May 2021, Vol. 248, No. 5
Features
US Federal Land Policy Still Leaves Room for Winning Hands
By Richard Nemec, Contributing Editor
Aside from the Permian Basin in parts of Texas and New Mexico, which is in a class by itself, the Bakken Shale play in North Dakota is the nation’s next largest oil and associated natural gas basin, and one of the biggest oilfields with substantial federal public lands.
As such, state energy officials have been laser-focused on the Biden administration’s suspension of new oil and gas leasing on federal lands because it could eventually curtail Bakken production by more than 100,000 bpd.
Lynn Helms, North Dakota’s oil and gas supervisor and director of the state’s Department of Mineral Resources, spent much of this year’s winter assessing what lands could be impacted by the leasing moratorium and how. He looked at the near-term and long-term cumulative effects on the Bakken’s 1.2-MMbpd and 3-Bcf/d (85-MMcm/d) respective oil and gas production.
Helms holds a wild card in North Dakota – called the “split estate” – to play in his discussions with federal officials in the Department of Interior’s (DOI) Bureau of Land Management (BLM).
Most of the public lands in North Dakota are split tracts that allow for small, 10-acre slices of federal lands to potentially block the development or drilling on much larger 500- and 600-acre adjacent expanses of private or state land. The small federal tracks can block the ability to lease and permit on private or state property.
Helms’ department identified a situation like this in Williams County near Trenton, N.D., in March, in which a 10-acre federal tract can prevent the drilling of three or four wells on adjacent private land. Ultimately, this could subject the federal government to legal action from private landowners and the state.
“We’ve got a very unique and interesting story to tell,” said Helms, noting that he intends to tell it loudly to federal officials in the coming months.
While the economic impact on the federal lands is not as severe as it is in other western states, such as New Mexico because of exemptions for tribal lands, in North Dakota the impacts can rollover to adjacent non-federal lands.
“The Biden leasing moratorium is probably less of a problem than initially feared because it was restricted from applying to tribal and a lot of other lands,” Helms said. “Anything managed in trust by the Department of Interior for Native American lands is exempt, and since that is predominantly the best geology in North Dakota, that really has mitigated the impact on our state.”
He added there is no literal “ban” on new permits, but only what he calls a “slowdown,” preventing district or local BLM offices from issuing permits; they all have to come from Washington, D.C. It is still possible to get a permit, he said. “That’s why we have estimated only a 150-well impact on North Dakota initially.” But the rest of the nation, particularly in the West, is not as sanguine.
Last year, the Great American Outdoors Act was signed into law by then-President Donald Trump, directing $1.3 billion annually for national parks maintenance using funds from oil and gas royalties and leasing revenues related to energy development on public lands. That law also sets aside $900 million annually to the Land Water Conservation Fund for offshore leasing and energy development.
The American Petroleum Institute (API) has suggested government action focus on market-based remedies to climate change issues, and that carbon pricing be among the tools deployed, while restoring oil and gas leasing on federal lands. API CEO Mike Sommers stresses the “significant progress” in the United States in reducing emissions to what he calls “generational lows,” although he acknowledges more work is needed.
“Confronting the challenge of climate change and building a lower-carbon future will require a combination of government policies, industry initiatives and continuous innovation,” Sommers said.
President Biden’s leading environmental advisors in late January reiterated his commitment to address climate change as one of four major interrelated crises that also include COVID-19, the economic downturn and racial inequity. They called climate considerations an essential part of the Biden approach to foreign and domestic policy.
Interior Department officials emphasize that Biden’s executive order provides a chance for the federal government to review its oil and gas program “to ensure that it serves the public interest and to restore balance…to benefit current and future generations,” citing the fossil fuel activity on public lands as contributing nearly a quarter of all U.S. greenhouse gas (GHG) emissions.
“Multiple bills in Congress have been introduced in recent years to reform the outdated program, including those to better ensure the public is not shut out of land management and leasing decisions; to address mounting clean up and remediation costs of orphan wells; and to provide a fair return to taxpayers for use of these resources,” an Interior spokesperson said back in January.
