash-settled May WTI contracts did not experi- to the satisfaction of the Authorized Officer to be no longer ence negative prices on April 20 or 21, 2020. capable of producing oil or gas in paying quantities..." DE- PA requests that this requirement be temporarily suspended. Our proposal would put federal position limits in energy, met- als, and non-legacy agricultural products only for the spot months. The proposal did not include federal non-spot month IX. 3 CFR § 3103.2-2 - Annual rental payments limits for these products. The proposal asked for public com- DEPA requests that the BLM suspend of the requirement for ment on that decision and I look forward to today’s first panel rental payments on federal leases where minimum royalty is and to comment letters on that topic. not being paid. Scope of Bona Fide Hedge Exemption Of course, we need to focus on the bona fide hedging exemption. The proposal enumerates a number of trading strategies as bona fide hedges. As the proposal makes clear, this list is non-exhaustive. The proposal includes what I think is a practical and workable solution for non-enumerated hedges to be recognized.

However, it will be more straightforward for hedgers to access the markets through an enumerated bona fide hedge, which means the scope of those enumerated hedges is still important. The current proposal includes a number of enumerated hedges that the energy industry had asked for in prior proposal, including in particular anticipatory merchandising.

I think all of us at the Commission are still interested in understanding if there are additional hedging strategies that should be enumerated. The energy industry, where we are proposing federal position limits where none currently exist, has very unique hedging needs. We have to make sure our markets still work for people hedging price risks in the cash markets. So we need to make sure our definition of bona fide hedging covers all legitimate hedging strategies. So I am looking forward to today’s second panel—and to comment letters—on the scope of the bona fide hedging exemption.

These comments can be found at www.cftc.gov/PressRoom/SpeechesTestimony/

DEPA Report on Industry, Leadership, Legislation, and Energy Regulation May 2020 9

Staying Productive, Positive, Connected, and Looking Toward the Future Protecting Against Negative Pricing in Crude Oil Contracts

While the world is social distancing, DEPA joined crude oil contracts to protect against a negative pric- the virtual meeting army and began hosting private ing situation, like what occurred April 20. invitation video conference meetings with Chairman DEPA believes producers should insist on two Harold Hamm and various oil and gas leaders. This main concepts within the pricing provisions of their temporary new normal in business has allowed us a crude oil contracts: (1) the calendar month average unique opportunity to make (CMA) should be based on new friends and collaborate the daily volume-weighted with companies about the average prices throughout current state of oil and gas so C RISIS the trading day (as op- we can continue our work on posed to only the daily behalf of the American do- settlement price), exclud- mestic energy producers. ing any negative trades; It is important during any and (2) under no circum- crisis that communication is stances should the pur- strong and talent is pooled to chase price to be paid for find the best path forward. any crude oil delivered be We are very appreciative of 危机 less than zero dollars. our partners in this communi- ANGER PPORTUNITY The following sample cations effort, Bill Stevens, D O pricing provisions address Stephanie Canales, Vignesh "When written in Chinese, the word these two main concepts: Veer, Fred Toney, Rock crisis is composed of two characters, Zierman, Blu Halsey, Harold Hamm, and John Schmitz one represents danger, and the other represents opportunity." Daily Volume-Weighted who stepped up to help us Average Pricing – make the most of our meet- John F. Kennedy Excluding Negative ings. Trades

In our eleven years DEPA has successfully tackled The price per net U.S. barrel shall be calculated as some huge tasks on behalf of the oil and gas industry the sum of the following items: to aid the push toward American Energy Independ- ence. Recently our mission has been working to re- (a) The calendar month average (CMA) of the dai- claim the energy security and prosperity developed ly volume-weighted average prices for the prior to Covid-19. Behind the scenes the past few [______] prompt month future contracts months DEPA has been especially active communi- reported by the New York Mercantile Ex- cating with the Department of the Interior, the EPA, change (NYMEX) from the first day of the the Bureau of Land Management, Collaborating As- calendar month of delivery through and includ- sociations, the Commodity Futures Trading Commis- ing the last day of the calendar month of deliv- sion and even the White House. ery (excluding weekends and holidays), plus Part of our tasks these past few weeks has been (b) [Trade differential], plus learning from this crisis to protect the future for our members. Understanding that crisis is often “danger” (c) [Premium/Offset, if any]. and “opportunity” merged, we want to offer sample (d) Notwithstanding anything to the contrary in this pricing provisions that producers can include in their contract, in the event one or more trades to be fac-

