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Fuel for Thought: Biden moves fast on US oil and gas campaign pledges

US President Joe Biden has halted a major pipeline project and curbed leasing and permitting on federal lands. The US oil and gas sector now faces a waiting game to see how the administration's energy policy will evolve, writes Jordan Blum.

As a Democratic presidential candidate, Joe Biden pledged to cancel the decade-in-the-making Keystone XL Pipeline and, not so shockingly, he followed through on his first day as US president by revoking the Canadian heavy oil pipeline's permitting.

That was just the beginning.

Since then, he's imposed a broad moratorium on leases for federal lands and waters, indefinitely delaying scheduled lease sales in March and April for the deepwater Gulf of Mexico, New Mexico and a number of western states. And his Interior Department has a 60-day pause on most permits for oil and gas wells, only allowing approvals from senior-level staffers.

Some believed Biden's campaign pledges were just trying to satiate his party's base and he would move toward the center after taking office. But Biden is following through with what he promised over and over again during his campaign. In fact, his campaign pledge of banning new oil and gas permitting on public lands and waters goes further than his actions thus far. So, maybe don't take someone for their word at your own peril.

The oil and gas industry's greater fear is what is yet to come much more so than what Biden has implemented thus far.

"We're going to review and reset the oil and gas leasing program," Biden said Jan. 27, citing the need to preserve public lands. "Let me be clear, and I know this always comes up, we're not going to ban fracking."

And, to highlight his consistency, let us go back to May when he was the presumptive Democratic nominee and what he had to say about Keystone XL, which was first shot down under President Obama and revived by President Trump.

"I've been against Keystone from the beginning," Biden said at the time. "It is tar sands that we don't need—that, in fact, is very, very high pollutant."

Pipelines

It also is very likely that Keystone XL is not needed anyway.

If Enbridge's Line 3 replacement pipeline project is completed late this year as scheduled, it would satisfy most of the pipeline restraints for Alberta producers, many energy analysts contend. And, in a couple of years, the Canadian government's Trans Mountain Pipeline expansion could come online.

But the fully permitted Line 3 project still finds itself in the crosshairs of environmentalists, with construction ongoing in Minnesota. On Feb. 4, as protests and blockades continued to escalate, activists tied themselves to barrels of concrete and a piano in the pipeline's path to temporarily halt the work.

They are working on a long-shot bid to generate enough grassroots pressure to get Biden to intervene and yank federal permits; something that would have been impossible if Trump had won reelection. There also is a push to get Biden to shutter the nearly four-year-old Dakota Access Pipeline that federal courts have recently ruled is essentially operating illegally without the necessary federal easement.

Regardless of the outcomes of these pipelines under Biden, it is clear it will be even harder to build new US oil and gas pipelines going forward than it was in an already difficult environment under Trump.

US undrilled oil permits on federal land by year

The waiting game

If Biden's federal leasing moratorium only lasts for a few months and well permitting picks back up after 60 days, then his actions will not hurt the oil and gas industry all that much. Future leasing sales may come more slowly with less acreage made available, and well permitting might become a more stringent process, but activity would still march on.

The greater question is whether Biden opts to make federal lands and waters off limits for oil and gas, except for existing leases and permits. That would represent a much stickier proposition.

Biden also could make federal leases less desirable by upping the royalty rates. A 12.5% royalty rate compared to the average 20% on state lands, and up to 25% on private lands, means operators drilling on federal acreage immediately have an advantage of up to $5/b, according to S&P Global Platts Analytics.

While industry groups are taking strong stances against Biden—the Western Energy Alliance already is suing to stop Biden's moves—Chevron CEO Michael Wirth said in an earnings call he is mostly taking a wait-and-see approach.

"It's early days to understand exactly how these will play out," Wirth said. "The executive order was sweeping and broad, but it also lacked some specificity. And I think they're looking to flesh out the details here in the coming weeks and months."

He added, "I don't want to overreact to that, at this point in time, until we know more."

Platts Analytics projects US production will continue to grow on federal acreage in New Mexico in the coming months and years, assuming no permitting ban under the Biden administration is permanently enacted.

Even in the event of an extended permitting ban, production could still grow over the course of the next one or two years as operators drill their significant inventories of stockpiled permits. Just in the past two years, operators rapidly accrued more than 2,500 permits in New Mexico, in addition to nearly 500 drilled-but-uncompleted wells, which would provide roughly two years' worth of activity for 80 rigs and 40 fracking crews, Platts Analytics said.

After two years, and if permitting is not extended, then crude oil production really would decline, triggering an estimated 1.1 million b/d decrease in production relative to Platts Analytics' base case by year-end 2024.

US production on federal lands and waters had increased from 2.4 million b/d in 2017 to a record of 3.2 million b/d in March 2020 before the pandemic took hold, largely because of the surge in New Mexico's Delaware Basin.

State worries

So, there is naturally a lot of nervousness, especially in New Mexico and in a handful of other potential losers with more federal land, such as Wyoming, Louisiana, Colorado, Montana, Utah and even in Texas, where many of the Delaware Basin and Gulf of Mexico jobs are still based.

New Mexico, for instance, saw its state revenues from oil and gas nearly double from $1.6 billion in 2016 to $3.1 billion in 2019. Even during the pandemic, revenues only dipped to $2.8 billion in 2020. So, the state sees itself as having a lot to lose. New Mexico, after all, accounts for 57% of federal onshore oil production and 31% of onshore natural gas production.

US federal land drilling restrictions to dent oil output

"A ban or moratorium on development would crush the state of New Mexico," New Mexico Oil and Gas Association Executive Director Ryan Flynn has said.

But state concerns mean less to an industry that can pivot from place to place.

Pipeline and exporting giant Enterprise Products Partners noted the Permian's active area is about 15 million acres, with only roughly 12% of it on federal land, and there are thousands of permits already approved on federal acreage.

"I'm a believer in the Permian. I'm a believer in the Eagle Ford," said Enterprise co-CEO Jim Teague in an earnings call. "If you have federal land issues in New Mexico, we've got a hell of a position in the Eagle Ford, and maybe rigs go down there. So, I feel pretty good about things."