According to the federal agency, the oil and gas industry has stockpiled millions of acres of leases on public lands and waters. Onshore that amounts to more than 26 million acres under lease, more than half of which (53%) are unused and nonproducing.
Of the more than 12 million acres of public waters under lease, more than 9.3 million acres are unused and nonproducing. The industry has 7,700 unused, approved permits to drill, Interior statistics indicate.
Ban’s Potential
While the Trump administration made more than 100 million acres of federal onshore and offshore lands available for leasing, the industry only leased about 10 million acres, or 10% of the available acreage. From a different perspective, the U.S. Geological Survey has reported that only 12% of public lands are permanently protected onshore, and roughly 23% of offshore public lands are protected.
In Wyoming, alone, the state Energy Authority completed a study of the ban’s potential impact that was conducted by a professor at the University of Wyoming. In addition, the Denver-based Western Energy Alliance (WEA) filed a lawsuit the day Biden signed his executive order, challenging it in federal court.
WEA attorneys alleged that the Biden order exceeds presidential authority and violates at least three major federal laws – the Mineral Leasing Act, National Environmental Policy Act, and the Federal Lands Policy and Management Act. The lawsuit was filed in the U.S. District Court in Wyoming.
WEA’s lawsuit cites the WEA study, which concludes the economic impact of the federal leasing ban would be “staggering,” reducing gross domestic products (GDP) across eight western states collectively by $33.5 billion and eliminating nearly 60,000 jobs.
“The law is clear, presidents don’t have authority to ban leasing on public lands,” said WEA President Kathleen Sgamma. “President Biden cannot simply ignore federal laws that have been in effect for more than a half century.”
The Wyoming economic study looked at potential impact in the states of Alaska, California, Colorado, Montana, New Mexico, North Dakota, Utah, and Wyoming. It estimated that by the end of Biden’s first term there could be $8 billion in lost tax revenue to the eight states, while workers would lose more than $15 billion in wages.
Nationally, oil and natural gas from public lands accounted for 6.4% and 9.2%, respectively, of national production in 2019; in that same year, oil and gas companies returned $4.2 billion in onshore and $5.6 million in offshore leasing revenue and royalties.
According to Wyoming’s study, if the Biden “pause” is extended over the next 20 years, the lost GDP in the eight western states would be $639 billion, another $286 billion in lost wages and $151 billion in lost state tax revenue, with 343,000 lost jobs.
Early in March, the U.S. Energy Information Administration (EIA) adjusted its short-term energy outlook (STEO) for the month to account for the expected effects of the Biden leasing pause, or Executive Order (EO) 14008, which EIA estimates will reduce U.S. crude oil production by less than an average of 100,000 bpd in 2022.
Historically, federal permits are issued in 10-year periods, and operators gain the access from the federal government. They are valid for two years, and when they are unused, leaseholders have been able to obtain two-year extensions.
“EIA assumes that no new federal leases are granted during the STEO forecast period, but that permitting and drilling on currently held federal leases continues pursuant to Interior Department orders [SO-3395],” said EIA’s spokesperson Tim Hess. “No effects likely will occur until 2022 because there is roughly a minimum eight- to 10-month delay from leasing to production in onshore areas, and longer in offshore areas.”
In late March, when she agreed to share her perspective with P&GJ on the federal land conundrum, WEA’s Sgamma offered an outlook for a long set of legal and regulatory battles. Her own lawsuit most likely will not get a ruling in federal court until this fall, Sgamma estimated, noting three months of briefs in the spring and early summer.
She does not expect individual operators to also file lawsuits on the overall ban, but they could regarding the permitting process.
“There might be space for lawsuits on failure to approve permits in a timely fashion if they do not recover from the immediate temporary moratorium,” Sgamma noted.