10 Domestic Energy Producers Alliance tored into a daily volume-weighted average price ative price there will effectively be a “price floor” of under paragraph (a) above is negative, then such zero dollars, meaning the buyer will pay nothing for the trade(s) will be removed from the daily volume- product and the seller will not be required to pay the weighted average price calculation for the applicable buyer to receive the product. day. Should this result in the removal of all trades to DEPA recognizes these pricing concepts differ from be factored into the daily volume-weighted average the current industry standard and that crude oil purchas- price for the applicable day, then such day will be ers evaluate their purchases based on a variety of differ- removed from the CMA. ent risk factors. However, most industry participants will agree what took place on April 20, 2020 is clear evi- Purchase Price Not Less than Zero dence of a flawed pricing structure in domestic crude oil The parties recognize that volatility exists in the markets and a change is necessary to restore confidence crude oil market but in no situation should crude be in these vital markets. It is imperative producers take the sold for a negative price as set forth in paragraphs lead in implementing these changes and DEPA is com- (a) through (c) above. In the event the price per net mitted to assisting its coalition members in these efforts U.S. barrel from such calculation results in a value and continuing the current renaissance in American oil less than zero dollars, the buyer will still be required production. to receive the full contracted volume of the product, To get this pricing provisions language in a word but in no event will the seller be liable to pay the document that you can use more easily contact our buyer for receiving the product. In all cases of a neg- office by email [email protected].

Our Work Is Critical. WWW. Your Support is Vital. DEPA Share this newsletter. USA. Sponsor a DEPA event.  Follow us on social media. ORG Get involved. Regulatory Committee Calendar 2020

⚫ June 18 ⚫ September 17 ⚫ December 17

Regulatory Committee Co-Chairman, Roger Kelley, Continental Resources) and Rusty Shaw, Denbury Resources Meetings are held by teleconference and are open to anyone who would like to attend. Please email [email protected] to be included in call in information. Dates are subject to change.

DEPA Report on Industry, Leadership, Legislation, and Energy Regulation May 2020 11

The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails. -John Maxwell Two State Organizations Have New Leadership

Cye Wagner Brooke Simmons Joins Elected New The Petroleum Alliance of Oklahoma Board Chair Written by David Le Norman, Chairman of the Petroleum Alliance of Oklahoma for the Texas Alliance of After an exhaustive search for a new organization Presi- Energy dent Brook Simmons is selected and began in his position Producers May 1. Brook is a native Oklahoman with deep roots in our indus- Written by try. He’s spent his career at the nexus of Oklahoma’s govern- Bill Stevens, ment and her largest industry, ensuring that those who pro- Chief Lobbyist, duce the energy that powers our state and our nation are treat- Texas Alliance of ed fairly by our elected officials and other policymakers. No Energy Producers other individual has the unique background and skill set that Brook brings to the table. In fact, he is alone in the depth of The Alliance is excited to have a new generation involvement he had in the two organizations that merged to of leadership as Cye Wagner moved into the form the Petroleum Alliance. Not only did Brook serve on the Chairmanship. Her bio speaks for itself. In her Executive Committee of the Oklahoma Oil & Gas Associa- two years as Vice-chair, Cye has worked on policy tion, he was also an active member of the Oklahoma Inde- at the State and Federal levels, including trips to pendent Petroleum Association, and even served on the steer- national conferences, direct contact with leaders in ing committee that oversaw the merger of these two historic EPA and DOE, the Texas congressional delegation organizations. and attendance at DEPA fly-ins. She has worked Brook is passionate about directly with Texas state leaders on policy and pol- the vital work being done eve- itics. She is a complete package of education and ry day by the hardworking men experience with industry knowledge of both large and women of Oklahoma oil public companies and small traditional independ- and natural gas, and he will be ents. an unapologetic, thoughtful, Cye Wagner enjoyed over 10 years with Cooper and articulate advocate for our Oil & Gas, Inc. She graduated from Texas A&M industry. Despite the very real University with a Bachelor of Science degree in challenges we face, I’m confi- Petroleum Engineering and a minor in Business. dent that under his leadership, After completing internships with Burlington Re- Oklahoma will emerge as the sources, Chevron and EOG Resources, she chose real hero of this story – a story to work for EOG in the Fort Worth Division upon of tribulation and heartache, but also one of hope. graduation. Cye enjoyed her tenure there in com- So we welcome Brook back to Oklahoma at a time when pletions and production engineering until making our industry and indeed our entire state must unite and work the move to the family business. At COGI, Cye as one to recover. These are without doubt uncertain times, serves in an executive management role over the but rest assured that united under the Petroleum Alliance ban- exploration, accounting, human resource, and reg- ner and with Brook Simmons at the helm, the resilient people ulatory departments. of the oil field will continue to provide the fuel and raw materials Americans are relying on to rebuild our economy. 12 Domestic Energy Producers Alliance

