The Ins And Outs Of Biden’s Federal Oil Leasing Ban

Originally published on Forbes.com on January 27, 2021

Photo President Biden signing executive orders

AFP VIA GETTY IMAGES

US President Joe Biden signs executive orders. 

Several executive actions were signed by President Biden on January 27. One was to instruct the Department of Interior to pause approving new oil and gas leases on federal lands and waters. Another was to create a Civilian Climate Corps Initiative that aims to restore federal lands and waters, by reforestation and safeguarding biodiversity.

Biden will establish a National Climate task Force populated by leaders across many federal departments. There will also be a President’s Council of Advisors on Science and Technology that places science central to the new administration.

According to CNN, Interior is directed to review all fossil fuel leasing and permitting programs, and also to double offshore wind projects by 2030. The pause of new leases will expand the previous 60-day ban which didn’t affect existing leases where drilling and fracking could continue.

“We’re not going to ban fracking. We’ll protect jobs and grow jobs including through stronger standards by controls from methane leaks and union workers willing to install the changes,” Biden was quoted by CNN in perhaps a hopeful sign for the oil and gas industry.

Defining what’s banned.

A number of aspects are explained in this article: A leasing ban is different from a fracking ban. A 60-day ban is quite different from a permanent ban. US states are affected by a ban in different proportions (two states are particularly vulnerable). Oil and gas companies will respond differently to a ban.

Last, what is the justification for the Biden administration ordering this ban on federal leasing? An attempt is made here to present both sides of federal government desires versus oil and gas companies’ interests.

The previous 60-day halt on 21 January 2021 is not restrictive for many oil and gas companies because they had anticipated such legislative action and had stockpiled extra leases. Several large companies admitted they had existing leases that would last four years to drill and complete wells. The BLM, under Interior, had approved 1,400 federal leases and permits in the previous three months – a lot more than usual and mainly in New Mexico and Wyoming.

But what if the leasing ban becomes permanent? That would be more serious for companies that don’t have a stockpile of leases in the bag because oil or gas production in new shale-type wells declines quickly over two – three years, and this loss is usually replaced by drilling new wells.

A drilling or fracking ban is usually not imposed directly. Once a lease is purchased, this implies a right to a permit to drill and frac a well. But an application for permit to drill (APD) still has to be made, and it is controlled by a Resource Assessment (RA) and an Environmental Assessment (EA). So, BLM officials can approve, defer, delay or even deny, the permit needed to drill and frac a new well.

This only applies to wells on public lands (governed by federal leasing). But this would still be serious in states like New Mexico and Wyoming because they have a large percentage of producing wells on public lands. 

Also, larger companies usually have also leased lots of wells on private land, so they could switch operations from public to private lands. But smaller oil and gas companies, especially those with a high fraction of their wells on public land, probably wouldn’t have the flexibility to switch.   

What would the feds be giving up if the leasing ban becomes permanent?

In FY 2014, federal leasing created $2.1 billion, mainly in royalties, which were then split between US Treasury and states where development occurred. This has increased over the years due to increasing shale oil and gas success, especially in the prolific Delaware basin of southeastern New Mexico – where about half of the land leased by operators is public land (Figure 1). Part of the larger Permian basin, the Delaware basin on the left of the figure straddles southeast New Mexico and west Texas. The other part of the Permian basin is the Midland basin shown on the right of Figure 1.  

Wells producing oil and gas from the Wolfcamp formation in the Delaware basin on the left.

SOURCE: EIA

Figure 1. Wells producing oil and gas from the Wolfcamp formation in the Delaware basin on the left.

In FY 2019, federal leasing created $4.2 billion in royalties which were split between US Treasury and states. The feds got $2.2 billion of this while the states got $2.0 billion. New Mexico got a big part of this, and when added to state revenues, received a windfall of $3.1 billion in FY 2019.

So if leasing on public land were stopped permanently, the Interior Department could be giving up a couple billion dollars per year.

What would the states be giving up?

The loss to individual states would be felt more, because state budgets are so much smaller. New Mexico general fund budget was $7.1 billion in FY 2019, for example.

