What Could the Biden Order Mean for the Permian and State Waters?
(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author.)
Shortly after taking office, President Biden signed an executive order directing the U.S. Department of the Interior to pause issuing new leases for oil and gas development on federal lands and offshore waters. According to a written statement from the Interior Department, the “targeted pause” neither affects existing operations or permits for “valid, existing leases” nor restricts energy activities on private, state, or tribal lands.
Prominent voices in the U.S. oil and gas industry criticized Biden’s order.
“Restricting development on federal lands and waters is nothing more than an ‘import more oil’ policy,” commented Mike Sommers, president and CEO of the American Petroleum Institute (API). “Energy demand will continue to rise – especially as the economy recovers – and we can choose to produce that energy here in the United States or rely on foreign countries hostile to American interests."
Dan Naatz, senior vice president of government relations and public affairs with the Independent Petroleum Association of America (IPAA), called the ban a “misguided proposal that will decimate jobs and economic development in communities across the country.”
Should the leasing pause become permanent, the outlook is particularly grim for the U.S. Gulf of Mexico (GOM), the head of the National Ocean Industries Association (NOIA) recently told Rigzone.
NOIA President Erik Milito, in a Feb. 17, 2021, article, predicted an indefinite leasing ban could result in:
- a loss of nearly 150,000 jobs linked to GOM oil and gas in the first year
- a drop in GOM oil and gas production of nearly 1 million barrels of oil equivalent per day in less than five years.
Additional informed voices have offered Rigzone their perspectives on Biden’s executive order. Read on for their insights on topics such as the ban’s effect on the Permian Basin, activity in state waters, and more.
Rigzone: The Permian Basin covers two states, one with extensive federal acreage (New Mexico) and another with largely private land (Texas). What impact do you anticipate for Texas from New Mexico’s loss of new leases on federal land?
Joel Ephross, Partner, Duane Morris LLP: The Permian Basin is in both New Mexico, as well as Texas. Leasing options vary by location. Texas does not have as much land ownership by the federal government as other oil-producing states such as Colorado or New Mexico, so there’s less of an impact in Texas than there is in other states by virtue of a moratorium. The pause on federal leasing does not impact existing leases. And federal lands are the source of about 10% of U.S. oil and gas supply – so the vast majority of production is from private land – and federal leases are the minority of leases that are entered into. The moratorium suspended oil and gas leasing and permitting on federal lands for 60 days while the administration reviews the legal and policy implications of the mineral leasing program. But a freeze or ban will not end production on federal lands overnight. E&P companies (regardless of size) still have the ability to develop existing leased acreage, and they always have ability to acquire privately owned acreage. Acquiring permits from larger companies is not a likely strategy for smaller E&P companies to take. I believe the more likely scenario is that smaller E&P companies will concentrate leasing activities on privately owned acreage.
James Blatchford, Energy Policy Analyst, Bloomberg Intelligence: Undoubtedly, the political uncertainty and risk for companies that have planned to develop federal acreage in New Mexico is a positive for acreage elsewhere – whether that’s in Texas, private and state lands in New Mexico, or in another location. Many companies have secured lots of federal permits, though, and that provides some flexibility for a year or a few. Other factors will matter, too, like in what other locations a company already has acreage, etc.
Clayton Gring, Managing Director, Turnaround & Restructuring Services, AlixPartners: Unfortunately, it’s just too early to tell what the long-term impacts of the Biden administration’s moratorium will be, especially considering that the moratorium is worded as being a “pause” in new leases … at least for now. However, in the near term, we are seeing that rig counts have increased significantly on a percentage basis in Texas’ Permian Basin since Q4 2020 (approximately 70% increase), so it stands to reason that the Texas Permian will continue to benefit from increased drilling activity, assuming that commodity prices hold.
Tom McNulty, Houston-based Principal and Energy Practice leader with Valuescope, Inc.: Producers here will be aggressive and will be very happy to pick up the slack. Prices have been rising, although probably by too much. The incentive to produce from existing wells is real, and there should be growing incentive to complete DUCs (drilled-but-uncompleted wells).
Fernando Valle, Senior Analyst, Oil and Gas, Bloomberg Intelligence: There would be less competition for resources, which would be positive for Texas producers – especially for completion crews. Larger operators like ConocoPhillips (NYSE: COP) and EOG (NYSE: EOG) can move some of their drilling plans to Texas, but others like ExxonMobil (NYSE: XOM) don’t have the same option due to their limited holdings.
Rigzone: Assuming Biden’s action turns out to be a significant win for Texas’ upstream, do you see the Permian as the primary destination, or should we see more activity in other plays such as the Eagle Ford?
Blatchford: Those that can move some activity easily across the border likely will and that’s probably Option 1 given the proximity, but companies with acreage in the Eagle Ford as well might shift some development dollars there, too, over time.
