Energy and the “Big Beautiful Bill”
“Stealth” permitting reform may soon be a reality.
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My post this week concerns the energy permitting reform embedded in the House budget bill—a huge potential plus for the energy-related stocks I recommend in Dividends Premium.
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Barely a week ago, the US House of Representatives passed a federal budget bill. The margin of victory was a single vote. But for the unwieldy majority, a win is a win is a win. And the bill is now before the US Senate, which will make changes and then send the whole thing to reconciliation talks.
To say certain provisions of this so-called “Big Beautiful Bill” are contentious would be the understatement of the decade.
As I pointed out in last week’s Dividends post “Don’t Get Flustered by Federal Budget Busters,” the massive proposed cuts to Medicaid would probably force a number of already cash-strapped hospitals to close. And it could leave tens of millions of Americans underinsured, with predictably dire consequences for emergency rooms and public health in general.
The bill also includes a rapid phase out of most Inflation Reduction Act tax credits. My view is that action would produce only phony savings, and in fact add to the federal deficit over time.
That’s because tax credits are only awarded when a facility is up and running—and paying taxes. There are only savings if just as much gets built without tax credits as with them—an assertion only a politician could make with a straight face.
Otherwise, if less gets built, there will be fewer tax credits distributed—but only because less taxes overall are collected. That means less revenue for the government and higher deficits.
The equally divided Senate will have to sort out these questions in the coming weeks. But there is one piece of BBB that is both consequential and even likely to escape controversy.
That’s the effective inclusion in this bill of “energy permitting reform.”
When then-Senator Joe Manchin (D-WVA) cast the deciding vote for the Inflation Reduction Act in 2022, his “price” was a promise that the Administration would push for energy permitting reform. What he got instead was a Congressional mandate to complete the stalled Mountain Valley Pipeline, which is now transporting low cost Appalachian natural gas to energy hungry Virginia and the Carolinas.
Comprehensive energy permitting reform, however, has since remained a bridge too far. And given Republicans’ razor-thin majorities in both houses—and the elevated rancor between the major parties—it’s highly unlikely any purely energy related bill could pass.
Congress, however, can pass budget bills with a process called reconciliation—which requires only a one-vote majority in the Senate and can’t be filibustered. So to support the Trump Administration’s promise to “unleash” American energy—mainly oil and gas—the House included the following in its version of BBB:
· Extended tax credits through 2031 for “clean fuel production” that would otherwise have expired at the end of 2027. The major beneficiary is sustainable aviation fuel (SAF) already being produced and sold by major refiners like Valero Energy (NYSE: VLO).
· Amending the Natural Gas Act to further speed up the application process for exporting LNG to countries lacking a “free trade agreement” with the US. Applicants would pay a $1 million non-refundable fee to submit a request. In return, “such applications” would be considered “automatically in the public interest, requiring approval without modification or delay.”
· New fast-track permitting procedures for natural gas infrastructure.
· A new compensation system at the US Department of Energy to reimburse developers for “unrecoverable losses” when the federal government pulls previously granted permits.
· Accelerated purchases of crude oil to fill the US Strategic Petroleum Reserve.
· Passing the Alaska Natural Gas Pipeline Act to accelerate development of drilling activity throughout the state, including areas now limited for new drilling.
· A new National Environmental Policy Act (NEPA) that would allow developers to pay for accelerated environmental reviews, with the objective of restricting administrative and judicial review.
· Rescinding and altering 47 federal energy and environmental regulations the DOE has previously been enacting administratively. That would in theory make the changes less subject to court challenges, as the Trump Administration’s record so far upholding its actions has been rather dismal.
You’d be right saying these measures really don’t have anything to do with the federal budget. But given the politicization of almost everything in America these days—including energy—it’s not the first time reconciliation has been employed to ram through a government’s priorities. And we can be sure it won’t be the last.
Not everything is going to survive in the House’s version of BBB. And in fact one good candidate for at least a partial reversal is the proposed rapid phase out of renewable energy tax credits.
Three members of the majority—Senator Collins (R-ME), Senator Murkowski (R-AK) and Senator Tillis (R-NC)—are reportedly united pushing colleagues to preserve the current credits. And with the vast majority of benefits flowing to red states, they’re likely to find other Republicans in support—in addition to the entire Democratic caucus.
What can be fairly called “stealth permitting reform,” however, at this point appears unlikely to be significantly challenged. In fact, it could very well be sweetened further for industry in return for keeping tax credits.
Clearly, the initial beneficiaries will be the oil and gas industry. The House version of BBB in fact actually preserved benefits to carbon capture projects being developed by ExxonMobil (NYSE: XOM), Occidental Petroleum (NYSE: OXY) and other oil companies.
Republicans clearly want to incentivize more US oil and gas production. Whether companies will actually pump more in response is, however, an open question.
To be sure, energy permitting reform will have a meaningful impact on costs throughout the industry. And that’s welcome news at a time when companies are squarely focused on bringing down expenses to offset the negative impact of soft oil prices.
US shale, however, is still far more interested in using free cash flow to cut debt, boost dividends and buy back stock, rather than pumping our more oil and gas. And at the end of the day, energy prices have to go a lot higher from here to alter that “shale discipline.” That’s the clear message from Q1 earnings results and guidance calls, just as it’s been the past several years.
Rolling back regulation will reduce the cost of building new natural gas infrastructure, such as LNG export facilities and pipelines to feed natural gas power plants. Midstream companies still aren’t going to build anything they can’t pre-contract first. But this should lower the bar for returns at least a bit, at least for projects that can be completed before the next election—when the regulatory picture could well be scrambled again.
It’s also possible we’ll even see a break in the regulatory logjam at the state and local level for select projects like the Constitution Pipeline, which would bring cheap Appalachian natural gas to energy-starved New England. But companies and their investors will almost always be better off betting on projects in energy-friendly states that can be completed faster.
It would also be a mistake to assume there’s no benefit in energy permitting reform for renewable energy. Yes, the Trump Administration has basically done a tit for tat on permitting on federal land, imposing the same limitations on renewable energy that the Biden Administration did on oil and gas.
But the provision for the Department of Energy to compensate developers for losses when federal permits are pulled would reduce risk of any energy project, even offshore wind. So would accelerated review of projects and strengthening rulings against court challenges.
BBB still has many miles to go with big changes likely. But stealth energy permitting reform is another reason why this is shaping up to be the “summer of energy.”
As always, it’s critical to focus only on energy companies with real earnings. And it’s equally important to be agnostic when it comes to energy sources.
As electric utilities have known for over a century, the best energy mix is a diversified one. Systems reliant on a single source will always be vulnerable. And in an era of accelerating demand, investment in everything is critical. That includes solar—apparently hated in the nation’s capital just now but still by far the world’s cheapest and fastest to build source of power, with or without tax credits.