Dunning: A fracking ban on federal lands -- is a perfect storm on the horizon?

Dunning: A fracking ban on federal lands -- is a perfect storm on the horizon?

{{featured_button_text}}

As we come to the close of the year and the 2020 election campaign heats up, hydraulic fracturing has taken a front seat as an issue – and not in a good way. Every Democratic front-runner is proposing some type of ban or limitation on the process, if not an outright ban on fossil fuels.

While few believe a ban is possible, or even legal, a short-term ban or moratorium on federal acreage is a possibility. This would create a perfect storm for some basins comprised primarily of federal acreage, including Wyoming’s Powder River Basin, the San Juan Basin in New Mexico and Utah’s Uinta Basin.

In Wyoming, we’ve seen the review and approval of projects that will bring thousands of jobs and hundreds of millions in revenue to both state and federal governments. These projects will be in limbo if a new ban is enacted, hurting both local and state economies. The U.S. Chamber of Commerce estimates a ban on federal lands would cost the U.S. $11.3 billion in annual royalties and $70 billion in lost GDP and result in 380,000 jobs being lost or threatened.

Time and time again, the oil and gas industry has shown it is risk averse and a short-sighted ban or limitation would not be forgotten, creating a long-lasting black eye for federal leases. This would lead to higher unemployment, most noticeably in Western states that up to now have seen increased oil and gas activity and the revenue that comes with it. It would create bust towns –due to politics, not oil prices. We’ve seen contractions like that in other industries and regions of the U.S., most noticeably the Rust Belt in the upper Midwest.

Over the next year, operators will start evaluating their capital risk based on their Bureau of Land Management (BLM) acreage holdings. Companies may hedge their risk by buying acreage or acquiring companies with lower-risk private acreage. But this requires investors willing to allow a company to take on additional debt or issue equity to finance such a purchase. Investors are increasingly focused on cash flow, so it’s an open question whether they’ll allow companies to spend the money needed to make this hedge. Furthermore, it’s unclear whether there are enough deals out there to be had for companies falling in this risky category.

While not impacting current operations, it will affect future production from basins comprised primarily of federal acreage. Since production from shale wells declines 50 to 70 percent in the first year, a ban of any significant time would create a steep decline in overall production that would need to be offset elsewhere.

Specifically, it could create opportunity for companies in areas such as Texas’ Eagle Ford and Midland basins. Their proximity to refineries, new pipelines and oil of a similar density to that on federal acreage makes them optimal. For operators in these basins, we could see an increase in valuation of assets compared to their federal counterparts. To be clear, we’d see a dramatic shift from federal to state and private lands, not a complete end to drilling, as some may think.

A ban could also create a short-term squeeze on financials for companies that are single-basin operators. The holdings in these basins are largely made up of private equity-backed companies; however several large, publicly-traded companies have significant positions and growth based in these basins as well.

Oilfield service companies, in anticipation, will start to move equipment and contracts to basins with less political risk, putting pressure on service prices. If pressure continues to build, midstream companies and transporters will also start to look to hedge volumes on pipelines to ensure they can meet the demand of refiners. What that would do to already constrained infrastructure is yet to be determined.

This spiraling effect occurs in vertical industries whenever there’s a profound and sudden policy shift, something a new administration should consider. While the industry is adept at moving capital and production to regions with less risk, the long-term effects on basins comprised of federal acreage are serious. The implications should be carefully considered by industry, investors, the public and especially politicians.

Phillip Dunning is senior manager of strategy at Enverus, the leading energy SaaS and data analytics company. Prior to joining Enverus, he worked as an asset development engineer in the Appalachian Basin and later at a private equity firm focusing on investments in unconventional plays and royalty/mineral acquisitions.

0
0
0
0
0

Tags

Catch the latest in Opinion

* I understand and agree that registration on or use of this site constitutes agreement to its user agreement and privacy policy.

Related to this story

Most Popular

Get up-to-the-minute news sent straight to your device.

Topics

News Alerts

Breaking News