Gring: We are also seeing increased rig counts on a percentage basis in the Eagle Ford (approximately 140% increase since Q4 2020). While this increase can be misleading given the number of rigs active in the Eagle Ford relative to the Permian (29 versus 142), we think the Eagle Ford will continue to see increased activity given the freeze of new leases on federal lands. Again, this will all be subject to commodity prices. It will be interesting to see how this moratorium will impact offshore drillers and producers. For instance, could there be either a different set or varying degrees of regulations for leases in offshore waters versus new leases on federal lands?
McNulty: Primary, yes, because of the cost advantage. But there should be increasing activity in the Eagle Ford and, frankly, all of the basins for those operators who know how to make money at these prices. Those are the well-run operators that you do not hear from often. The ones that talk a lot tend to be poor operators. The DUC data might not show it right now, but I expect there will be more well completion activity accelerating soon. And I think the DUC inventory we have now is only a year or so supply of potential new production wells.
Valle: The Permian has the lower extraction costs, but it all depends on capital availability, as I mention above – some larger companies can move activity to Texas, but not all. ConocoPhillips and EOG would probably allocate some additional capital to the Eagle Ford and potentially North Dakota’s Bakken for Conoco, but it would likely not be at the same pace because the companies are focused on generating free cash flow from these basins, rather than grow for growth’s sake, at least for now.
Rigzone: Let’s shift for a moment to the implications of the administration’s action for the offshore oil and gas industry. Where is the boundary between state and federal waters in the Gulf of Mexico, and how might the “pause” change the dynamic of activity in state and federal waters?
Ephross: The boundary between state and federal waters is nine nautical miles in the Gulf of Mexico – this is different than the boundary between state and federal waters in the Atlantic. The pause in leasing is likely to increase leasing activity in state waters. However, any leasing activity is predicated on the price forecast for energy in the future and offshore exploration is more expensive than onshore exploration, which is why shale development has been favored over offshore development in recent years.
Rigzone: Ultimately, if you’re an exec with a large E&P contemplating your drilling program mid- to long-term, what are your priorities leasing-wise in light of recent Biden administration actions?
Ephross: The moratorium on new leases on federal lands is a short-term event – it only lasts 60 days. However, most people in the industry view the moratorium as part of President Biden’s sweeping plan to combat climate change and bring the economy to net-zero emissions by 2050. The details are not clear, but the direction is clear, and other aspects of the Biden administration’s plan – such as adopting tougher methane regulations or changing the tax treatment of oil and gas exploration – will have a significant impact on the economics of E&P companies. An executive with a large E&P company will have options to develop energy in basins outside of the United States, where policies are different. The small independent E&P companies are much more limited in the scope of their operations and are often tied to a single domestic basin.
Rigzone: Given the extraordinary winter weather that hit Texas in February, coupled with widespread power outages, do you anticipate any shifts in attitudes – from the public and from elected officials – toward domestic oil and gas E&P?
Gring: Public perception could very well change in the near term and on a limited basis for those who were greatly impacted by the recent extreme winter weather events, but sentiments changing on a meaningful or national level regarding fossil fuels versus renewable energy seems unlikely. Remember that those who were most impacted were Texans. Texas is already a largely pro-fossil fuel state given the oil and gas industry’s grip on the economy. Further, there was much more to the far-reaching power outages than frozen wind turbines. If anything, Texans are more likely to question their state’s stance on energy independence and deregulation than they are to change their views on domestic oil and gas production.
Blatchford: I haven’t seen any polls recently about attitudes towards domestic oil and gas companies, but I don’t anticipate the recent weather resulting in any particular change in attitudes.
McNulty: Winterization will be the main theme. The equipment here in Texas can be winterized to sustain severe cold weather. There are no wind turbines or thermal plants that are specifically made just for Texas. Cold weather packages already exist and can be added to the generation base here in Texas. In many cases they should have been, and that can be investigated. It is not that difficult; it just needs to be paid for and done. The public will clamor for someone to be punished, and certain political figures will oblige. My guess is that the existing base of statutes will be amended; I do not think we will see the origination of a comprehensive new law.
Valle: I don’t see a major shift in attitude, but natural gas demand is likely to continue rising globally. The blackouts in Texas and California just amplified the need to increase base load supply. With most states and countries shunning coal and nuclear, that likely means more natural gas-powered generation.
Rigzone: Would you like to add any comments?
Gring: We are in the midst of a price recovery for oil, although the extent of the rebound remains to be seen. Rig counts have climbed, and oilfield activity is increasing as a result. But actions to freeze new leases on federal lands and offshore waters will clearly limit production over time. This will have an impact on which regions will experience short-term benefits or losses, but it is too early to say what the longer-term effects of the reforms will be.
McNulty: It is my understanding that the Mineral Leasing Act of 1920 requires that the federal government hold quarterly lease sales, so I think that this statute will have to be amended for the ban to become permanent.
Blatchford: The likely changes are obviously a negative for the industry, but I think companies will find plenty of workarounds. They can shift activity to other locations, they may be able to drill longer laterals from non-federal locations, etc.
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