Dear Shalennials, You have been on my mind lately. Like everyone else in this field, you have been waiting for your pink slip. I certainly hope it doesn’t come. I believe everything we do matters. It is up to us to move the needle and make sure we do not lose a generation of workers and students involved throughout this powerful industry. Right now, the industry is faced with the unique challenges that came with the world-wide pandemic of COVID-19, the illegal dumping of crude oil by Saudi Arabia and Russia, and the historic decline in market prices. The next few months will be difficult as companies evaluate storage situations and demand fluctuates. Although the U.S. oil and gas industry will not be restored overnight, it will survive these challenges. Since January when COVID-19 hit the U.S. the collaboration of companies and individuals taking on this pandemic has given us many reasons to be proud to be an American. Companies nationally have donated protective equipment to healthcare professionals and millions of dollars in support of disaster relief efforts. Alongside COVID-19, Russia and Saudi Arabia unleashed an unprecedented broadside to global markets by opening the taps on their storage tanks, threatening American security and jobs. Shortly after, many U.S. Senators, with the Domestic Energy Producers Alliance’s (DEPA) support, encouraged the U.S. Department of Commerce and the U.S. International Trade Commission to pursue a Section 232 investigation into the deliberate and illegal acts of antidumping (AD) and countervailing duty (CVD) on these foreign nations. A few weeks later, the Organi- zation of the Petroleum Exporting Countries (OPEC) and Russia committed to cut production. Turning the U.S. from a net importer to a net exporter of oil to years. There will be another boom on the other side of this, and you will be a part of it. April 20th, for the first time in history crude oil prices settled below zero. With the rest of America paused in disbelief, Representative Alexandria Ocasio-Cortez (AOC) (D-NY) expressed her feelings on the market via Twit- ter, “You absolutely love to see it…” she said. She went on, “This along with record low interest rates means it’s the right time for a worker led, mass investment in green infrastructure to save our planet.” AOC, now is not a time to push a progressive agenda that is dangerous and unfeasible for our country. Representative Kelley Arm- strong (R-N.D.) said it best, “Openly celebrating the economic destruction of families and communities because it fits a political narrative is unacceptable and unbecoming of a member of Congress.” Now is a time to come together as a country effected by this industry every day. Engineering Students, oil and gas interns, and my fellow industry workers, we are the people especially affected by the ramifications of COVID-19, oil dumping, and volatile markets. We must all rise together and stay sup- portive of this industry in conservation of national security interests. No matter what you have touched, you have touched the American oil and gas industry. I encourage the students who are set on a course to go into the oil and gas field to continue on your path. Workers, don’t flee our industry. Oil and gas is cyclical. You have learned about the ebb and flow of the industry from mentors to Wildcatters. American oil will boom again. If we have a little faith and give everyone time, I am confident we will see a positive come back in the way this great and resilient industry has historically proven.

DEPA’s Staff Millennial

DEPA Report on Industry, Leadership, Legislation, and Energy Regulation May 2020 13

Will Video Kill the Radio Star, Again? Video conferencing has grown from 10 million daily meeting participants in December to more than 200 million in March. It isn’t a surprise to find out that video conference soft- the U.K.; 22 times more in France; and a huge 55 times ware downloads are at an all-time high. Chances are you more in Italy. In an important note on the statistics, the have participated in more video interactions in the last higher numbers are in areas that began lockdowns earlier, month than you ever have before, perhaps in your whole making it clear our spring shut-in drove the data. During career. From regular business meetings and distance the same period, Hangouts Meet saw 30 times the weekly learning to doctor’s appointments, music concerts, and level of downloads compared to the last quarter of 2019 in even social hangouts, right now, we see each other mostly the U.S. while Teams saw an 11-fold increase.” on video. That will change as our states open up in the Video conferencing is easy to maneuver, easy on the coming weeks, and we all head back to our office build- schedule, and free to use in many instances. “We believe ings, but will it change back completely? Even the most the more personal interaction that the video/webinar for- tech resistant executives have mat provides is more appeal- spent 60 days getting familiar ing to our membership,” said 89% of users say video conferencing helps Bargas when asked why The with the various video plat- them feel connected forms. Before the start of a Petroleum Alliance chose to DEPA webchat, a committee 87% of employees not physically present for go with a video platform over member commented that he a meeting report feeling better a traditional conference call had taken “the full tour of engaged with colleagues through video for their Morning Fuel video conference software” events. using three different plat- 82% of video users are less likely to multitask Will video conferences forms just that week. Will (as compared to just audio) take the place of conference our brief stint in quarantine phone calls and even in- change the oil and gas indus- Adding video to meetings improves person meetings? The Petro- try’s love of in-person meet- productivity by up to 50% leum Alliance of Oklahoma ings? Will it kill the confer- plans to continue their Morn- ence call? Data from LifeSized.com ing Fuel video chats, hosted “Our weekly Morning by their Board Chairman Da- Fuel webinars were con- vid Le Norman. “Because the ceived in response to the response has been so posi- COVID-19 pandemic in an effort to bring our members tive, we hope to continue providing this service to our timely and relevant information at a time when we are members for as long as they find it valuable,” said Bargas. unable to interact with them in person. With an overload “I don’t see the majority of large in-person meetings, of information being disseminated via email and social conferences, moving to an online video platform. The media, we felt like this was a valuable alternative to keep networking aspect is too important,” said DEPA Executive our members informed during these unprecedented Director Jerry Simmons. “Our work, in particular, repre- times,” said Jon Bargas The Petroleum Alliance of Okla- senting companies and associations has to be done face to homa Senior Vice President of Public & Gov. Affairs. face, to really be effective,” added Simmons. According to a report by App Annie, video software However, meetings intended to hammer out committee downloads were up 45% from the week before, and up details and next steps are more likely to go video than be a 90% from the pre-Covid-19 weekly download average. call like they were in the past. This temporary new busi- Business application downloads represent the highest ness world has forced us to experience video meetings out growth in any category in both the iOS and Google Play of necessity and in the process has broken down some per- stores. sonal reluctance to use a video platform. “The ability to Computer World reported, “Microsoft Teams and see everyone does offer the feeling those participating are Google Hangouts Meet both jumped in the rankings, with more like a team. I think our video meetings in April were Zoom Cloud Meetings the undisputed winner; it saw large very beneficial to our productivity, and getting to know numbers of downloads in the U.S., U.K., and across Eu- our committee members better. I hope it does continue,” rope.” According to App Annie, “during the week of said DEPA Director of Marketing and communications, March 14-21 Zoom was downloaded 14 times more than Cynthia Simonds. its 2019 Q4 weekly average in the U.S.; 20 times more in

