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Oil

US oil producers brace for White House policy shift, eye moving operations

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US oil producers brace for White House policy shift, eye moving operations

Highlights

As much as 2.9 million b/d may be disrupted

New Mexico, Gulf of Mexico expected to be hardest hit

Court challenge from industry likely

Washington — Democrats are still months from naming a candidate in next year's US presidential campaign, but oil producers are already preparing for a policy change which could disrupt nearly one-quarter of daily crude oil output and throw thousands of federal leases into legal limbo.

"It's a significant hit," said Dan Naatz, a senior vice president with the Independent Petroleum Association of America. "We think it's a mistake on several different levels."

All 17 Democratic presidential candidates have pushed some policy aimed at slowing US oil output, which the US Energy Information Administration forecasts will average a record of nearly 13.4 million b/d by the end of 2020, up more than 40% in just four years.

These candidates have pledged to ban drilling on federal lands, and analysts expect that any potential move by a Democrat into the White House will likely lead to stricter limits on fracking and flaring and increased scrutiny under the National Environmental Policy Act, all contributing to a significant reduction in output.

Analysts with Rapidan Energy Group said new prohibitions on drilling in federal acreage, both on and offshore, could disrupt up to 2.9 million b/d of existing crude oil output, and new federal regulations would "severely dampen" output in the Permian, Bakken and Alaska's National Petroleum Reserve.

"While only a fraction of production on private lands, federal land crude production is roughly equivalent to the total production of Kuwait, and policies that disrupted output on them would ripple through the global market," analysts with Rapidan wrote in a recent note. "In addition to limiting current production, policies would negatively impact investor sentiment and plans for future growth on private lands."

While a fracking ban on private lands would require a change in law, the US president has "vast control" over development on federal lands and waters, according to analysts with ClearView Energy Partners. A ban on leasing on federal lands and suspension of drilling permits could cause a decline of about 650,000 b/d of crude oil output per year, these analysts said.

PRODUCERS PREPARE

In a November 1 earnings call, Neil Hansen, an ExxonMobil vice president, said a fracking ban would slow development of the Pemian and other basins.

"I think any efforts to ban fracking or restrict supply will not remove demand for the resource," Hansen said. "If anything, it will shift the economic benefit away from the US to another country and potentially impact the price of that commodity here and globally."

On an earnings call late last month, Concho Resources CEO Tim Leach said his company was prepared to move operations from federal lands in New Mexico to private lands in Texas if a federal fracking ban is put into place.

While a ban on shale development on federal lands would be a detriment to producers in Colorado and Wyoming, but the biggest impact may be in New Mexico, according to Robert Erickson, an energy analyst with S&P Global Platts Analystics.

Some New Mexico producers with federal acreage "are responding to this proposed policy shift by planning to develop these plays to before the election takes place and a Democratic president has the chance to block them," Erickson said.

But offshore federal leasing may be at greater immediate risk, ClearView analysts said. Oil output in the US Gulf of Mexico averaged nearly 1.96 million b/d in August and is forecast to average 2.1 million b/d by the end of next year, according to EIA.

The Trump administration is in the midst of developing a five-year offshore leasing plan, expected to open more areas offshore Alaska and, potentially, new acreage in the Atlantic and eastern Gulf, to drilling.

But a Democrat in the White House would likely revoke, or at least ignore, that plan, potentially halting all offshore leasing, even in the central and western Gulf. The impact of this policy change may not be clear for years since numerous projects in the Gulf are sanctioned through starts into 2026.

"It would take several years to see the impact," said Rene Santos, an analyst with Platts Analytics. "But after that, the impact could be significant."

LEGAL CHALLENGE

Any action to limit oil production on federal lands and in federal waters will face numerous legal challenges from industry.

"If such a ban were issued by executive order... we would be in court the next day challenging it," said Kathleen Sgamma, president of the Western Energy Alliance. "Since Congress has mandated, via the Mineral Leasing Act, quarterly lease sales in states where there is interest, we feel very good about our chances in court, including with a preliminary injunction to stop the order immediately."

Analysts with ClearView said a Democratic president may attempt to limit oil development by declaring a national climate emergency, similar to President Trump national security emergency proclamation in February intended to fund the wall along the US-Mexico border.

ClearView analysts said a Democratic president could use such a declaration to shut down US crude oil exports, suspend offshore drilling, and limit oil shipments by pipeline, rail, and marine transport using emergency powers in the Energy Policy and Conservation Act, Outer Continental Shelf Lands Act, and Aviation and Transportation Security Act.

"We are skeptical that such uses of emergency authorities might survive the scrutiny of strict constructionist judges, but we believe the topic deserves serious consideration, not least because a future Congress might seek to create climate emergency authorities that could survive in court," ClearView analysts wrote.

-- Brian Scheid, brian.scheid@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com