Will New Order Kill Oil and Gas

Following a toned-down swearing-in with Gaga and J-Lo, President Biden began to sign executive orders, one of which temporarily suspends oil and gas leasing in the Gulf of Mexico. Biden’s January 27 order directs the Interior Secretary to pause on new oil and natural gas leases on public lands and offshore waters, and review leasing and permitting practices. Where lawful, the Secretary can adjust royalties or take other appropriate action to account for corresponding climate costs. Wondering if Biden’s order sucker punches Houston oil companies leasing in the Gulf, I peeked at two of them. Onshore federal leases, Keystone, and mega-majors like Chevron are beyond this article’s scope, its focus is Houston independents operating in the Gulf.

In November 2020, the Bureau of Ocean Energy Management (BOEM) conducted a sale of Gulf of Mexico federal offshore oil and gas leases in New Orleans. Lease Sale 256 generated over $120 million in high bids, spread over 93 tracts that covered 517,733 acres. It was the 131st GOM sale to be held since the government began offshore leasing in 1954. W&T Offshore, a Houston-based independent that has been exploring and producing oil and natural gas in the GOM since 1983 was among 23 companies with high bids. W&T bid $518,000 for 8,800 acres on two offshore blocks for a five-year lease term and 12.5% royalty. A puny shopping trip, compared to the year before when W&T snatched 83,800 acres in a GOM Lease Sale. That same year the company acquired, not at auction, 119,500 federal Gulf acres and an onshore processing facility.

BOEM typically took up to 90 days to accept or reject a high bid, and Biden signed his order within 90 days of the sale, so it wasn’t a dumb question to ask W&T if Biden’s order waylaid their leases. Al Petrie in Investor Relations replied the Bureau awarded their leases before Biden issued his order, W&T is registered as Lessor. Nothing else, however, is certain. People are calling, Petrie said, but they don’t have answers, and they don’t know if the executive order will delay drilling permits. The company intends to cooperate with the administration, and is encouraged by the fact that the Bureau issued some drilling permits after Biden signed.

In October 2020, an analyst asked W&T’s CEO Tracy Krohn if they planned to participate in the November Lease Sale, the implication being a Biden victory could unleash permitting delays and costs uncertainty. Yes, Krohn said, there’s no reason not to. W&T doesn’t routinely frack nor flare gas in the GOM, and has a proven safety record. The country needs the energy, and the government needs the royalties.

If W&T sounded cautious, Houston’s Talos Energy’s seemed to suss-out business as usual. Two days after Biden signed, Talos which did not shop in the November Lease Sale but which has 1.5 million leased GOM acres in its inventory, told investors the order pauses new leasing activities but has “no impact on existing operations or permits for existing leases, which are continuing to be reviewed and approved. Talos does not expect any material near-term impact to its current production or its ability to conduct development, exploitation and exploration activities.” The company expects to continue development efforts across the industry’s 11.7 million acres of active federal GOM leases.

Talos’ CEO Timothy Duncan added, “Despite the current regulatory environment, we do not see any impediments to continuing to execute our business – providing reliable, secure, affordable, domestic energy resources to supply our society while operating in a safe, environmentally and socially responsible way. Undoubtedly oil and natural gas play a crucial role in our daily lives, supplying the growing demand for energy to generate electricity, fuel cars and airplanes and power domestic manufacturing, demand best supplied with our own domestic resources, rather than importing from abroad, which would increase emissions, increase consumer costs, decrease government revenues, reduce security and destroy American jobs.”

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If indeed Biden’s open-ended suspension doesn’t affect existing operations or permits for existing leases, the fact that W&T and Talos squirreled away many GOM leases means they can continue to explore and develop and produce for a long time. Future lessors on the other hand are vulnerable to carbon reduction regulatory changes. Perhaps more stringent measures related to approval of drilling permits, exploration plans, development plans, oil spill-response submissions and decommissioning plans. Although it’s impossible to know what’s coming, I personally would go to the bookie with this last item. Decommissioning relates to cessation of operations, plugging and abandonment and removal of production facilities and pipelines. Trump loosened up Obama-era financial assurance requirements (bonds) for decommissioning, however Biden mentioned “abandoned wells” three times in the speech he made before signing. He related abandonment to new well-capping jobs, nevertheless his words might be a clue to hardball protocol on decommissioning.

None of this told me what happened to GOM Lease Sale high bidders whose leases were not yet awarded the day Biden paused leasing. So I contacted BOEM’s Public Affairs office, which sent a link to Biden’s executive order which I already had, and a lame reply, “For Lease Sale 256, all leases not yet awarded will have to go through a review process by higher authority.” Surely the high bids became meaningless. One imagines BOEM’s staff is flummoxed, a new director appeared in February, and the upcoming March GOM Lease Sale 257 got cancelled. Meanwhile acting Secretary de la Vega “reviews” leasing and permitting and presumably entertains stricter carbon capture lease terms and higher royalties. Interior Secretary Bernhardt split January 20, and Interior nominee Deb Haaland, awaits confirmation.

President Biden called climate change an existential threat. Transitioning from fossil fuels will create “millions of clean energy jobs in wind, solar and carbon capture.” He predicted a million jobs in the automobile industry alone. Biden pledged to spend $2 trillion to convert to carbon-neutral energy sources. Opponents say the notion that anything but a truly diverse energy portfolio can power up our entire residential, commercial, transportation, and industrial network is half-baked.