Editor’s Note: This is one in a series of pieces NGI is undertaking as the energy industry readies for the new year, with Lower 48 natural gas and oil supply continuing to surge in an uncertain environment as liquefied natural gas exports ramp up, Mexico markets remain shrouded and stakeholders demand more value.

The United States has become the undisputed world leader for unearthing natural gas and oil resources from shale and tight formations, but campaign rhetoric by some Democratic presidential candidates to ban or restrict drilling is causing heartburn for the energy industry.

What started as a “Keep It in the Ground” campaign by environmental groups opposed to developing all fossil fuels has evolved in the early 2020 campaign season with calls to ban or restrict unconventional drilling using fracturing (fracking) technology. Several politicians have jumped on the bandwagon, with many Democrats asserting they will restrict or ban the process if they are elected.

Say What?

Energy industry veteran Daniel Yergin, vice chairman of IHS Markit, said the notion to ban a method of oil and gas extraction that has ensured U.S. energy security, created thousands of jobs and plumped up state and federal coffers is absurd. He offered his views last month at the annual Abu Dhabi International Petroleum Exhibition & Conference in an interview on CNBC’s Capital Connection.

“The notion just to say I’m going to stop fracking, it is like this all-encompassing term,” he said. “What are you talking about? I mean really, what are you talking about?”

If elected, Sen. Elizabeth Warren of Massachusetts has pledged to “ban fracking everywhere,” echoing Vermont’s Independent Sen. Bernie Sanders and Hawaii Sen. Tulsi Gabbard. Sen. Cory Booker of New Jersey wants to phase the practice out, while businessman Tom Steyer and author Marianne Williamson want to transition toward more renewables.

Candidates who want to limit fracking or impose more regulations are former Vice President Joe Biden and Mayor Pete Buttigieg of South Bend, IN. Also calling for limits are former San Antonio, TX, Mayor Julian Castro, former Maryland Rep. John Delaney, Minnesota Sen. Amy Klobuchar and businessman Andrew Yang.

The only candidate running for the Democratic nomination not calling for a ban on fracking is Colorado Sen. Michael Bennet, who has called natural gas a key in fighting climate change.

“I think if it is extracted properly, natural gas has a role to play in the transition to renewables,” Bennet said in a recent interview on MSNBC. He said banning gas production would increase emissions.

“There are people that don’t make the observation that a massive amount of coal displacement in this country has been the result of natural gas,” Bennet said. “If you’re going to take the position that the answer to our climate issues is banning all fracking now, you have to contend with the lack of coal displacement that would have resulted.”

In his criticisms of calling for a ban on fracking, Yergin specifically called out Warren, who has promised on her first day as president to “sign an executive order that puts a total moratorium on all new fossil fuel leases for drilling offshore and on public lands. And I will ban fracking -- everywhere.”

Although U.S. production primarily is regulated by the states, “there is so much that the federal government can do with a thousand cuts of regulation and so forth,” Yergin said. For Warren to say she is “against fracking shows a total lack of understanding.”

Lower 48 exploration and production (E&P) has become “one of the most dynamic parts of the U.S. economy,” he said. “You’re talking about millions of jobs.” Politicians opposed to drilling are “not even able to explain what they don’t like about fracking.”

Evercore ISI’s Sarah Bianchi, global head of political analysis, said Warren’s call to ban all fracking may need to be reconsidered “even in the context of a general election given the jobs at stake in relevant areas. However, as an executive action, she could only ban fracking on federal lands and only about 5-10% of all fracking occurs on federal lands.”

Other regulatory agencies, including the Federal Energy Regulatory Commission and the Environmental Protection Agency (EPA), “have a role to play here with permitting and interstate pipelines and even what can be used to do fracking. Warren could have a greater impact on fracking using these tools.

“However, this is an area where Warren could scale back even in the context of a campaign, given the number of fracking jobs in important states in parts of the Midwest.”

Likewise, International Energy Agency Executive Director Fatih Birol said a ban on unconventional drilling “would have major implications on the market for the U.S. economy, for jobs growth and everything.” The ban also would not be positive for energy security, “because U.S. natural gas provides a lot of security to the markets.”

Before the Lower 48 unconventional boom, Birol noted that “Russia was the country which was dominating alone the gas markets. With the U.S. coming into the picture, there is a choice, there are options for the consumers, better for energy security, for diversification.”

The American Petroleum Institute (API) is carrying the message that banning any type of drilling is not in the country’s best interests. A recent video noted that “some Democratic presidential candidates are now proposing restrictive energy policies that would erase a generation of American progress.”

API’s message features past Republican and Democratic presidents, including Jimmy Carter, Ronald Reagan, George W. Bush and Barack Obama, who each declared the importance of ending U.S. reliance on foreign oil. API’s closing message is simple. “Support America’s Energy Security. Oppose a Fracking Ban.”

Bring It On

The concerns by E&Ps about potential drilling bans was evident during third quarter conference calls. Some already are on the offense in preparation for any drastic changes to drilling.

Permian Basin player Concho Resources Inc. is making plans for 2020 around a “conservative commodity price,” CEO Tim Leach said during the quarterly call.

“The industry has faced a lot of different challenges over time. Today, sentiment toward the sector now, amplified by campaign promises to severely limit or regulate oil and gas operations, comes at a time when Concho and our peers are making significant strides in reducing our environmental footprint, all the while unlocking an energy source in our country...and provides us with more security and change the global balance in our favor.

“Since we don't know how the politics will resolve, I'll clarify that our exposure to federal acreage is about 20% of our total gross and net acreage position in our capital allocation toward that acreage is roughly the same. We've a great deal of flexibility, if we need to reallocate that capital.”

