U.S. oil producers are bracing for a Democratic victory in the November presidential elections, which many fear will mean significant restrictions on new drilling. Former Vice President Joe Biden won the Democratic nomination in mid-August, setting up a showdown with President Donald Trump in November.
Biden, who is leading Trump in the polls, has vowed to cease all new drilling on federal lands and in federal waters as part of a plan to address climate change. A drilling ban would come at a time when the U.S. upstream industry is already reeling from increased OPEC production and the weak demand as a result of the global COVID-19 pandemic.
Biden’s plan doesn’t preclude hydraulic fracturing and wouldn’t apply to leases on private or state-owned lands, but it still could have a significant impact on an industry that has lost tens of thousands of jobs this year. The American Petroleum Institute, an industry trade group, has estimated a federal ban would cost the industry 1 million jobs by 2022.
Some U.S. producers have stepped up leasing activity in preparation for a Biden victory. Devon Energy said it is “building a deep inventory” of permits on federal lands ahead of the election. It plans to have more than 550 in hand before November. A fifth of Devon’s drilling portfolio is currently on federal lands.
EOG Resources, another major shale driller, has about 2,500 federal permits approved or in progress, which is said should allow for more than four years of drilling activity on federal lands.
Three of the country’s biggest oil producing states—New Mexico, North Dakota and Wyoming—could be particularly hard hit by a ban on federal leases. A ban also could affect new drilling in the Gulf of Mexico, which produces about 2.3 million barrels a day.
Trump has stepped up leasing activity in recent months, offering drilling permits on millions of acres of public lands nationwide, including the Arctic National Wildlife Refuge in Alaska, which environmental groups have fought to preserve for three decades.
Royalties for drilling on federal lands totaled $9.3 billion last year.
The battle over federal leasing comes as producers are still struggling with weak demand that has caused many to shut in production in recent months. Occidental Petroleum, once one of the largest drillers in the prolific Permian Basin of West Texas and eastern New Mexico, has said it will have just a single rig operating in the region in the second half of this year. Oxy bought Anadarko Petroleum last year, and at the time, the two companies had a combined 22 rigs running in the Permian.
The energy industry has been the worst-performing sector of the Standard & Poor’s 500 Index, falling more than 35% in the first seven months of this year. While the pandemic and the collapse of energy demand that came with it has hit independent producers hard, the majors are suffering as well, with many struggling to generate enough cash flow from operations to cover shareholder distributions.
Exxon Mobil, the biggest U.S. major posted back-to-back quarterly losses for the first time in its history—which dates to 1870, when John D. Rockefeller founded the company as Standard Oil. Exxon’s upstream business lost $1.65 billion in the second quarter and its production fell by 7%. The company has slashed spending for big projects by 30% and cut operating expenses by $1 billion. In early August, it announced it would cut company contributions to the retirement plans of its 75,000 employees. Exxon is struggling to maintain its shareholder dividend, which it has raised for the past 37 years and which costs it about $15 billion a year.
At Chevron, the results were even worse. The company’s upstream business lost more than $6 billion in the quarter, compared with income of $3.48 billion a year earlier. The company in July said it would buy Houston-based Noble Energy in a stock deal valued at $5 billion.
The pandemic has also shattered the idea that the majors could shift more of their focus to petrochemicals and natural gas exports. The petrochemical business suffers from oversupply in many of its key markets, the result of global overbuilding during the past decade. Many U.S. petrochemical plants have expanded operations in the U.S. in response to cheap natural gas unleashed by the shale boom.
BP recently announced it was selling its global petrochemicals business to Ineos for $5 billion. Meanwhile, hopes that Asian countries would step up demand for natural gas imports also seems to be crumbling.
The rush to build liquified natural gas export terminals in the U.S. has led to a glut, which has driven down prices to the point that many U.S. exporters can no longer make money. Analysts say this situation could persist long after the pandemic subsides.
“The U.S. LNG export dream seems out of reach,” Clark Derry-Williams, an energy finance analyst at IEEFA recently told cable-news network CNBC. “LNG prices are now far too low for U.S. exporters to many any profit.”
With few growth prospects and weak demand in their core business, many majors are looking for acquisitions—as Chevron did with Noble, and Oxy did last year with Anadarko—taking on more debt and selling assets. Those measures, analysts say, are stopgap moves at best, but they don’t represent a long-term, sustainable strategy for the industry.
The possibility that the Democrats will retake the White House in November raises the prospect of a more difficult—if not outright hostile—regulatory regime for at least the next four years. While Biden has not called for an outright ban on fracking, as some other Democratic presidential candidates did earlier, he favors policy to combat climate change that could put more restrictions on the industry while promoting renewable energy. Such a policy would represent a sharp about-face from a Trump administration that has generally favored oil and gas production, and even coal, over renewables.
With 23 U.S. oil and gas producers already filing for bankruptcy this year—the most since the second quarter of 2016—the elections looms as yet another blow to an industry that’s already been battered this year.
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