Oil facility in the Gulf of Mexico.
Kerr-McGee/John Manning via Getty ImagesThe Biden administration’s plans to change and possibly halt new oil and gas leases on federal land may have the most severe effect on companies that drill in the Gulf of Mexico, Citigroup analyst Scott Gruber wrote on Monday.
Biden put a 60-day moratorium on new oil and gas permits on federal land last month. Last week, the Department of the Interior revoked about 70 previously issued permits, claiming that they had not gone through proper reviews. Current oil and gas projects on federal land can keep operating.
“A ban on new leases would likely impact activity in the Gulf of Mexico first,” Gruber wrote. “While E&Ps can still produce, carry out exploration programs, and develop discoveries on the existing leases, suspension of new leases translates to curtailed exploration, reduced investment, and eventually a gradual production decline in the basin.”
At nearly 2 million barrels of output a day, the Gulf accounts for the largest share of oil and gas production on federally controlled property in the U.S. Companies have secured leases and permits to continue drilling this year and sometimes for multiple years, the Biden policies could cause a decline in production. And that could hurt both U.S. producers like Exxon Mobil (ticker: XOM) and Hess (HES) and European ones like Royal Dutch Shell (RDS. A).
In fact, Shell and BP (BP) have the first and third most-active oil drilling operations in the Gulf, according to Gruber. For BP, Gulf drilling accounts for more than 10% of its cash flow from operations, according to Citi.
“We estimate that base production decline to be in double digits annually,” Gruber wrote. In fact, a total ban on new development wells could just about wipe out Gulf production in less than a decade.
“In case of a complete ban, where no new development wells can be drilled, 1.6 million barrels of oil and equivalents per day of future Gulf of Mexico production could be lost by 2030,” Gruber estimated in a prior report.
Gruber thinks that the larger producers will be able to manage this kind of decline by moving operations elsewhere.
But smaller operators could be hit harder. Other analysts have pointed to Murphy Oil (MUR) as one company with substantial exposure. Another independent company with Gulf of Mexico exposure is Apache (APA). Gruber has previously pointed out that engineering and service companies that service offshore operators such as Transocean (RIG) and Oceaneering International (OII) are also exposed. For smaller producers, a ban on new permits could inspire a new round of consolidation.
Gruber points to a potential unintended consequence of a ban on new drilling in the Gulf. He writes that emissions from Gulf operations are generally lower than elsewhere in the world. If the U.S. is forced to import more oil, it could actually be helping fund more carbon-emitting production elsewhere.
Write to Avi Salzman at avi.salzman@barrons.com
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BP and Other Offshore Oil Drillers Look Vulnerable to Biden Plans - Barron's
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