Devon Energy Corp. CEO Dave Hager warned during the third quarter call that a ban on drilling would harm communities and impact the broader economy because of an “inevitable spike” in energy costs. Proposals to ban drilling is “campaign rhetoric,” and there likely would be “substantial obstacles...for such an idea to be enacted into law.”

Around 20% of Devon’s Lower 48 leasehold is on federal land. In the Powder River Basin, nearly 60% of net operating area is on federal land. In the Permian Delaware, roughly half of the acreage is federal, while Eagle Ford Shale assets are “almost entirely on private lands,” he said.

Devon already has done “a lot of background legal work” around a drilling ban proposal, which is “really fraught with serious legal ramifications in the ability to enact on a short-term basis. I think even more importantly obviously, we just think it is going to unfairly harm the communities where we work,” Hager said.

According to a report issued in 2018 by the Congressional Research Service, which worked with the Department of Interior, only 13% of U.S. gas production was from federal lands in 2017, a figure that has declined every year since 2009.

“Even before we factor in the political challenges and legal hurdles to implementing a fracking ban on federal land, we believe the effects such a policy may have on gas production are being overhyped,” Energy Aspects analysts said. “Nearly 90% of the gas production that comes from federal land takes place in Wyoming, New Mexico and Colorado rather than the current production growth powerhouses in Texas and the Northeast.

“Indeed, Pennsylvania, Ohio and West Virginia all rank in the bottom half of states in terms of the proportion of land owned by the federal government.”

Operators that are able to adapt would likely shift resources to overcome the obstacles. “Although a federal lands fracking ban, if enacted, would likely cut into some regional gas production totals, we do not feel it would significantly affect total supply,” the Energy Aspects team said.

Still, It’s Possible

It’s become “abundantly clear that energy and climate policy will play a key role” in the Democratic campaign for the White House, according to Raymond James & Associates Inc. Analyst Pavel Molchanov and his team last month hosted a conference call with energy law expert Ali Zaidi of Kirkland & Ellis LLP, who is a former senior energy official for the Obama administration.

Some of the Democratic proposals regarding energy related plans, such as imposing a carbon tax, would require congressional action, but a fracking ban on federal acreage and even public acreage could be implemented, Zaidi said. Still, a ban of any sort on drilling could take years to implement and likely face legal roadblocks.

A president could order a drilling ban through the EPA that likely would apply only to public (federal) acreage, but jurisdictional limits of federal regulations could make it unrealistic to ban fracking or any type of drilling activity across the entire country.

EPA has authority over the type of acreage, with more control over federal acreage than state/private lands. EPA also could withhold permits for long periods of time, much easier to maneuver than attempting to revoke already approved permits.

A future administration opposed to drilling likely would focus on banning activity on federal acreage, which accounts for around 18% of onshore drilling activity, according to Zaidi. An outright ban is a possibility, but EPA could instead impose restrictions, that while not technically a ban, could make permitting more difficult to obtain.

Even with clear federal jurisdiction, however, regulatory decisions may be challenged in court and thrown out if found to be "arbitrary and capricious.”

To illustrate how judicial reviews could impact proposed rules, the Obama administration’s Clean Power Plan to decarbonize the electric power sector was blocked in 2016 by the Supreme Court and has since been upended by the Trump administration. Likewise, Trump in 2018 attempted to bail out federally regulated coal-fired power plants, but the effort has never advanced to a formal decision “because administration lawyers realized that it would stand no chance in court.”

If fracking were to be banned on federal acreage, “it could shave off up to 12% of U.S. oil/liquids production by 2025,” according to modeling by Raymond James. The analysis is based on the set of procedural steps that would have to be undertaken to implement regulations, which would include a public comment period.

“Even with a faster-than-normal process, it could easily take a year,” according to Molchanov and his team. “So in this simplified thought experiment, we assume the rule takes effect in January 2022.”

Analysts also assumed all of the impacted rigs would remain offline rather than being moved to drill on state/private lands; well productivity on federal and state/private acreage was the same; and the loss of supply from federal acreage and a resulting uplift in commodity prices would not spur incremental drilling on state/private acreage.

“With the current U.S. onshore rig count of 800, we estimate that 140 (or 18%) are on federal lands,” analysts said. About one-half of the rigs working today are in the New Mexico portion of the Permian Basin within the Delaware sub-basin. Most of the other rigs are running in Colorado’s DJ and North Dakota’s Bakken Shale.

Assuming West Texas Intermediate futures strip pricing in the low $50/bbl range, the rig count could change only slightly between now and the end of 2021, according to analysts.

“If 150 rigs were to be permanently mothballed, then, all else being equal, we estimate the year-one (2022) reduction in oil/liquids production to be 445,000 b/d,” Molchanov said. “The impact should gradually moderate but would still compound over time, reaching 1.4 million b/d on a cumulative basis by 2025. In other words, production in 2025 would be 1.4 million b/d (or 9%) lower than it would be under business-as-usual, i.e. without a fracking ban.”

The impact analysis “is purely a thought experiment,” however. “In real life, there are ‘workarounds’ that would reduce the impact on drilling activity, and thus on production.”

E&Ps could rigs to nearby state/private acreage, and while some operational disruption would be expected, anything implemented at the federal level would take time.

A second scenario envisioned by Raymond James would allow E&Ps to “preemptively get ready for a potential ban by stockpiling federal permits for fracking.” Legally, it would be difficult for EPA to revoke issued permits, so operators holding a swath of permits could continue to use them even if new permits were no longer being issued.