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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Biden’s Policies Unlikely To Cause Crash In U.S. Oil Production

Permian rigs

U.S. President Joe Biden has put the oil industry and oil-producing states on edge with his plans to reform oil and gas permitting and leasing practices on federal land and in federal waters.

Currently, the Administration is pausing new oil and natural gas leases pending completion of a review for potential changes to the regulations. Although it is not clear yet how restrictive those changes would be, the industry and analysts are trying to quantify how much U.S. oil production would suffer in the medium and long term.

Immediate impacts will likely be negligible, but in the medium to long term, new regulations could have far-reaching consequences, not only on U.S. shale production and conventional production offshore but also on the oil revenues and budgets of the states where a large part of the drilling activity currently takes place on federal lands. 

Wide Range Of Scenarios

All forecasts show there will be impacts on production and tax revenues for states. But how drastic those impacts would be will depend on the final rules and how successful the industry will be in challenging potential drastic measures in courts.

According to Wood Mackenzie, the current temporary moratorium will have little impact on oil production.

“The review process, however, could result in more far-reaching measures, such as heftier royalties or environmental obligations on new leases, a ban on new lease sales and/or the prohibition of new permits on existing leases. It could also result in something close to business as usual,” said Pablo Prudencio Senior Research Analyst, US Lower 48 Supply, at WoodMac. Related: How Oil Could Go To $100 Per Barrel

Around 6 percent of U.S. oil production comes from federal lands, so just a fraction of shale output would be directly affected by changes to the new lease permitting process. However, “banning new federal drilling permits on existing leases is a more extreme scenario, which would put future supply volumes at risk and dent future drilling inventories in some regions,” WoodMac’s Prudencio says.

Leasing Restrictions To Slow Down Permian Production Growth

In the Permian, the top U.S. shale basin, production growth will slow down and activity will move from New Mexico to Texas since half of New Mexico’s oil production comes from federal acreage in the Permian, Garrett Golding and Kunal Patel, business economists in the Research Department at the Dallas Fed, said in a report earlier this month.

In the reference case, where leasing, permitting, and drilling is little changed from Q1 2021 levels, Permian production would grow from 4.3 million bpd in 2020 to 5.3 million bpd in December 2025, while New Mexico’s output would grow to 1.5 million bpd from 1 million bpd now, at WTI Crude averaging $50 a barrel.

Assuming no new federal leasing but existing leaseholders still receiving drilling permits, Permian production would rise to 5.1 million in 2025. But New Mexico’s output would rise by just 100,000 bpd, according to the Dallas Fed.

In the most restrictive case, where no new federal permits or extensions are granted starting in 2023, Permian production would still rise, to 4.8 million bpd in 2025, but New Mexico’s output would decline to 700,000 bpd, or 800,000 bpd less than in the reference case.  

States With Large Federal Land Production Will Hurt Economically  

The variations in Permian’s expected production are an exemplar of how the states with more drilling activity on federal lands will see their oil production decline. New Mexico will be one of the most adversely affected states, with tax collections plunging and employment dropping, as “production and employment across the basin will gradually shift from federal lands in New Mexico to private and state lands in New Mexico and Texas, with wide-ranging economic implications for the region,” the Dallas Fed noted. Related: Is South Korea’s Monster Wind Farm Feasible?

A ban on federal leasing could cost New Mexico 62,000 jobs by 2022 while $1.1 billion in New Mexico revenue would be at risk, the American Petroleum Institute (API) says.

The fiscal impact on New Mexico will be large, according to the Dallas Fed. In the fiscal year ended June 30, 2020, New Mexico received $2.6 billion from oil and gas industry taxes, royalties, and fees—one-third of the state’s general fund—with $809 million coming from the state’s share of minerals revenue on federal properties.

Democratic-led New Mexico faces a dilemma—support for President Biden’s climate policies and restrictions on federal oil drilling would mean much lower revenues for the state to use for education, schools, and other government programs.

Other states will also suffer from restrictions on drilling on federal lands. In Wyoming, for example, the federal lease moratorium will impact 75 percent of the state’s conventional fields and 60 percent of drillable land, the University of Wyoming’s Enhanced Oil Recovery Institute (EORI) said in a report earlier this month.

“This policy will restrict, or possibly prevent, access to 2.9 billion barrels of potentially recoverable oil reserves on federal lands and the associated $12.9 billion in tax revenue,” the report says.

Offshore Oil Production Set To Suffer The Most

Onshore production in some states such as Wyoming and New Mexico will suffer the most, but overall, the biggest impact of changes to leasing regulations is set to be felt offshore, in the Gulf of Mexico.

“We expect production from other basins to decline against business-as-usual forecasts as well, especially in the Gulf of Mexico, where the federal government manages nearly all oil and gas activity,” Dallas Fed’s economists said.

The API said in a report last year the U.S. offshore oil production would drop by 44 percent by 2030, while offshore natural gas production would fall by 68 percent.  

Referring to the suspension of new leases, Chevron’s CEO Michael Wirth said on the Q4 earnings call in January that “the risks are probably greater in the Gulf of Mexico.”  

By Tsvetana Paraskova for Oilprice.com

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Leave a comment
  • Don Lapre on March 09 2021 said:
    So help me understand here, Biden campaigned he was for green energy and clean water ; so he chooses to ban fracking on what amounts to 4% of Texas’ oil acreage and the Democrats cheer this is a huge win ? This makes no sense; what happened to Biden believing in science ? Is Hunter now on some energy board for an oil major ? How come CNN isn’t mercilessly pounding Joe over this ?

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