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Biden issues broad moratorium on oil and gas leases on federal lands and waters

Highlights

Moratorium most impacts New Mexico, Rockies, Gulf of Mexico

Risk to longer-term oil, gas production

Part of broad executive order to combat climate change

Houston — President Joe Biden implemented a moratorium on new oil and gas leases on federal lands and waters through an executive order on Jan. 27 that is expected to have a longer-term impact on US production.

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The moratorium represents a pause on new oil and gas leasing "to the extent possible" and also initiates a new review of existing fossil fuel leasing and permitting practices.

"We're going to review and reset the oil and gas leasing program," Biden said at the signing ceremony, 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."

While the order won't impact US crude oil and gas production much in the near term because existing leases and drilling permits are not impacted and big producers have ample inventories of undrilled well permits, the move could still push the industry to shift its focus away from federally controlled regions such as New Mexico's Delaware Basin, the Rockies and much of the deepwater Gulf of Mexico.

"The risk to US supply moves from the immediate to the longer-term, while also shifting from onshore producers to GOM and Alaska operators who now bear the brunt of President Biden's plans," said S&P Global Platts Analytics analyst Parker Fawcett. "Onshore operators will be contending with stricter methane regulations and a more comprehensive and slower permitting process, but are set to be able to continue to grow volumes assuming no further ban on permitting."

"An outright ban of new leasing will impact Gulf of Mexico production five to 10 years out, limiting operators' ability to access nearby unleased acreage close to exploration discoveries," Fawcett said.

Actually banning federal drilling, which is not a part of this order, would put more than 1.6 million b/d of US crude oil production at risk, according to Platts Analytics, as part of a "worst-case scenario." It is more likely that closer to 1.1 million b/d would be impacted over time.

Artem Abramov, Rystad Energy's head of shale research, said installing only a federal lease ban -- if it lasts eight years -- would equate to the loss of 250,000 boe/d by the end of the decade so long as drilling permits continue. The effect would grow to 400,000 boe/d later in the 2030s. The Gulf of Mexico is relatively mature with only a handful of major operators, most of which already have fully permitted drilling programs, he said.

The biggest hits would come to services companies, especially seismic companies, rig owners and other exploration-focused services segments, according to Rystad.

But the American Petroleum Institute warned that this moratorium may just be the "first step" toward a broader ban on all oil and gas activity on public lands. And the fear is that ongoing well permitting and other standard approvals will dramatically be slowed under Biden.

"They're going to continue to look at the permitting process, and we're very concerned about a slowdown in permitting for our operators in the field," said API CEO Mike Sommers at a press conference, while his colleagues noted that drilled wells already are not receiving the simple approvals needed to connect to pipelines.

Industry stockpile

According to the Department of Interior, the oil and gas industry "has stockpiled millions of acres of leases," and is "sitting on approximately 7,700 unused, approved permits to drill."

"Onshore, of the more than 26 million acres under lease to the oil and gas industry, nearly 13.9 million (or 53%) of those acres are unused and non-producing," Interior said in a release. "Offshore, of the more than 12 million acres of public waters under lease, over 9.3 million (or 77%) of those acres are unused and non-producing."

Auctions held under the Trump administration generated little interest from the industry, according to Interior, with only 5 million offshore acres purchased from 78 million acres offered over the past four years.

About 22% of US oil production and 12% of natural gas production takes place on federal lands and waters, but the planned moratorium would not undo existing leases and permits.

Critics contend the order, which has no set time limit, will hurt US energy security and oil production, prop up foreign adversaries, cost thousands of American jobs during a weak economy amid the pandemic, and create winners and losers within the US by harming oil-producing states with more federal lands and waters. However, environmental groups are praising Biden rapid moves on climate and energy issues.

In response to order, the Western Energy Alliance filed a lawsuit Jan. 27 claiming Biden exceeded his presidential authority.

"Presidents don't have authority to ban leasing on public lands. All Americans own the oil and natural gas beneath public lands, and Congress has directed them to be responsibly developed on their behalf," said alliance president Kathleen Sgamma in a release.

Biden's order is an extension of an initial move last week from the Interior Department's acting secretary to put a hold on new oil and gas leases and permits for 60 days unless otherwise approved by senior Biden officials. Still unclear is whether a scheduled lease sale in March for the deepwater Gulf will be canceled.

New White House National Climate Advisor Gina McCarthy pushed back against making assumptions about future moves, noting that there aren't any bans on fracking or permitting.

"It's to make sure we take a little pause and review our whole strategy with regards to public lands," McCarthy said at a press conference.

Big inventories

Most of the broader impacts are years away after permitting on federal lands surged in the final two months of the Trump administration. The administration approved over 600 wells versus the previous three-month average of fewer than 190 wells per month, according to Platts Analytics. More than 60% of the current inventory of federal drilling permits are in New Mexico's Delaware Basin. Nationwide, nearly 4,000 permits for new wells are undrilled or uncompleted.

Platts Analytics expects drilling and completion activity on federal lands to surge in the coming months as operators drill permits before they expire.

"S&P Global Platts Analytics expects a stronger near-term recovery in federal onshore production relative to state and private production due to relatively stronger drilling activity and lower breakevens observed on federal lands in New Mexico," Fawcett said.

Abramov, of Rystad, said New Mexico shouldn't have too much to worry about for now.

"Most operators can maintain tier-one activity at the current pace in Delaware New Mexico for more than 10 years, even without any new federal acreage permits," Abramov said.

He noted that federal acreage accounted for up to 80% of the total permitting activity in the New Mexico region in multiple months last year.

Biden's pick to lead the Interior Department is a congresswoman from New Mexico, Rep. Deb Haaland.

Apart from New Mexico, API said the federal lands accounted for more than 40% of the shale gas production in Colorado, more than 60% in Utah and more than 90% in Wyoming.

Because of the loss of demand from the coronavirus pandemic, US crude oil production already has fallen from record highs of nearly 13 million b/d near the beginning of 2020 down to 11 million b/d this January.

Other impacts

Biden's new executive order touches on a broad variety of energy topics to tackle climate change, including:

  • Identify steps to double renewable energy production from offshore wind by 2030.
  • Directs federal agencies to eliminate fossil fuel subsidies to deploy clean energy technologies and infrastructure, including swapping out the federal governments fleet of vehicles with new electric vehicles.
  • Develop the US's emission reduction targets and a climate finance plan now that the country has rejoined the Paris Agreement.
  • Establishes the White House Office of Domestic Climate Policy -- led by the first-ever national climate advisor and deputy national climate advisor.
  • Establishes the National Climate Task Force with leaders from 21 federal agencies and departments for a new "whole-of-government approach" to combatting the climate crisis.
  • Ensure that every federal infrastructure investment reduces climate pollution and that steps are taken to accelerate clean energy and transmission projects.
  • Commits to the goal of conserving at least 30 percent of US lands and oceans by 2030.
  • Establishes a White House Environmental Justice Interagency Council and a White House Environmental Justice Advisory Council to prioritize environmental justice through new or strengthened offices at the Environmental Protection Agency, Department of Justice and Department of Health and Human Services.