14 Domestic Energy Producers Alliance

A Webinar with Harold Hamm June 10 ⚫ July 15 ⚫ August 12

This summer webinar series Commission advisory and will be an opportunity to par- possible investigation, to the ticipate in a high level status of the current supply and discussion on the current demand markets, to various state of oil and gas. political happenings, we will DEPA Chairman Harold be working to offer what you Hamm will be hosting these need to know as an oil and gas special events for our executive. members and their guests. Join us for one, or each of These free events will the webinars we have planned. offer insight into the issues All of the webinars will begin of the day while the oil and at 11:00 am Central Time. We gas industry is in such a will be using the WebEx video unique climate. There are platform and attendees will not several interesting and im- be seen. We encourage our portant threads to be follow- attendees to submit questions ing right now. From the in advance during registration. Commodity Futures Trading Registration is required and will be limited. Register to participate in our webinars at www.depausa.org/events.

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Network Collaborate Grow

REQUEST A RATE CARD! [email protected]

DEPA Report on Industry, Leadership, Legislation, and Energy Regulation May 2020 15

EARTH DAY 2020 5 YEARS Of Overlooking Fossil Fuels

Earth Day 2020 celebrates fifty years of taking time The oil and gas community is full of people who to consciously recognize the wonder, beauty, and boun- appreciate, respect and celebrate our planet’s natural ty of our planet. For each of those fifty years Earth wonders. In our ranks are hikers, cyclists, hunters, gar- Day has overlooked one of the most amazing natural deners, animal lovers and recycling enthusiasts. With- wonders- the oil and gas that is given to us from the out a poll, I’m confident that one hundred percent of earth. Fossil fuels are as natural as mountains, streams, the oil and gas community enjoys breathing, drinking trees and rainbows. Why are these resources vil- clean water, and partaking in healthy crops as much as lainized? Especially during Earth Day. These unsung any other person. Fossil fuels, and the people who heroes of the current pandemic are providing lifesav- develop them are not an enemy of the earth, despite the ing, everything. The list is enormous. It starts with the drum beat of Greta and her Gen Z followers. electricity that runs every ventilator and mask making sewing machine; it includes the plastic that creates eve- This Earth Day 2020, while we distance celebrate ry face shield and latex glove. The list includes the fuel the bounty of Mother Earth’s resources, let’s include that propels every simi-truck down the empty highways the industry that has offered the life connection to keep to bring toilet paper and hand sanitizer to grocery stores our world functional during this pandemic. Let’s put shelves. It doesn’t stop at your front door. It produces down the drums and offer a tip of the hat to the indus- the TV, computer and cell phone components keeping try literally saving lives everyday by the ingenuity and you hopefully informed, entertained, close to your “petropreneurship” of its people, and a nod to the natu- loved ones. For many of the lucky, this same technolo- ral resource that gets scowled at most all the while be- gy is keeping them employed during this quarantine. It ing an essential part of modern life. fills homes with synthetic materials to wear, sit on and sleep in. It has made this quarantined Earth Day beara- If Earth Day is about “Fighting for a better tomor- ble. Fossil fuels would never brag, but they offer more row”, then let’s also remember who provided a better versatility to create modern comforts than probably any today so you can fight for tomorrow. other natural resource. (No disrespect water, wood, air and plants.) 16 Domestic Energy Producers Alliance

