Guest “Biden’s American Energy Impotence” by David Middleton
What would a Joe Biden win mean for oil and gas?
As Biden nudges ahead in the polls, the US oil and gas industry should prepare for far-reaching potential changes
29 July 2020
Principal Analyst – US Gulf of Mexico Upstream
With analysis from Julie Wilson, Research Director Global Exploration, Ed Crooks, Vice-chair, Americas and Rowena Gunn, Research Analyst
The most eye-catching of Biden’s proposals for the offshore industry is a promise to ban “new oil and gas permitting on public lands and waters.”
He also plans new protections for the Arctic National Wildlife Refuge and other areas President Trump has sought to open up for oil and gas development, including the eastern Gulf of Mexico (GoM).
How much does the oil and gas industry stand to lose if Biden’s policies are enacted?
Biden’s plans lack clarity: it’s unclear which permits would be included in his proposed ban. But by any definition, the impact on investment, production and tax revenues would be substantial.
How stringently the measures are applied – which could range from the least restrictive option of not awarding new exploration leases to the most draconian: putting a complete stop to oil and gas production – will be important.
The devil is in the detail: Biden’s proposed policies by the numbers
Each step towards tighter restrictions would wipe out tens of billions of dollars of capex.
So how do the numbers stack up?
In our base case, total remaining estimated capex is US$276 billion.
If no new leases are awarded under the least restrictive scenario, US$76 billion of that spending would be lost. And that would escalate if the measures were applied more stringently.
Nearly 25 billion boe is yet to be produced from the US GoM and Alaska. The least restrictive application of Biden’s policy – banning new leasing and drilling of exploration wells – would wipe out almost 12 billion boe of potential future production.
And in the worst case, shutting in all production would mean giving up that 25 billion boe in its entirety.
Explorers could miss out on US$20 billion of potential value. And government coffers would be US$135 billion lighter.
If production in the US GoM is shut in, this could be catastrophic: US$340 billion in revenue over the first ten years would be wiped out. Meanwhile, more than 1 billion barrels of economically viable reserves could be left in the ground in Alaska, which would dash hopes for sustained growth in the region.
And that could open the US government to potential legal challenges
Upstream producers have already sunk billions of dollars into exploration and development projects, the value of which could be eradicated.
In US GoM alone, companies have invested over US$180 billion since 2005, developing discoveries on the premise that they will be able to produce these resources.
It would “open the US government to potential legal challenges” and they would get their @$$es kicked in court. The leases were issued under laws passed by Congress. The laws require the Federal government to allow the lessees to develop the mineral resources under the leases. Once the Federal government issues a lease in the Gulf of Mexico, the operator owns the mineral resources, subject to the terms of the lease agreement (a legally binding contract). If the government simply declared an prohibition of “new oil and gas permitting on public lands and waters,” without fairly compensating the lease owners, it would be violating the “Takings Clause” of the United States Constitution, not to mention serial breaches of contracts.
As the WoodMac article notes: “The devil is in the detail”… And we have not heard any details, just, often contradictory, phrases from Biden. He has clearly stated that he would ban frac’ing…
During the primary season, as he worked to secure the votes of his Party’s left-leaning voter base, Mr. Biden has promised at various times to enforce a policy of “no new fracking” in his administration; to end the use of oil and natural gas in the United States; and to end new drilling on federal lands in the U.S. While promises like those and others played well to the voters in Party primaries around the country, they have the potential to come back to haunt Biden during the general election in key swing states like Michigan, Pennsylvania, Ohio and New Mexico, where the industry supports hundreds of thousands of jobs and the state governments rely heavily on income from oil and gas taxes.Forbes, June 11, 2020
“No new fracking” = A ban on frac’ing.
However, Biden has also said that he would not ban frac’ing:
Shut down the fracking industry? No
During an interview in April, Biden told KDKA television in Pittsburgh that he would not shut down the fracking industry. He said that he would not allow new leases on federal land, adding that 90% of the leases are on private land.
“I would make sure … the water is not being contaminated, but I would not shut it down, no,” he said.USA Today, June 19, 2020
Firstly, I don’t know what “the fracking industry” is, and I’ve been petroleum geologist for almost 40 years. Secondly, if you read the USA Today “fact check” in it’s entirety, it’s pretty clear that neither Joe Biden, nor the USA Today knows what “frac’ing” is.
Are Biden’s comments about banning “new oil and gas permitting on public lands and waters,” something to be taken literally? Or simply a phrase he doesn’t understand?
