As governors in a slew of upper mid-western states are held to account for their inability to correctly manage their state’s election and protect the system from fraud, the oil and gas industry has problems of its own, some of which will assuredly get more complicated under a Biden administration.
the year 2020 has already been a fierce year for oil and gas. It’s the kind of year that drives some to drink, some to stop drinking and still others to call their life coaches or therapists. While there are economic principles that the market historically can rely upon to guide recovery, two unusual tangents have crossed. Covid-curated economic closures that have smashed demand, combined with the supply glut that had already brought pressure to the energy industry
Together they have created an exceptionally challenging landscape. With more than 120,000 layoffs across the industry to date, Europe again closed up tightly, and no additional PPP legislation on the horizon, executives anticipate there will be more layoffs coming in the weeks ahead.
While there are many versed in the realm of Covid recovery theory, such uncertainties create a landscape such that no economist, futurist or medium can reliably describe how or when the market will fully recover. While communities across the U.S. respond in a variety of ways, some with an eye toward liberty and economic recovery, others with an eye toward tyranny and shutdowns (think Seattle and the entire state of California), the O&G industry is based on a global market.
As such, it won’t be until the economies in Europe, Asia, Africa and the U.S. fully open and recover that the O&G industry can again fully stretch out into a comfortable stride. If a heathy oil and gas industry is akin to trail running, this current market has been more like running straight up a mountain while holding a martini carrying an F-150 or Dodge Ram 1500 on its back. It has been exceptionally difficult, and we aren’t up the mountain yet.
So where is the industry left under a Biden administration? Let’s look at several areas:
Paris Climate Accord: A Biden administration will immediately re-enter the Paris Climate Accord. By all accounts this will be done via an executive order signed on inauguration day. Legislative gaming is of course ahead, led by the thousand -year old House speaker, Nancy Pelosi. The Democrats will pass loads of "green" legislation to support the accord’s climate goals.
However, because of American natural gas development, the U.S. has already delivered levels below those outlined in the accord. Natural gas is an exceptionally clean-burning fuel that has helped reduce emissions and lead to U.S. energy independence. The accord and all legislation framed around it will represent classic political symbolism over substance. Regardless, the Republican-controlled Senate, hopefully secured by upcoming Georgia run-offs, will largely keep legislation pertaining to the accord at bay.
Federal Land: Obviously, permits for drilling on federal land are legitimately threatened with under a Biden administration. According to industry experts, about seven percent of domestic assets are located on federal land. The threat of “ending fracking” was promised during both of Biden's debate appearances and his limited interactions with young children and sycophant media at ice cream stops during his Weekend at Bernie’s-themed campaign.
Producers that hold active permits will be permitted to carry on, but no new permits will be issued. That leaves only conventional drilling on federal land, which reduces the potential value of said wells. Even if producers find that they have sound legal ground on which to challenge the administration on this change, fighting the government is like tussling with a special forces operator: they have more than one method of neutralizing their target. The bottom line is that the day to day interaction with a Biden administration-led Bureau of Land Management will create added grief and discord for producers, presumably lending to higher lease operating expenses and certainly lower returns on investment on assets on federal land.
Regulatory Environment: The favorite tool of Democrats is regulation. Regulations always cost industry money. Industry leadership understands that the the strongest headwinds under a Biden administration will be new regulatory mandates and tightened regulation that will start coming fast and furious for upstream, mid-stream and downstream sub-sectors. Regulation is to a Democrat, what corn is to bourbon.
There will be plenty of both in the oil plays across the U.S. under a Biden administration. Regulation currently costs the industry between $3-$5 per barrel. That is a direct pass-through to the consumer. The variables depend on the size of a company, their lobbying efforts and whether reporting is done in-house or with outside consultants. The bottom line is that regulation is expensive and considered a barrier to business. Under a Biden administration, there will be more of it.
So What’s Next?
While each individual business and all industry sub-sectors have already been modeling how a Biden administration might affect their respective asset portfolios and businesses, it is essential the industry also prepare. While expert at finding, producing, transporting, refining and marketing O&G and related products, the industry lacks self-awareness about how the world sees it as an industry.
The industry has stood largely silent in the face of the solar and wind crowd framing what we do as treacherous and ruinous of the environment and the planet. The energy industry has abandoned its own narrative to those who seek its demise. In the face of an administration that will fight every day to denigrate, damage and dismantle the O&G industry, we must define ourselves to the country and to the world. Oil and gas must develop its own brand. We must constantly remind the country that, without the work we do, the geo-political landscape from which the economy and country benefit would look more like Dresden, 1945 and less like HGTV’s "Fixer Upper."