Across the USA, only about 9% of oil and gas production occurs on federal land (its much higher in federal waters). But New Mexico and Wyoming have the highest fraction of federal land in their oil and gas properties, and their budget is especially sensitive to oil and gas revenue.

New MexicoFederal leases occupy about half of the Delaware basin, New Mexico portion. The Delaware has around 45,000 oil and gas wells in the southeast part of New Mexico, around the towns called Carlsbad and Artesia, and not far from Carlsbad Caverns.

The oil and gas industry provided historically about a third of New Mexico’s budget but it’s been a bit of a windfall in recent years due to lots of federal leasing in the prolific Delaware basin. In FY 2018 it was $2.2 billion to the NM general fund, $3.1 billion in 2019, and $2.8 billion in FY 2020. For FY 2020, the $2.8 billion revenue was more than a third of the state budget, with $1.4 billion going to education and over $0.6 billion to health services.

This was a big surprise because in the first half of 2020 oil prices were pummeled by the coronavirus and by Saudi Arabia – Russia squabbling, and the price even slammed down to zero for a while. Yes, the selling price for a barrel of oil did in fact fall to below $0.

The Delaware basin has been the most active basin in regard to federal leases – its why New Mexico got a huge boost in revenue to $3.1 billion in 2019 up from $2.2 billion in 2018. It follows that in the 50 states of USA, New Mexico stands to lose the most revenue if a permanent halt is called on federal leasing.

Wyoming. In Converse County, Wyoming, a 5,000 well development has recently been approved by BLM. This is part of the Powder River basin. The leasing situation is complicated because BLM control only 6% of land surface but a hefty 64% of the mineral estate that includes oil and gas.

As a result, over 50% of oil production and 92% of gas production comes from federal lands.

Devon, EOG, and Occidental are all big players in both the Delaware basin of New Mexico and Converse County in the Powder River basin. Devon and Occidental both have conceded they have a decent stockpile of approved leases to continue drilling and fracking. 

EOG has reportedly said they are not too concerned if Interior stops leasing on federal lands, because they have a lot of opportunities in non-federal land.

The hurt of a permanent ban on federal leasing would affect New Mexico and Wyoming disproportionately compared with other states. A cynic might say that in previous years the revenue benefited the same states disproportionately, so it’s a wash.

Another observer might say vulnerable states like these need to diversify their economy. Democratic Governor Lujan Grisham probably has this in mind when she talks about green jobs associated with New Mexico’s Energy Transition Act – a bold new transition to renewable energies that was announced in March 2019.

What would the feds gain if the leasing ban becomes permanent?

President Biden has mentioned four crises that have to be addressed strongly: the pandemic, the economy, racial justice, and climate change. For climate change, it makes sense to start with bans on leasing federal land that the government can regulate – it’s low-hanging fruit. They can also point out that oil and gas companies, and states, have benefited hugely in past years/decades by drilling and fracking wells on these public lands.

Another argument is that a quarter of all US oil and gas production comes from public lands onshore and offshore in Gulf of Mexico. When these oil and gas fuels were extracted and burned in 2018 the greenhouse gas (GHG) emissions amounted to 500 million metric tons, according to USGS (United States Geological Survey) in a report in 2018.

This amounts to over 8% of all US greenhouse gases. Any way you look at it, this is a big chunk of GHG emissions. It can’t help but make sense to federal officials who know that US fossil fuels are responsible for close to 70% of all GHG in the US.

Last words.

Many New Mexicans don’t have to argue the need for climate action – they feel like they’re living in it. Right now, half the state is in an exceptional drought, the strongest classification there is.

Solutions to the climate crisis proposed by President Biden at one bookend, and by Governor Lujan Grisham at the other bookend, must include job expansion. Work on windfarms, electrical transmission lines, plugin electrical supply stations on highways, housing and office retrofitting. The economy will need to be boosted by transition to a green economy.

Senator Martin Heinrich from New Mexico recently conveyed in a statement. “It’s also crystal clear that the zero carbon, zero pollution economy is coming. Even oil and gas majors are planning for that future. To weather that change New Mexico needs a transition plan with a predictable glide path for producers and robust investments in the communities where our energy veterans have produced our country’s transportation fuels.”

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