While a ban on “new oil and gas permitting on public lands and waters” wouldn’t immediately drop Gulf of Mexico oil production to zero-point-zero, it eventually would do just that.
According to a study prepared for the National Offshore Industries Association (NOIA):
Impact of No New Drilling Permits Being Issued
Another potential restrictive policy change that has been advanced for the Gulf of Mexico offshore oil and natural gas industry is that regulatory authorities no longer issue new drilling permits for Gulf of Mexico wells. This scenario assumes that no new drilling permits would be issued from 2022, but that existing permits would be unaffected, and that no other major policy or regulatory changes impacting the Gulf of Mexico offshore oil and natural gas industry would be enacted.
▪ Average combined oil and natural gas production across the forecast period is projected to decline from around 2.5 million barrels of oil equivalent per day to 1.1 million barrels of oil equivalent per day (an over 55 percent decline). In 2040, combined oil and natural gas production is projected to be around 323 thousand barrels of oil equivalent per day compared to 1.96 million barrels in the Base Case.
▪ Average annual employment supported is projected to decline to 179 thousand jobs from around 370 thousand jobs nationally (a 52 percent decline).
▪ Average annual contributions to GDP are projected at $14.2 billion, around a 55 percent reduction compared to contributions of $31.3 billion in the Base Case.
▪ Government revenues are projected at an average of around $2.7 billion per year, a 61 percent reduction from the $7 billion per year projected in the Base Case.
▪ State revenue sharing under the Gulf of Mexico Energy Security Act (GOMES) is projected to fall to an average of around $273 million per year, compared to around $374 million in the Base Case (a 27 percent reduction). LWCF funding, including GOMESA and non-GOMESA offshore funding is project to fall to just under $585 million a year compared to $1.3 in the Base Case.NOIA
All operations in the Federal waters of the Gulf of Mexico require permits… And production can only be maintained through ongoing operations. Right now, the Gulf of Mexico is the second most productive oil province in the US, with massive remaining growth potential. The Gulf of Mexico is second only to the Permian Basin.
The only one of those regions that wouldn’t be eviscerated by a frac’ing ban, is the Gulf of Mexico. However, a ban on “new oil and gas permitting on public lands and waters” would be devastating.
On top of the reckless destruction of value, a ban on “new oil and gas permitting on public lands and waters” would also drive many, if not most, operators into bankruptcy, leaving them financially incapable of properly abandoning and retiring billions of dollars of infrastructure that was just rendered worthless by the government.
Hurricanes in 2005 (Katrina & Rita) and 2008 (Ike) inflicted extensive damage on Gulf of Mexico oil & gas infrastructure, depressing production by about 250,000 bbl/d from 2006-2008. The Obama maladministration’s unlawful drilling moratorium and “permitorium” in response to the Deepwater Horizon blowout and oil spill depressed production by about 500,000 bbl/d from 2011-2013.
Since then, Gulf of Mexico oil production has surged to record levels, topping 2 million barrels per day in 2019. Due to the COVID-19 shutdown, production has fallen off a bit, however EIA forecasts that it will remain relatively flat for 2020-2021.
EIA forecasts GOM production to remain relatively flat, averaging 1.9 million b/d in 2020 and 2021, nearly unchanged from its 2019 average. In addition, EIA expects no cancellation in announced GOM projects for 2020 and 2021. EIA forecasts that crude oil production from Alaska will remain at an average of 460,000 b/d in 2020 and that it will increase slightly in 2021.EIA, May 14, 2020
EIA forecasts global oil consumption to recover to pre-lockdown levels by Q3 2021.
US motor gasoline demand has recovered to 8.6 million bbl/d from a lock-down low of 5.3 million bbl/d and is only about 1 million bbl/d lower than it was in August 2019.
The US economy is still far from being fully reopened… Yet gasoline demand has already recovered 3/4 of the way to “normal.” Assuming the economy continues to recover, oil demand will continue to recover. If Joe Biden gets elected and delivers on his promise to ban “new oil and gas permitting on public lands and waters,” where will he get the roughly 2 million bbl/d of crude oil that he just took off the table? Saudi Arabia? Russia?
Personally, I tend to think that if the unthinkable happens and Biden wins in November, his maladministration will be more akin to than of Obama’s and not a Sanders|Ocasio-Cortez|Warren Green New Deal Cultural Revolution. He will make it more difficult for us to do business in the Gulf of Mexico and he will not open any of the currently “off limits” areas. I don’t think he would even think about trying to shut down leasing and drilling in the areas of the Gulf of Mexico that have been open for about 70 years and comprise our nation’s second most important source of domestically produced crude oil. But… I could be wrong.