M EMBER S POTLIGHT Ed Cross

Edward Cross serves as President of the Kansas Independent Oil & Gas Association (KIOGA) where he is responsible for public policy advocacy and interaction with external stakeholders including elected officials, regulators, government decision-makers, and community thought leaders. At KIOGA, Cross is director of staff, editorof the Association’s publications, serves as an industry spokesperson to media outlets and other forums, and is an industry advocate as a registered legislative agent. On behalf of KIOGA members, Cross lobbies in both Topeka and Washington, D.C. Cross serves as an executive board member to the Domestic Energy Producers Alliance and a board member of the Council for a Se- cure America. He is an active member of the Inde- pendent Petroleum Associa- tion of America (IPAA) and serves as an advisory board member to the Tertiary Oil Recovery Program (TORP) and the Chemical & Petrole- um Engineering Department at the University of Kan- sas. In 2005, Cross was elect- Proud supporter of DEPA. ed to serve as Secretary/Treasurer of the Liaison Committee of Cooperating Oil and Gas Associations (Liaison Commit- Thank you for what you do for our country. tee), a network of state and regional trade associations that represent the independent oil and natural gas exploration and production industry in the United States. Cross is responsible for coordinating the organization’s efforts. Cross is a Kansas appointee to the Interstate Oil & Gas Compact Commission (IOGCC). The IOGCC is a national organization representing the Governors of 37 oil and natural gas producing states. At IOGCC, Cross served from Let us help you diversify. 2005-2007 as Chair of the Public Outreach Committee, one of the eight standing committees of the Compact. In January 2013, Cross was selected by the Kansas City business magazine, Ingram’s, as one of “50 Kansans You Should Know”. Cross has published 8 peer-reviewed pa- pers on economic, environmental, and energy education WWW.OMEGACAPITAL.COM issues facing the independent oil and gas industry. He is a licensed professional geologist and certified school business 918-293-3925 official holding a B.S. in Geology and an M.B.A. from Southern Illinois University.

DEPA Report on Industry, Leadership, Legislation, and Energy Regulation May 2020 17

DEPA Comments On Proposed WOTUS Rules Jointly, the Western Energy Alliance, American Ex- ploration & Production Council (AXPC), Domestic Energy Producers Alliance (DEPA) and the Independent Petroleum Association of America (IPAA) provided comments on the Environmental Protection Agency (EPA) and the Department of Army’s proposed revisions to the definition of Waters of the U.S. (WOTUS) April 15. Stating in the letter, “We think the agencies are headed in the right direction, and the revised definition of WOTUS (proposed rule) will provide greater clarity, predictability, certainty, and consistency for federal agencies, states, tribes, the regulated community, landowners, rule that its interpretation of the scope of WOTUS was based and the general public.” on the information and conclusions detailed in Specific recommendations were also provided in the let- the Connectivity of Streams and Wetlands to Downstream ter to further clarify the revised rule to make it more practical Waters: A Review and Synthesis of the Scientific Evi- and implementable. Additionally, the four organizations re- dence (Connectivity Report) even though the Connectivity quested the agencies move Report clearly states, “…it quickly to finalize the proposed “We support the direction the agencies neither considers nor sets rule which clearly provides a forth legal standards for “bright line” of jurisdiction that are headed concerning the concepts CWA jurisdiction, nor does it follows the Clean Water Act provided for in the proposed rule. establish EPA policy.” 1 It is (CWA) and case law as over the opinion of the Western 40 percent of the states are The improved jurisdictional clarity not Energy Alliance, AXPC, DE- currently required to follow the PA, and IPAA the agencies overreaching 2015 Clean Wa- only benefits regulated entities, it misused the Connectivity ter Rule (2015 WOTUS rule). improves protection of water resources Report to supersede the CWA Our industry has great in- and affiliated case law. terest and supports the pro- and regulators’ ability to ensure The letter to Administra- posed rule to narrow and clari- programs are effectively implemented.” tor Wheeler offered, the 2015 fy WOTUS. It can impact our WOTUS rule contained inter- industry regarding several sec- pretation“ of “significant tions of the CWA, including nexus” to navigable waters, “adjacent waters” and tributaries Section 404 permitting, Spill Prevention, Control, and Coun- that are clearly at odds with the Supreme Court’s rulings termeasure (SPCC) planning, stormwater permitting, and oil in Rapanos v. the United States and SWANCC v. U.S. spill reporting. The definition of WOTUS also impacts the EPA. These decisions show the implementation of the 1986 surface owners we work with to develop oil and natural gas, rule expanded beyond its original intent even before the including family farmers and ranchers. promulgation of the 2015 WOTUS rule. In practice, Army’s The four associations wrote that they agree with the use of preliminary jurisdictional determinations has ignored agencies' thorough explanation of the deficiencies of the 2015 the narrowing demanded by the decisions WOTUS rule. As finalized, the 2015 WOTUS rule failed to in Rapanos and SWANCC. As others have noted, “It is diffi- follow the CWA and related case law, was overreaching in its cult to imagine that Justice Scalia could have envisioned that scope, failed to follow the Administrative Procedures Act six years after the Rapanos decision the Corps would have (APA), and was fraught with technical shortcomings. Even developed an administrative process that not only complete- the U.S. Court of Appeals for the Sixth Circuit, the District of ly negated both the Scalia and Kennedy Opinions but actual- North Dakota, and the Southern District of Georgia found it ly resulted in Step Two - Proposed Revised Definition of likely to be overturned on its merits. WOTUS expanding its jurisdiction.” 2 The agencies have The 2015 WOTUS rule is an unreasonably broad inter- been disregarding the law and court rulings for some time, pretation by the agencies of their regulatory authority. The and the 2015 WOTUS rule went beyond the legal and statu- agencies clearly stated in the preamble to the 2015 WOTUS tory foundation.

