The policies of the new US administration could directly threaten oil and gas production, hit seismic contractors and offshore drillers hard, and lead operators to shift their exploration focus, according to Norwegian consultant Rystad Energy.
President Joe Biden, who took office last week, has already implemented a 60-day moratorium on permitting activity on federal lands and waters and is now expected to suspend new oil and gas leases on federal territory.
Should such a policy be implemented and last for two presidential terms, Rystad expects the constraining effect on oil output from the US Gulf of Mexico to gradually reach 200,000 barrels per day by 2030, or around 250,000 barrels of oil equivalent per day of hydrocarbon production.
“However, the peak effect will be felt in the late 2030s, when hydrocarbon production will be as much as 400,000 boepd lower than what our forecasts show for that time,” said Artem Abramov, Rystad’s head of shale research.
The US Gulf of Mexico is already suffering from slowing investment. Total spending in the region, excluding operating expenditure, was down from the between $30 billion and $35 billion in 2015 to just around $14 billion in 2019, the year before the Covid-19 pandemic impacted the market.
“If the lease ban gets expended to a permanent drilling ban, we will see a natural decline in the [Gulf of Mexico] as soon as operators work through the existing inventory,” added Abramov.
He added that this will vary from operator to operator, using the example of Anglo-Dutch supermajor Shell and US independent Murphy Oil that have already permitted their development programmes for the next two to three years, while others have just a one-year term on permits.
Billions in lost revenue
“Then, basically from 2023, [Gulf of Mexico] oil production will enter into the decline phase 10% to 15% per year if permitting is banned today. Then there won’t be much oil coming from the basin in early 30s.”
Such a ban would translate into billions of dollars in lost revenues for service companies; while major drilling contractors first have to exit from ongoing restructuring processes before they start thinking about the impact of this new regulation on their long-term business model.
The US currently accounts for around 8% of the global offshore services market at around $15 billion and any ban would hit seismic service providers and offshore drillers the hardest.
Around half of the US offshore services market is brownfield and decommissioning, so contractors that count on investments in enhanced oil recovery and well intervention work will not be very affected by the lease ban, noted Audun Martinsen, Rystad’s head of energy service research.
Offshore wind opportunities
“Many of the suppliers in [Gulf of Mexico] are exposed to land or international offshore as well, so a ban will not be too dramatic in the short term, but some US-focused firms will be challenged. However, they have some time to change strategy before this ban really impacts them fully,” said Martinsen.
“Some of the suppliers (vessel companies and yards) are likely to be “compensated” by a stronger push for offshore wind projects in the US.”
Meanwhile, operators exposed to the Gulf of Mexico — such as Norway’s Equinor — may have to re-evaluate strategies, with a potential shift in exploration focus to other growth regions, according to Rystad chief executive Jarand Rystad.
“Nations rich in fossil fuel resources that were competing with the US to attract investments may benefit,” he said.
“Last but not least, such a ground-breaking policy change by the US, a world leader country, could have a ‘contamination’ effect to other countries’ exploration agenda.
“It remains to be seen if there will be chain-reaction policy changes elsewhere in the world.”
Souki's clean-up call
In another move, US liquefaction player Tellurian chairman Charif Souki is calling on industry to take the necessary steps to clean up its emissions under the new Biden administration.
Souki is calling for a complete ban on methane leaks from gas operations and a nationwide price on carbon — similar to that in Europe.
He said: “We want to repair our relationships around the world, and I think natural gas is going to be central to this discussion everywhere.”
Abramov added that other things to watch in the next weeks or months will be, tax incentives for oil industry, corporate tax rate gradual reversion and stricter environmental regulations.
“Such policies might result in considerable increase in costs of development for producers both onshore and offshore. Small companies will be affected the most," he said.
“This has to go through the Congress though and it cannot be taken for granted that every single democrat will support such aggressive shift in oil industry regulation, especially given that these incentives have existed since the early 20th century.”