As expected, the first few months of 2021 have ushered in a period of continued volatility and uncertainty for America’s oil and natural gas sector.
Beyond the pandemic and questions about whether OPEC+ will maintain production quotas that help balance out supply with demand, the inauguration of President Biden and ensuing executive actions taken in the early days of his administration underscore the ever-shifting landscape for the industry, particularly for companies operating on federal lands.
High-profile Day 1 moves included temporarily suspending delegated authorities at the Interior Department from taking actions on oil and gas projects, revoking the Keystone XL Pipeline permit, rejoining the Paris Agreement, and restricting access to onshore and offshore areas in the Arctic.
In an executive order issued just one week later, the president instituted a “pause” on all new federal oil and gas lease sales and directed the administration to begin work toward conserving at least 30% of U.S. lands and 30% of U.S. waters by 2030. Then, in late February, as an interim measure pending a revised estimate due by January 2022, an interagency working group established on Inauguration Day raised the social cost of carbon upward to $51/ton.
Amid all the activity, federal agencies have also been directed to immediately review all actions taken in the previous four years deemed to conflict with new national objectives related to areas including public health and environmental protection, greenhouse gas emissions, climate change, and clean air and water. Specific items under review include previous actions to regulate hydraulic fracturing and eliminate methane regulations.
With all the executive actions taken, industry is rightly concerned about how federal policy could impact existing and future operations. At the same time, comments by senior administration officials and nominees also suggest a pragmatic recognition of the reality that oil and gas is here to stay well into the future.
For example, in an opening statement at her confirmation hearing, Interior Secretary nominee Debra Haaland said that “there’s no question that fossil energy does and will continue to play a major role in America for years to come,” and that she knows “how important oil and gas revenues are to fund critical services.”
Similarly, prior to her confirmation, then-Energy Secretary nominee Jennifer Granholm said that U.S. LNG exports “can have an important role to play in reducing international consumption of fuels that have greater contribution to greenhouse gas emissions.” She also committed to supporting pipeline projects and acknowledged the importance of pipeline infrastructure, including their contributions to carbon reduction efforts. Notably, President Biden also reportedly told a group of labor leaders in February that “I’m all for natural gas.”
That is not to say that there is an easy road ahead. There most certainly is not. In addition to uncertainty associated with the actions already taken, including ongoing litigation, the regulatory landscape is likely to look much different once all the dust settles and the pause on federal leasing is lifted.
In addition to more stringent regulation of activities, including methane emissions and hydraulic fracturing and reduced access to federal acreage, federal permitting and approval processes are likely to be more time-intensive and cumbersome as requests are weighed against the administration’s climate objectives. For those leases that are issued, lessees should not be surprised to find lease terms and conditions that are less favorable, including through higher royalty rates.
The likelihood of such an outcome is underscored by the president’s direction that in conducting the review of the leasing program to be carried out during the pause, the Interior Secretary “shall consider whether to adjust royalties associated with coal, oil and gas resources extracted from public lands and offshore waters or take other appropriate action, to account for corresponding climate costs.”
To be sure, pressures are not only emanating from the White House. A Democrat-controlled Congress is set on advancing the ball on climate policy as quickly and as far as possible, and spurred by the party’s progressive base, oil and gas is clearly in the crosshairs. Even in the oil and gas bastion of Texas, regulators are tightening the screws by applying greater scrutiny in reviewing natural gas flaring requests, and industry itself is making commitments to end routine flaring.
Importantly, all of these developments are taking place amid a boom in environmental, social, and governance (ESG) and sustainability trends, with investors, shareholders, and financial institutions joining other voices in demanding greater transparency and accountability from industry regarding environmental footprints and the steps being taken to mitigate them.
While it may seem like a bleak moment for the industry — and immense challenges most certainly do exist — it is far from the end of its storied history. First, a lower-carbon future will necessarily require the use of oil and gas. Petroleum will be a critical feedstock for everyday goods as varied as clothing, ink, and paint and a backbone for transportation around the world. At the same time, natural gas will be pivotal to ensuring a stable electricity supply as more intermittent energy is integrated into the grid, meeting the electricity demand that will come with the increased use of electric vehicles, and providing allies and people around the world with abundant, reliable and cleaner energy.
Moreover, technology and innovation continue to flourish, and coupled with continued cost efficiencies achieved during the pandemic, solutions exist to ensure a strong position for oil and gas in the energy transition and journey toward a lower-carbon future. Investments and R&D in areas such as carbon capture and storage, production of certified “green” natural gas, renewable natural gas, equipment electrification, and hydrogen are just a few of the areas of opportunity for oil and gas companies to help ensure their resilience and maintain a leadership position amid the decarbonization movement.
The last year has been a time of unprecedented turmoil for the U.S. oil and gas sector, and many companies have sadly not survived intact. However, with ingenuity and agility that is second to none, despite whatever bleakness may seem apparent at the moment, better days for the industry are indeed ahead.
About the author: Paul Looney is a principal, advisory services, Cornerstone Government Affairs, where he advises energy industry clients on government, regulatory, ESG, and strategic business matters. In his past, Paul was principal and co-founder of the Washington, D.C. lobbying firm, The Washington Capitol Group, served as government affairs director at the American Institute of Aeronautics and Astronautics and served in Congressional affairs at the U.S. Department of Interior’s Bureau of Land Management.