1Connectivity of Streams & Wetlands to Downstream Waters, EPA, Jan. 2015 2 Gale, Barry, “Six Years After RAPANOS – What’s Changed? (Answer: Not Much)”, Federal Regulation of Cultural Resources, Wildlife, and Waters of the U.S., Paper No. 13, Pg. 16-17 (Rocky Mt. Min. L. Fdn. 2012) 3 EPA Docket # EPA- HQ-OW-2017-0203-15104, Regulations.gov, 2018 4 Restoring the Rule of Law…by Reviewing the WOTUS Rule, 82 FR 12497, February 2017

18 Domestic Energy Producers Alliance

In addition to the substance of the 2015 WOTUS rule it- II. Suggestions for Improvement self, the rulemaking process followed by the agencies was While the proposed revisions to the definition of WOTUS are procedurally deficient. The agencies failed to provide an op- a huge step toward creating clear and discernable criteria for portunity for public comment on distance limitations for ter- determining federal jurisdiction, there are still some opportu- minology like “adjacent waters” and “significant nexus.” By nities to improve clarity of the proposed rule. Specifically, we circumventing the public process, the agencies promulgated a recommend the agencies: final rule that significantly overstepped their authority and • Use the USGS Topographic Maps as a more practical ap- violated the APA requirements for proper notice and comment proach and a primary reference tool to determine the maxi- rulemaking. This deficiency alone is a valid reason to repeal mum extent of federal jurisdiction. Such an approach will pro- and/or replace the 2015 WOTUS rule. vide the regulated community, landowners, and general public The letter urged the quick adoption of the proposed recodi- with a clearer and more certain understanding of potential fication of the preexisting WOTUS rule since it would end the WOTUS jurisdictional extent unless site specific situations untenable situation of having different definitions of WOTUS suggest otherwise. in effect in different states across the nation. The letter stated the groups support the direction the agen- • Maintain the need for direct hydrologic surface connections, cies are headed concerning the concepts provided for in the while excluding groundwater connections from consideration, proposed rule. The improved jurisdictional clarity not only when determining adjacency between wetlands and jurisdic- benefits regulated entities, it improves protection of water re- tional waters. sources regulators ability to ensure programs are effectively • Remove bed, bank, and ordinary high-water mark (OHWM) implemented. Indeed, CWA’s water quality objectives are best from the criteria used to determine jurisdictional tributaries. met through clear jurisdictional boundaries that can be admin- • Include all three wetland criteria (hydrology, hydrophytic istered in a way that promotes accountability and preserves vegetation, hydric soil) in the regulatory text. These are clear resources for actual environmental protection. These important indicators of consistent, non-episodic, water. water quality objectives are certainly not met by ignoring CWA’s mandated approach to cooperative federalism. They III. Specific Comments on Categories of Water support the agency's narrowing of WOTUS to account for the Traditional Navigable Waters (TNW’s) role of states and tribes in the management and protection of While this category has not seen much change in this re- water. definition, we appreciate the focus on ensuring that TNW’s In general, they stated they support the comments filed by are actually involved in interstate commerce. The preamble the Waters Advocacy Coalition concerning this matter; how- clearly states that a water qualifies as a TNW based on its nav- ever, the letter did offer substantive comments on a limited igability, which in turn is directly tied to its transport ability in amount of issues within the proposed rule for the Administra- interstate commerce. The preamble roots TNWs in the concept tor’s consideration. Those comments were as follows. of navigability and we would recommend that the agencies I. General Areas of Support clarify that recreational use alone would not be enough to es- We strongly support the changes to the proposed rule and tablish jurisdiction. appreciate the agencies working toward a definition of Making the distinction that real commerce takes place on WOTUS that improves jurisdictional certainty and clarity. The permanent waters is needed to constitutionally authorize feder- proposal follows the legal underpinnings of the CWA and al regulation of the water. Such a stance avoids many of the implements the overall objective of the CWA to restore and issues associated with the SWANCC decision. Using migratory maintain the integrity of the nation’s waters while providing a birds or aquatic birds (per the 2015 WOTUS rule) as the nexus clear definition of WOTUS. The proposed rule: to bring more waters under federal jurisdiction was an overreach that caused much of the legal troubles that precipitated • Strikes a balance between state and federal jurisdiction of this redefinition. Establishing an appropriate, consistent with waters, acknowledging the important role of the states in man- Congressional intent, definition for this category is of tremen- aging and protecting their land and water resources dous importance as the other categories of water in the pro- • Is consistent with Executive Order 137784 posed rule are jurisdictional due to their physical connection to TNW’s. • Is easier to implement for the regulated community, landowners, and the agencies with the removal of ephemeral fea- Tributaries to TNWs tures along with the other exemptions We strongly support the proposed changes to the tributary • Clarifies which waters are and are not WOTUS by relying category which would eliminate the most confusing and legal- upon direct hydrologic surface connections ly problematic sections of the overreaching 2015 WOTUS rule. • Removes subjective interpretations by eliminating vague concepts such as significant nexus and ecological considera- Ephemeral Features tions as criteria used in case-by-case analyses of jurisdiction. The exclusion of all ephemeral features (e.g. surface flow only in direct response to a precipitation event) is a particularly