“We’ve got enough to handle with all the existing leases we’re already defending in lawsuits from environmental groups,” she added. New Interior Secretary and former New Mexico Congresswoman Deb Haaland likely will follow President Biden’s clear mandate regarding oil and gas development on federal lands, she said. “I don’t think she will change course on the leasing ban at all, given her personal antipathy to oil and gas on federal lands.”
Also, in late March, the Washington, D.C.-based API released a climate action framework concluding that a long-term ban or significant curtailment of federal leasing and development would cause coal use to reverse and increase by 15%, and carbon dioxide (CO2) emissions in the power sector would increase 5.5% by 2030, according to a recent analysis prepared for API by OnLocation Inc.
Additionally, an Obama administration Bureau of Ocean Energy Management report analyzing the effects of offshore leasing restrictions found that U.S. GHG emissions will not be affected much and, in fact, could increase slightly in the absence of new offshore leasing.
Program Revenues
Speaking at a March 25 Interior Department oil and gas forum, API Senior Vice President of Policy, Economics and Regulatory Affairs Frank Macchiarola stressed the importance of continued federal leasing and development for America’s energy security and environmental progress.
“Revenues derived from this leasing program support important priorities across the country, including education, infrastructure and conservation,” said Macchiarola. “We encourage DOI to undertake this review expeditiously and fully reinstate federal oil and gas leasing.”
At the same conference, Interior Secretary Haaland acknowledged that oil, natural gas and coal will play a major role in building the economy and powering the nation for years to come. She wants a thorough review of leasing activity but expects permitting to continue throughout the review. Rather than “rushing permitting to suit political timetables,” she wants more careful consideration of the environmental impacts of fossil fuel extraction.
Earlier, API’s Sommers had equated restricting development on federal lands and water with a policy of relying on more foreign oil imports.
“Energy demand will continue to rise – especially as the nation’s economy recovers from the impacts of the pandemic – and we can choose to produce that energy here in the United States or rely on foreign countries hostile to American interests,” he noted in January.
Dropping down from the national level, the dialogue surrounding minerals and federal lands turns more red-faced and heated in states like New Mexico, where the Federal Reserve Bank of Dallas (Dallas Fed) in early March was predicting state and regional economies could take a sharp hit, despite all the recent months and years of overall positive economic stimulation from the robust Permian Basin oil and gas production.
About half of New Mexico’s Permian production comes from federal land, the Dallas Fed’s Garrett Golding and Kunai Patel estimate. A permanent pause in leases would lead to a realignment with Permian operators in Texas, where nearly all the production comes from private or state lands, similar to the situation in North Dakota.
“A pull back in New Mexico drilling may derail economic growth and adversely affect employment and tax collections,” Golding and Patel note. Biden’s actions on federal leases have cast a higher level of worry throughout the Dallas Fed’s 11th District area.
Golding and Patel note the timeline and outcome of the federal pause are uncertain, but they offer two scenarios of possible impacts in the Permian, both of which could result in production losses of 230,000 bpd to 490,000 bpd by the end of 2025 if drilling activity continues at its early 2021 pace.
A hybrid case assumes no new leasing, but existing leaseholders continue getting new permits, and the second, restrictive case includes no new permits or extensions starting in 2023.
“As a result, production and employment across the basin will gradually shift from federal lands in New Mexico to private and state lands in New Mexico and Texas with wide-ranging economic implications for the region,” the District Fed authors said.
In 2020, the Texas part of the Permian produced 3.3 MMbpd, and New Mexico’s portion chipped in another 1 MMbpd.
Using New Mexico as a litmus test, the Biden administration last January said the President’s order on development of public lands and waters was aimed at restoring a “balance, creating jobs and providing a path to align the management of America’s public lands and water with our nation’s climate, conservation and clean energy goals.”
