The new administration of US President Joe Biden, having already implemented a 60-day moratorium on permitting activity on federal lands and waters, is now expected to suspend new oil and gas leases on federal territory.
Should such a policy be implemented and last for two presidential terms, Rystad Energy expects the constraining effect on oil production from the US Gulf of Mexico to gradually reach 200,000 barrels per day (bpd) by 2030, or around 250,000 barrels of oil equivalent per day (boepd) when including other hydrocarbon production.
In the case the ban lasts for only one presidential term, the above effect would be 175,000 bpd by 2030 or about 200,000 boepd when including other hydrocarbon production.
Should a ban be extended in the possibility of a second Biden term, the barrels at risk are piling up and the effect becomes more long-term.
Artem Abramov, Head of Shale Research:
The impact of a federal lease ban, if the ban lasts for two presidential terms, will be around 250,000 boepd by the end of the decade (or 200,000 bpd when we only count oil).
However, the peak effect will be felt in the late 2030s, when hydrocarbon production will be as much as 400,000 boepd lower than what our forecasts show for that time.
In the end of 2030s, about 40% of the volumes we have normally forecasted do not come from existing fields, but from expected discoveries.
The Gulf of Mexico is a relatively mature offshore basin. That is the general consensus, though its deep water part maturated somewhat too quickly amid known regulatory challenges (slowdown in spend growth in 2011-2014) and diversion of capital to other supply sources (resulted in the lack of spend recovery in 2018-2019).
The total spending in the GoM (Excluding. opex) was down from the $30-35 billion range in 2015 to almost $14 billion in 2019 before COVID-19 hit the market.
Exploration spend went down by nearly 70% in the same period. The current exploration market size in GoM is at about $2-2.5 billion per year, hit by Covid-19.
The general industry sentiment around future GoM prospects was fully in line with the “mature basin” story.
About 75% of oil production is operated by Shell, BP, Chevron, Occidental, Murphy and Hess, which grew their share systematically in the last few years both organically and inorganically.
Among them, Shell had particularly ambitions GoM program in the last few years and still has plenty of upcoming developments in the pipeline (which are all permitted).
Murphy – similar story (all upcoming developments are permitted). BP – was already in decline, GoM is a cash cow in their portfolio (when oil price is 40+) to finance energy transition ambitions, so no big corporate impact either.
Chevron and Occidental have more than enough flexibility in their portfolios to compensate for reduction in long-term GoM potential.
Hess is probably the one which was hit the most among the large players (as they were downplaying the significance of US onshore in the last few years).
Then, of course the outlooks for smaller emerging players like Kosmos will be more conservative now.
We are of course talking about billions of dollars in lost revenues for service companies in GoM in the long-term if the new lease rounds never happen again (extensions of existing leases, which is quite common in GoM is a separate discussion from regulatory perspective).
However, there are more opportunities for advanced recompletion/intervention technologies and more opportunities outside of GoM for them.
The present value of the loss is quite negligible though as all these lost revenues are in far future.
Major drillers first have to exit from the ongoing restructuring processes before they start thinking about the impact of this new regulation on their long-term business model.
Active GoM companies will have to reallocate capital to other assets (e.g. US Land in case of Chevron and Occidental) or will fast track energy transition process (e.g European supermajors like Shell and BP).
The new lease ban on federal land will be a fair trade-off between the long term clean energy ambitions of Biden and short term performance of oil industry.
Other things to watch in the next weeks or months will be, tax incentives for oil industry (IDCs, reservoir depletion), corporate tax rate gradual reversion and stricter environmental regulations.
Such policies might result in considerable increase in costs of development for producers both onshore and offshore. Small companies will be affected the most.
Most state-level tax incentives (like 2-year production tax holiday) have only survived in the states like LA, OK and ND (to some extent).
I would be surprised to see any immediate state-level actions from the energy regulators in these specific states based on such order.
Federally-regulated tax incentives for the oil industry (tax treatment of intangible drilling costs and reservoir depletion) are now indeed in a risk zone.
If they are removed, smaller producers will be hit the most as the significance of these tax benefits for their cash flow balance is high (there is a limit on the total tax exemption you can get regardless of the producer size, so Exxon will not feel too much impact).
This has to go through the Congress though and it cannot be taken for granted that every single democrat will support such aggressive shift in oil industry regulation, especially given that these incentives have existed since the early 20th century.
If the lease ban gets expended to a permanent drilling ban, we will see a natural decline in the GoM as soon as operators work through the existing inventory.
This varies from operator to operator. For example, Shell and Murphy already permitted their development programs for the next 2-3 years. Others have a 1-year lifetime of permits.
Then, basically from 2023, GoM oil production will enter into the decline phase 10-15% per year if permitting is banned today. Then there won’t be much oil coming from the basin in early 30s.
Audun Martinsen, Head of Energy Service Research:
Currently, the US offshore makes up around 8% of the global offshore services market at around 15 BUSD (2020 number).
Under the current regulatory status quo, and taken our view on oil and gas prices going forward, the service market seems to stay at this level and this percent for throughout the decade.
Around half of the US Offshore services market is brownfield and decommissioning. Companies that count on investments into EOR and intervention will not be very affected by the lease ban.
The other half is greenfield developments and exploration, where we are likely then to see a decline in investment if a ban stays. But the impact will vary throughout the years.
Seismic service providers and offshore drillers will be the most hit, but the ban will also affect others.
Many of the suppliers in GoM are exposed to land or international offshore as well, so a ban will not be too dramatic in the short term, but some US-focused firms will be challenged. However, they have some time to change strategy before this ban really impacts them fully.
Some of the suppliers (vessel companies and yards) are likely to be “compensated” by a stronger push for offshore wind projects in the US.
Jarand Rystad, CEO at Rystad Energy:
This ban will not influence short-term oil prices or even economics of oil E&Ps in US, but it will be very dramatic for suppliers such as. seismic companies, rigs and other exploration-driven oil service segments.
The exploration departments within oil companies exposed to the GOM, like Equinor, may have to re-evaluate strategies and we could see exploration focus shifting to other ‘friendlier’ regions that are upcoming.
Nations rich in fossil fuel resources that were competing with the US to attract investments may benefit.
Last but not least, such a groundbreaking policy change by the US, a world leader country could have a “contamination” effect to other countries’ exploration agenda. It remains to be seen if there will be chain-reaction policy changes elsewhere in the world.