DEPA Report on Industry, Leadership, Legislation, and Energy Regulation May 2020 19

welcome change that requires a complete removal of past guid- time period for making such determinations. ance coming from the SWANCC and Rapanos decisions. Includ- Lake/Pond ing ephemeral features would have been especially acute in the We recommend keeping lakes and ponds as a separate catego- West, where arid conditions and seasonally fluctuating rainfall ry. Keeping these features as their own category once again pro- are commonplace. Many ephemeral water features would have vides the clarity that they are only WOTUS if they are directly been subject to the 2015 WOTUS rule despite being dry for connected via intermittent or perennial surface hydrology to much of the year or even for many years. other WOTUS. Bed, Bank, and Ordinary High-Water Mark Impoundments The removal of beds, banks, and ordinary high-water marks as We support maintaining a separate category for impound- defining features of a tributary is key in making the revised defi- ments or combining it with lakes and ponds. What is important is nition of WOTUS clearer and more consistent as well as provid- that only those impoundments that are directly connected via ing predictability in the implementation. intermittent or perennial surface hydrology to other WOTUS Typical, Certain Times of a Typical Year, and Rolling Thirty- would be considered WOTUS as well. year Period Adjacent Wetlands The agencies propose to use “typical” and “certain times of a We support the concept of adjacent wetlands needing a direct typical year” in the definition of perennial and intermittent. The hydrologic surface connection that abuts or is physically adjacent agencies also propose to define “typical year” to mean within the via intermittent or perennial surface hydrology to other WOTUS. normal range of precipitation over a rolling thirty-year period for The removal of ecological considerations or groundwater con- a particular geographic area. Under this proposed definition, a nection as defining criteria is a positive decision which greatly typical year would generally not include times of drought or clarifies the definition of WOTUS for the regulated community extreme flooding. The use of these terms and the determination and is a more practical and implementable approach. We also of a rolling thirty-year average is too complicated for the regulat- recommend the agencies include the wetland criteria of hydrolo- ed community and is unnecessary. As described in the Suggested gy, hydrophytic vegetation, and hydric soil in the regulatory text. Improvements above and in the Geospatial Datasets for WOTUS For enhanced clarity, we recommend that the agencies clarify the below, we recommend the use of the USGS Topographic Maps phrase, “direct hydrologic surface connection,” by further deline- as a more practical and implementable approach to determine ating the concept of inundation. and document the maximum extent of jurisdiction, with field work to conclude the presence (or absence) of a WOTUS tribu- Interstate Waters tary.5 However, if the agencies ultimately decide not to use these We support the removal of Interstate waters as a separate cat- maps as a more practical and implementable approach, terms egory. As mentioned with other categories, water features should such as “typical year,” “geographic area, only be considered WOTUS if they meet the criterion of at least an intermittent direct hydrologic surface connection to other Ditches WOTUS. We support maintaining the separate category for ditches. It provides much needed clarity that only those ditches built in IV. Specific Recommendations tributaries or wetlands already determined to be WOTUS will Categorical Exemptions also be WOTUS. While we agree with the agency’s preamble The agencies propose eleven exclusions from the definition of language that the burden of proof in determining jurisdiction in WOTUS. This provides additional clarity to the regulated com- respect to the ditches category rests with the agencies, we submit munity, landowners, and the general public and is more straight- that agencies should clarify what the expectations are for the forward for the agency staff to implement. We support these permittee, what are the evidentiary thresholds, and establish a exemptions and provide the following comments.

