Biden’s Energy Moves: Swift Execution, Limited Near-Term Impact
President Biden has quickly begun executing on his policy agenda. In his first ten days in office, he announced the United States will rejoin the Paris Agreement and announced a sweeping climate plan. He appeared to come down hard on the oil and gas industry in the US. But did he? President Biden’s administration cancelled the presidential permit for the Keystone XL pipeline, ordered a cessation of leases in the Arctic National Wildlife Refuge (ANWR), directed federal agencies to eliminate fossil fuel subsidies and temporarily suspended new fossil-fuel-related leases and permits on federal land. President Biden had telegraphed these moves during his campaign, so they did not come as a surprise to me or the market.
The administration’s first moves support the base case I laid out before the election, and I believe they will have fairly limited near-term impact on oil and gas producers and production. Here’s why:
- Cancellation of the Keystone XL pipeline permit: Local challenges had held up the pipeline throughout the Trump administration, rendering the cancellation largely symbolic.
- Cessation of leases in the ANWR: The federal government just completed the first round of leases in the area, which was met with poor demand. The leases failed to garner interest from major and independent oil companies largely due to the difficult operating environment, lack of capital for new exploration spending and anticipated permitting and ESG (environmental, social and governance) concerns.
- Elimination of fossil fuel subsidies: On the face of it, this move would free up funds that could be reinvested into renewable energy initiatives. However, it requires Congressional approval—no easy feat with a narrow Democratic majority in the Senate. Further, many oil companies have significant net operating losses that would prevent them from paying cash taxes, even if the federal government eliminates the intangible drilling costs credit.
- Cessation of lease activity: Over the near term, the cessation of leases will have a minimal impact on production and producers as the majority of high-quality federal onshore acreage has already been leased to producers. In the offshore arena, recent lease rounds have seen tepid interest as major and independent producers have shunned offshore development and many of the remaining companies have stressed balance sheets. As a result, I see a limited near-term impact from this move.
- Sixty-day suspension of permits on federal land: The suspension will last for 60 days while the administration reviews existing fossil-fuel related permitting practices. Drilling can continue on federal onshore and offshore land as oil and gas companies already have ample inventory of drilling permits onshore and permits were already included in the lease for currently leased offshore acreage.
The endgame is now a key question. Will the administration look to change the permitting process to include more stringent water, methane and emissions standards? Or will Biden try to balance the demands from environmental groups and the economic impacts of a carbon clampdown?