Energy Regulations Get Tougher, But Can the US Afford a Drilling Ban?

A slew of new US regulations raise questions about the future of oil drilling on US government land, with reports of a moratorium on new leasing and permits as the administration considers major changes in the program.

Pumpjacks producing oil in New Mexico near the Texas border.
Source. Stephen Rassenfoss

On the day he was sworn in as US President, Joe Biden immediately raised questions about the future of US oil and gas exploration.

The big unknown was first wrapped up in an order that quietly slipped out of the US Department of the Interior on Monday. It declared a 60-day moratorium on issuing leases and permits for oil development on federal lands and waters.

Biden said during his campaign that he would be looking at stiffer restrictions and by Wednesday his administration made good on that promise after issuing an executive order to that end. According to a fact sheet posted online by the White House, the US Department of the Interior has been instructed to pause new leases for oil and developments in federal onshore and offshore areas.

The order did not give a timeline for the moratorium, making it unclear it extends the 60-day period, but calls for a “rigorous review of all existing leasing and permitting practices related to fossil fuel development on public land and waters.” Native American tribal lands will be exempt from the moratorium.

Other planks of the executive order include new projects to reduce greenhouse gas emissions from the country’s infrastructure and the establishment of an investment scheme for communities dependent on the fossil fuel industry.

Biden is also moving to set aside 30% of federal land and water for wildlife conservation and is launching a plan to double power generation from offshore wind farms by 2030.

Before the executive order was shared this week, Morgan Stanley said this is not the beginning of the end.

“Given the significance of federal drilling to employment and tax revenue in key Democrat states [New Mexico], we expect the permitting ban to ultimately be lifted, but expect more stringent environmental review of new permits going forward and potentially more explicit emissions limits” on flaring and methane emissions, Morgan Stanley said.

While the vast majority of US acreage is not in federal hands, the outcome could significantly affect future output. About 25% of the oil produced in the US comes from federal lands and water, and 40% of that 2.7 million B/D comes from onshore shale, according to Morgan Stanley.

Tougher regulation was the theme in the stream of orders undoing Trump administration policies rolling back Obama era limits on carbon emissions and blocking construction of the Keystone XL pipeline.

Leaseholders were parsing the fine print in the 60-day order that allows the Interior Department’s Bureau of Land Management (BLM) to limit their ability to get permit variances in for small, but important to resolve issues, such as right-of-way changes.

If drilling continues on federal lands, it will represent a large and growing share of US oil production, according to a study by the University of Wyoming.
Source: University of Wyoming.

Tough To Stop

Don’t look for a sudden drop in drilling and fracturing activity due to the moratorium. Current leases and permits are not affected, and they have years to run.

As it became clear that the end of the Trump administration and its oil-exploration-friendly policies were coming to an end, there was a run on permits. More than 3,000 permits were issued in New Mexico during the last few months of 2020, according to a report by Platts Analytics.

Permits allowing drilling and fracturing on federal land are for 2 years and can be renewed for another 2 with BLM permission. Offshore permits run 7 years and can be extended to 10, Platts said.

Most of the market reaction has been focused on oil companies with federal lands. Investors focused on five big independents with federal onshore leases, EOG Resources, ConocoPhillips, Devon Energy, Murphy Oil, Cimarex Oil. In most of those cases Morgan Stanley said they can adapt by shifting their plans to unaffected acreage.

A leasing ban would invite lawsuits challenging the power of the Interior Department to stop offering acreage.

Among those who said the federal government’s options are limited is John Axelrod, a policy analyst with the Natural Resources Defense Council. While the environmental group has called for a temporary moratorium on federal leasing to review and likely limit activity and reduce the environmental impact, “the law is pretty clear” that the Interior Department is required to hold regular mineral lease sales.

Congress could change that law, but the Democrats pushing for drilling limits hold a razor-thin margin in the US Senate. They would likely require the support of Democrats from states hard hit by a drilling ban, particularly New Mexico, with two senators who are Democrats.

“Roughly 60% of oil and gas is developed on federal lands in New Mexico,” according to a report on the impact of a ban on onshore drilling by Timothy J. Considine, a professor at the School of Energy Resources at the University of Wyoming.

The study by the energy economist estimated that if drilling were stopped, it would reduce spending in New Mexico by $3.1 billion a year over the first 5 years of a ban and the value of the oil not produced during those years would be slightly higher than that and would reduce the state’s tax revenue.

Service companies working there could also take a hit. Of all the US drilling rigs working, 14% are on federal land with the largest number in New Mexico, home to the Delaware basin and the highest total of undeveloped federal acreage, Morgan Stanley said.

Texas onshore oil producers are not going to be hurt by any federal leasing limits because all the land in the state is either leased from individuals or the State of Texas, whose leaders are thinking about ways to encourage drilling.

For those looking for an upside, if federal leasing was limited, it could reduce future US production. Morgan Stanley said that could limit the supply of shale oil, pushing up the value of the oil sold without reducing short-term demand.