It tasked the Interior Department with “engaging diverse stakeholders” nationwide and conducting formal consultation with Native American tribes in regard to the U.S. government’s ongoing trust responsibility. “The executive order will have Interior pause new oil and gas leasing on public lands and offshore waters, concurrent with a comprehensive review of the federal oil and gas program, and the targeted pause does not impact existing operations or permits for valid existing leases.”
The New Mexico Oil and Gas Association (NMOGA), however, views the federal action differently, noting that any restrictions on U.S. oil and gas activity “only serve to reward other countries that do not share our commitment to environmental leadership and undercuts American energy security.”
On a broader scale, Biden has also directed the Interior Department to work out a plan to conserve at least 30% of U.S. lands and water by the year 2030. The scientific community has recommended this move to safeguard American health, food supplies, biodiversity and community-wide prosperity.
This involves farmers, ranchers, and forest and agricultural landowners as well as fishermen, outdoor enthusiasts and tribal nations, not to mention state, local and territorial governments. In the coming months, the Interior Department is charged with determining how to assess and measure progress in what the Biden team is calling a 30-X-30 goal.
New Mexico Upshot
RBN Energy Inc.’s analyst Jason Ferguson, who keeps a close eye on the Permian, deconstructed Biden’s executive order and a separate Interior Secretary’s order (SO) in February with the thought that longer term they could produce “some clear winners and losers,” while the near-term impact could potentially only be “a ripple in the ocean.” Ferguson said, “there is no outright ban on activity as Interior leadership can still approve items previously delegated to their subordinates.” As others have surmised, the impact in the Permian is limited to New Mexico because Texas lacks any federal lands.
In the New Mexico portion, more than half of the rigs operating early this year were on federal lands, and in the case of a permanent leasing shutdown, many of those rigs are likely to move to the Texas side of the Delaware sub-Basin, Ferguson notes.
“It seems reasonable that in today’s reduced-rig-count environment, finding a new plot to drill shouldn’t be incredibly difficult,” Ferguson said. “Another scenario might be that an even greater share of rigs ends up on Texas’ side of the Delaware, owing to its geographic proximity and similar collection of takeaway pipelines.”
Meanwhile, in North Dakota’s Bakken, oil and gas supervisor Lynn Helms in March was expecting the number of drilling rigs to pick up later this year and into 2022. With exemptions for the state’s tribal lands, the federal ban will only affect about 14% of the future rig count instead of the 26% that would have been impacted otherwise, Helms noted.
North Dakota estimates in March indicated the long-term impact through 2040, if there is a permanent ban on federal lands could eliminate $576 million in federal royalties, of which half usually goes to the state.
“Our largest, most well-financed operators do not operate to a large extent on federal lands, so the [expected] increase in drilling activity will take place on private and state lands,” Helms said.
For example, in early 2021, XTO put two big units in place, activating a gas processing plant and connecting gathering pipeline. When he made these comments, Helms noted that prices were up to nearly $50/bbl, which Helms noted at the time was plenty of incentive for ExxonMobil to add two more rigs.
In the midst of all the activity and focus on drilling on federal lands, Helms and North Dakota are considering a possible partnership with the three tribes that jointly operate the state’s Fort Berthold Reservation, the Mandan, Hidatsa and Arikara (MHA) Tribes, to drill up to 75 wells on adjacent state-owned lands bordering the reservation.
This relates to resources located just off the western boundary of Fort Berthold. The idea would be to drill from inside the exempted reservation lands and tap oil and gas located under adjacent state lands.
Helms’ state Department of Mineral Resources earlier in the year completed a rough evaluation of the resource potential, and state lawmakers have hired an outside consulting firm to do more evaluation for the geographical area that Helms thinks included two very large tracts of federal minerals close to the surface.
An approved partnership with the tribes could eventually unlock enormous future value for both the state and local governments, Helms said.
If the changes on federal lands are going to produce both winners and losers, the folks in North Dakota think they can be on the winning side despite their opposition to the Biden move.
Richard Nemec is P&GJ’s contributing editor based in Los Angeles. He can be reached at rnemec@ca.rr.com.
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