The impact of Biden’s federal leasing ‘pause’

Two things to start: ExxonMobil is considering board changes and new capex cuts after discussions with activist investors. And Charif Souki, one of the biggest names in US natural gas, says the sector needs to clean up its environmental act: “People have decided to vilify hydrocarbons and some of it is deserved.”

Welcome to today’s Energy Source. Joe Biden’s executive actions on climate and energy arrived yesterday. The upshot? President Biden is fulfilling some of candidate Biden’s campaign pledges, ordering action on everything from efforts to deliver “environmental justice” to electrifying the federal vehicle fleet to the much-trailed “pause” on new oil and gas leases on public lands or offshore waters.

For those in the hydrocarbon business, this last one was the one that mattered. But what exactly does the pause mean? Myles McCormick provides answers in our first note.

Across the Atlantic, Nathalie Thomas reports on the rising potential of floating offshore wind projects for our second note.

Thanks for reading. Please get in touch at energy.source@ft.com. You can sign up for the newsletter here. — Derek

Dissecting Biden’s federal leasing ‘pause’

Joe Biden’s much-anticipated “drilling ban” — an area of endless controversy on the campaign trail — landed yesterday.

Lobbyists and industry representatives went through the motions of shaking their fists and expressing collective outrage: “a punch in the gut”; “increased imports”; less tax revenue for states.

But behind the scenes there was a collective sigh of relief at an edict that was far less severe and far less extensive than many had feared.

On the campaign trail, Mr Biden vowed time and again to crack down on oil and gas drilling. “No more. No new fracking,” he vowed. The president’s online climate plan still states:

“Biden recognises we must go further, faster and more aggressively than ever before, by . . . banning new oil and gas permitting on public lands and waters.”

Despite the fanfare, what emerged yesterday was neither a ban on new drilling nor on new permits. Instead, the president mandated a “pause” on new oil and gas leasing on federal lands “to the extent possible” and a “rigorous review” of how leasing and permitting is carried out going forward.

“I would say it’s a best-case scenario for the oil industry under a Biden administration,” said Parker Fawcett, an analyst at S&P Global. “Leases are already plentiful — it’s the permitting that matters.”

The public lands over which the government has the greatest scope to flex its muscles account for just 22 per cent of US oil production, with most of that coming from offshore wells in the Gulf of Mexico. (Though states whose output relies more heavily on federal lands such as New Mexico, Wyoming and North Dakota will also be hit.)

But most of the leases for high-potential drilling areas on these lands have already been hoovered up in recent years, meaning demand for new ones — especially onshore — is low.

So the decision to limit the pause to new leases (and exclude the more immediately important drilling permits) means that even if it stays in place for some time yet, it will be at least another five years before production onshore is affected — and longer still to impact output from slower moving offshore production, analysts said.

But that’s not all . . .

While the suspension itself might not be as bad as feared, operators are concerned that it is only the start of more radical changes by the federal government.

“Of course, we are relieved that the order today doesn’t include permits,” Mike Sommers, chief executive of the American Petroleum Institute told me yesterday. But he said that the direction of travel was worrying for the sector:

“This decision appears to be a first step toward an end goal of stopping natural gas and oil development on federal lands and waters.”

The suspension paves the way for a wider crackdown on oil and gas producers. The idea, said Gina McCarthy, the president’s climate tsar, is to implement a “little pause” in order to give the administration time to reconsider exactly “what new leases ought to be approved and sold”.

Analysts said the administration could now look to tie up the permitting process in red tape, even without mandating an official suspension. “They can make it a lot more difficult, much longer. That’s the discretion that they have,” said Rene Santos at S&P Global.

For offshore producers in particular, tighter rules on federal lands leave them with few alternatives.

“Onshore, it’s much easier for companies to move from federal acreage to private or state acreage where these types of decisions do not apply,” said Erik Milito, president of the National Ocean Industries Association, an industry group representing operators in the Gulf of Mexico. “Offshore is almost entirely managed and regulated by the feds.”

“There is no shortage of negative consequences from this leasing pause,” he added.

However long the leasing suspension lasts, yesterday’s orders “are only the tip of the proverbial iceberg,” said Kip Hunter, a partner at law firm Hall Estill.

