What is within a president’s power?
Going back to the theme of checks and balances, what does the president have the authority to do? On federal lands and waters, the executive branch has fairly wide latitude. It seems that the president could ban fracking on federal lands and/or suspend new drilling leases on federal lands with an executive order. That said, the executive order would almost undoubtedly be challenged in the courts. As discussed in this article from CNN, attempts to add fracking regulations through the Bureau of Land Management in 2015 were met with petitions for judicial reviews from Wyoming and Colorado and ultimately deemed unlawful by a federal judge. Presumably, permits already granted would not be revoked, but if attempted, more court cases would be expected.
Beyond federal lands, instituting a broad fracking ban would likely require legislation from Congress. The reason often cited is that hydraulic fracturing was excluded from regulations surrounding underground injection and protection of underground water sources in the Safe Drinking Water Act of 2005. (This is commonly referred to as the Halliburton loophole by various stakeholders.) Of course, there could be other ways to increase regulation without instituting a complete ban that could make fracking much more difficult or economically unattractive. By and large, fracking has been regulated at the state level, with a few states such as New York, Vermont, and Maryland having instituted fracking bans.
As a practical example of checks and balances, President Trump’s April 2017 executive order to allow offshore drilling in the Arctic Ocean was deemed unlawful by a federal judge. The executive order sought to reverse Obama administration actions that barred 125 million acres of the Arctic Ocean from oil leasing activities. The judge ruled that President Trump does not possess the authority to reverse the ban under the Outer Continental Shelf Lands Act, meaning an act of Congress will be needed to reopen offshore drilling in the Arctic. The court’s decision was being appealed as of May. As this example demonstrates, changing energy policy can be challenging, time consuming, and will likely involve the courts.
What role do federal lands and waters play in US energy production?
If drilling policies on federal lands change, what could be at stake? Federal lands relevant to energy production are largely in the Mid-Continent and Western United States, namely the New Mexico portion of the Permian, Bakken/Williston, and Rockies/Powder River Basin (Colorado). With some risk to future development of these lands, producers have disclosed more information on their federal acreage. For example, Matador Resources (MTDR) detailed its federal leasehold acreage in Lea, Eddy, and Loving Counties, New Mexico. Chevron (CVX) indicated on its 3Q19 call that less than 10% of its Permian unconventional acreage is federal land. Up north, Oasis Petroleum (OAS) stated that only 3% of its Williston acreage was on federal lands during its last call. Others disclosing information around their federal acreage include Concho Resources (CXO) in its November presentation and EOG as well.
How significant are federal lands and waters to current production? The Bureau of Land Management (BLM) oversees the federal government’s onshore mineral interests and some oil and gas development on tribal lands. At the end of September 2018, the BLM had leased 26 million acres to oil and gas producers, though less than half of those acres were producing meaningful volumes. Less than 10% of the oil, natural gas, and natural gas liquids sold in fiscal 2018 were produced from federal or tribal lands. In terms of federal waters, the major production area is the Gulf of Mexico, with a small amount produced off the coast of California. In calendar year 2018, federal offshore production accounted for 16% of US oil production and less than 3% of total natural gas production. Note that not all offshore production is federal – drilling near the coast is under state jurisdiction.
What’s the bottom line?
The executive branch could potentially curb drilling development on federal lands and waters, though court cases are likely to ensue. A broad fracking ban would be an even taller order probably requiring Congress to act. As producers watch the 2020 election unfold, they may try to mitigate the risk of a potential policy change for federal lands by attempting to accelerate permitting or development in those areas. However, the permitting process for federal lands is already lengthy by comparison to private lands, which may limit producers’ ability to stockpile permits. Furthermore, with producers mostly slowing activity, they may not have extra resources or flexibility to accelerate development on federal acreage.
With a still-crowded field of Democratic presidential candidates and several months before voters go to the polls, there’s a lot of time on the clock, so to say. If drilling activity on federal lands is eventually curbed by an executive order, court cases will probably ensue. If upheld, producers will adapt to the new rules by shifting development to private acreage, and existing production on federal lands and waters will succumb to decline rates. Though difficult to quantify, any negative impact to US production growth from policy changes could be bullish for oil prices, though lower volumes are directionally negative for midstream. As with most risks, asset and geographical diversification can be helpful for energy producers and midstream companies with exposure to federal acreage.