5) Revised Definition of WOTUS, 84 FR 4177, February 2019 “certain times of the year,” “intermittent,” and “perennial” must be clarified to ensure the consistency the agencies have been espousing. 6) USGS Topographical Maps, USGS, 2019 State and Federal Lands Protection

20 Domestic Energy Producers Alliance

Groundwater mum potential extent of federal jurisdiction.6 As discussed pre- The agencies state that they have never interpreted WOTUS to viously, the rule should allow supporting information (e.g., air include groundwater and would continue that practice through photos, historical knowledge) and field work to subsequently be this proposed rule by explicitly excluding groundwater. We utilized to determine whether the water is WOTUS or not. Such strongly agree with this position. an approach would provide the regulated community, landown- Ephemeral Features ers, and the general public with a practical tool and a more cer- We support the exclusion of ephemeral features and diffuse tain understanding of WOTUS jurisdictional extent along with a stormwater run-off. The harm caused by the overreaching 2015 regulatory pathway to demonstrate a reduced jurisdictional ex- WOTUS rule is especially acute in the West, where arid condi- tent if site conditions suggest otherwise. We anticipate there will tions and seasonally fluctuating rainfall are commonplace. be many comments attempting to show that the narrowing of the Many ephemeral water features would be subject to the 2015 definition of WOTUS will leave certain waters unprotected. We WOTUS rule despite being dry for much of the year or even for work with state agencies on a continual basis and know that wa- many years. Also, as discussed above regarding tributaries, we ters of the state can still be protected under state jurisdiction. The support removing the presence of bed/banks/OHWM as a crite- proposed rule simply designates which waters are regulated by rion to identify a WOTUS tributary. the federal agencies, and which are left to the states to manage. But if these features are absent it We support this approach as it indicates that it is an ephemeral fea- comports with the intent of the ture and not a WOTUS tributary. CWA – specifically the idea of cooperative federalism – whereby Artificial Lakes and Pond states, tribes and the federal gov- The agencies propose to exclude ernment work in partnership. artificial lakes and ponds constructed in uplands, including water stor- Burden of Proof Concept age reservoirs, farm and stock wa- We also submit that for con- tering ponds, settling basins, and log sistency in interpretation the cleaning ponds, as long as they are agencies clarify in the final rule not jurisdictional impoundments. that the burden of proof for juris- The agencies recognize that artifi- dictional determinations rests cial lakes and ponds are often used with the agencies across all juris- for more than one purpose and can dictional categories of water. have a variety of beneficial purpos- Placement in the Code of es. We agree with this proposed Federal Regulations (CFR) exemption. The agencies propose to locate the proposed definition of Wastewater Recycling Structures WOTUS in eleven different locations within the CFR. We sup- The agencies propose to exclude wastewater recycling struc- port this effort and think it would be more straightforward ap- tures constructed in uplands such as detention, retention and proach for the regulated community. infiltration basins and ponds, and groundwater recharge basins. Rapanos Guidance We strongly agree with this exemption, as it encourages the Finally, the agencies solicit comment on whether they should recycling of produced water that is such a challenge in our in- revoke their 2008 Rapanos Guidance, should the agencies final- dustry. It promotes innovation and provides greater clarity on ize the proposed rule, because existence of the final rule may which waters are and are not federally regulated under the mean that guidance on Rapanos may no longer be needed. The CWA. 2008 guidance has presented implementation challenges to oil Geospatial Datasets for WOTUS and natural gas development. The agencies solicit comment as to how they could establish CWA jurisdiction has been an inconsistent concept in agency an approach to authorize states, tribes, and federal agencies to interpretations for years. It is often addressed in a case-by-case develop geospatial data tools to help identify WOTUS. The manner with individual interpretations of guidance documents development of new geospatial data tools will be extremely and the term WOTUS. Often, agencies’ case-by-case determina- costly, take a significant amount of time and effort to develop, tions skew towards an overly broad interpretation of authority. lead to inconsistencies across the nation, and would likely in- We agree with analysis that finds that, “The irony in the prelimi- troduce interpretations that stray far from the CWA and case nary jurisdictional determination process is that by assuming that law. The regulated community needs tools that are available all water bodies on a site are jurisdictional, the Corps is actually immediately to make informed decisions on what waters are/are extending its jurisdictional reach beyond what it was regulating not WOTUS. Step Because tools already exist, there is no need prior to the Rapanos decision.”7 Ultimately, that overreach was to create new ones that will take years to develop. We recom- codified in the 2015 WOTUS rule. We recommend this guidance mend the widely used USGS Topographic Maps be used as a be revised consistent with the finalized revisions to the definition primary reference tool to determine and document the maxi- of WOTUS or be revoked.

DEPA Report on Industry, Leadership, Legislation, and Energy Regulation May 2020 21 Thank You for Reading

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