In line with President Joe Biden’s campaign promises, the U.S. Department of the Interior last week under his new administration suspended approvals of new oil and gas drilling permits and leases across domestic federal lands for 60 days. Following the news, some producers experienced a drop in stock prices, but there was no significant change to oil prices.
Beyond market reactions, though, it’s important to consider broader implications this change may have for the energy industry. The fact that the suspension is short term and only applies to federal land and new permits will likely limit any major disruptions. Many operators have also been bracing for this decision and as a result may find themselves somewhat insulated from any immediate ripple effects.
The short-term suspension pertains specifically to new permits and leases on federal lands and waters for fossil fuel production. Federal and tribal lands account for approximately a quarter of total domestic oil production, according to Bloomberg, meaning only a portion of U.S. production is subject to the suspension. The largest production area in this category is the Gulf of Mexico, followed by New Mexico, Wyoming and then North Dakota.
The chart below shows U.S. oil production from federal lands and waters, illustrating the change in production over time. While there was a dip in 2016 due to the oil crash that year, production on federal lands increased over the last several years. Note that the new suspension exempted tribal and individual trust lands.
This announcement was not a surprise to the industry, which has been stockpiling permits over the last several years to minimize exposure. Federal permitting in the Permian Basin alone was up 80% last summer, Reuters reported in September. The rush for permits coupled with the recent slowed rate of well completions due to the industry’s pandemic-related downturn means most operators will have enough permits in stock to continue pumping oil and gas for years. The Gulf of Mexico, the largest revenue contributor among the areas subject to the DOI’s suspension, is also somewhat shielded from immediate near-term effects; offshore permits typically last seven to 10 years, which is longer than onshore permits.
This specific announcement will have little short-term impact on the oil and gas industry, based on many operators’ limited exposure and the protection operators have with permits already in place. However, should the administration expand the suspension to apply to a broader area, the impact on the industry has the potential to become more consequential. On Jan. 25, The New York Times reported that Biden is expected to announce several executive actions related to climate change this week, one of which will “direct federal agencies to determine how expansive a ban on new oil and gas leasing on federal land should be,” according to the Times. This seems to indicate that the short-term ban could be extended and that the area it applies to could change.
The content and pace of these orders related to drilling serve as a signal from the new administration – along with other recent announcements such as Biden revoking the permit for the Keystone XL pipeline on his first day in office – that the industry will see major policy shifts over the next four years.