“There is little doubt that this breaking dynamic . . . will be a centrepiece of the energy policy debates in this country for the foreseeable future.”

(Myles McCormick)

And we all float on . . .

For more than a decade, companies such as Norway’s Equinor, France’s Ideol and Principle Power of the US have been working on floating wind turbine designs, hoping that the technology will open up vast areas that are currently unsuitable for conventional offshore wind turbines owing to the nature of the seabed or because waters are too deep. 

Floating wind has been hailed by its supporters as a promising alternative for countries including Japan, Taiwan and the west coast of America. It’s also been touted as a way to allow developers in mature markets such as the UK — home to the world’s biggest offshore wind farms — to access waters further from the coast, where wind speeds are faster.

Early prototypes and small arrays, such as Equinor’s Hywind Scotland which is 25 kilometres off Scotland’s east coast, have been aided by generous subsidies. But developers know that for floating wind to be deployed on a large scale, it must be able to compete with other technologies on costs.

New research suggests floating offshore wind projects could secure contracts that are “subsidy free” in the UK as early as 2029 as deployment rates grow globally, the industry matures and investors become more comfortable with the technology. 

This timeline is notable because it wasn’t until 2019 that the UK’s conventional turbines won a government contract that was below wholesale electricity prices.

But Offshore Renewable Energy Catapult, the UK technology and research centre behind the report, is seeking further support to decrease the costs of floating wind projects — including asking British prime minister Boris Johnson’s government to raise targets. 

In a “green industrial revolution” plan published last year, Mr Johnson said he hoped for 1 gigawatt of floating wind capacity by the end of the decade, part of a target to quadruple overall offshore wind capacity to 40GW.

Offshore Renewable Energy Catapult believes he should be more ambitious, doubling the floating wind ambition to 2GW.

 “It is vital the UK takes a strategic approach to supporting the rapidly developing UK floating wind industry to ensure the potential benefits are realised,” said Chris Hill, operational performance director at the Offshore Renewable Energy Catapult.

Something for Mr Johnson, who has rebranded himself as something of a green warrior, to ponder. (Nathalie Thomas)

Data Drill

Wasteful natural gas flaring is set to rise again in Texas’s Permian basin — but could be largely eliminated at little cost, according to the Environmental Defense Fund, which commissioned a detailed analysis on flaring from Rystad Energy.

EDF argues that if Texas adopted a 98 per cent gas capture rule, like the one proposed in neighbouring New Mexico, then 40 per cent of total flared volumes could be eliminated “without cost”. The industry could see an additional $400m of revenue by 2025 by capturing and selling the gas rather than burning it off, it said.

Flaring has surged along with oil and gas production, spewing an increasing amount of carbon pollution into the atmosphere which has damaged the industry’s reputation and come under investors’ spotlight.

Power Points

• US power supplier NextEra Energy just shut down its last coal plant in Florida. On Tuesday’s earnings call chief executive James Robo was blunt: “There is not a regulated coal plant in this country that is economic today . . . not a single one,” he said. On top of federal pressure to reduce coal use, Mr Robo said it’s become clear that it is more affordable to build new renewable power infrastructure than to operate existing coal plants. “Leave aside the environmental benefits,” he said. “Coal economics are so out of whack.”

• NextEra also took a $1.2bn after-tax impairment charge against the Mountain Valley pipeline, which would deliver shale gas 300 miles from West Virginia to neighbouring Virginia, citing legal and regulatory challenges.

• S&P Global Ratings on Wednesday increased its risk assessment for the entire oil and gas industry, citing the energy transition, price volatility and weaker profitability. The agency placed nine companies — including Chevron, Shell, ExxonMobil and ConocoPhillips — on credit watch. It also lowered the credit ratings on BP and Canada’s Suncor Energy from stable to negative.

• The US Army Corps of Engineers will have to carry out a lengthy environmental review of Energy Transfer’s big Dakota Access pipeline in North Dakota, according to a ruling from the DC Court of Appeals. More judicial review or an intervention from the White House could still shut the pipeline, which remains open for now, analysts say.