Mountain States

Despite Rising Oil Prices, Western Energy Production Stymied By Leasing, Permitting Uncertainty

Recent news coverage has highlighted rising oil production in New Mexico and Wyoming as a sign that the Biden administration’s illegal federal leasing ban has had little impact on domestic energy production. But a focus on high oil prices sidesteps other signs that America’s domestic energy producers are continuing to struggle in the wake of this policy decision, including decreased western production and price volatility.

Higher Prices Cover Weakened Fundamentals

According to E&E News, rising oil prices have driven a production rebound in the Gulf of Mexico and New Mexico, which recently overtook North Dakota as the nation’s second-highest oil producing state. Behind these positive developments lurk challenges that could jeopardize the ability to maintain this pace of development.

Notably, New Mexico is unique in returning to its pre-pandemic levels, a fact noted in a briefing to the state’s Legislative Finance Committee in late June. Dawn Iglesias, the Legislative Finance Committee’s chief economist, told legislators:

“New Mexico is the only top oil-producing state to have recovered to pre-pandemic levels of oil production.” (emphasis added)

In June, legislative staff reported an increase in some tax revenues thanks to higher oil prices, but warned that overall gross receipts were down because of “reduced oil and gas drilling activity.” Over the border in Texas, meanwhile, production is down 13 percent.

Unpredictable Federal Policies Hurt Wyoming Production

A similar situation is at play in Wyoming, where 10 rigs have returned to the state in the past year. While a clear improvement over last year’s zero rigs, the number is lower than it has been in previous years. As recently as 2019, 33 rigs operated in the state.

Because much of Wyoming’s production occurs on federal lands, where operating costs are higher, many companies are waiting to see if prices will hold steady before investing in new rigs and crews. Steve Defenfelder, land manager for Kirkwood Oil and Gas, told a Wyoming paper that uncertainty about public lands permitting was making companies hesitant to invest in the state:

“Operators are going to risk investment capital if they feel like they’re going to make a good return, and so that all factors into whether they want to drill in the Permian Basin, or in North Dakota, or Oklahoma or Wyoming. It does not make Wyoming a predictable place to conduct business, and that is not a positive when companies are considering where to deploy their capital.”

Higher prices alone are not enough to guarantee production increases. Across the west, energy producers and customers are looking for prices to stabilize in order to make long term plans.

By delaying a decision on its public lands mineral leasing policy, the Biden administration is adding to this uncertainty and further delaying investment in future western energy.

Illegal Leasing Ban Hurts Future Energy Security

Strong 2021 numbers may be covering weaker future prospects. According to a presentation by the Dallas Federal Reserve, 2020 was a “blockbuster” year for leasing and permit acquisition “as companies ‘banked’ drilling rights in anticipation of a different regulatory environment in 2021.” After analyzing the implication of sustained restrictions on federal lands production in New Mexico, the Dallas Federal Reserve concluded that these restrictions will “result in an eventual cap and decline on federal royalties.”

Already the oil and natural gas industry is warning that while permitting numbers are encouraging, blocking new leases is putting a damper on America’s future energy security.

Last month, a federal judge in Louisiana ruled that administration had instated an illegal leasing ban, and despite pledges to comply with the ruling, the Interior Department has to yet to announce new lease sales.

Because of the lengthy lead time for investment and planning, leases are generally secured years before a company plans to start production and acquiring a drilling permit is one of the final stages of this process.

As API’s Mark Green wrote in a recent blog:

“Permitting is about production that’s imminent; leases represent energy in the future. That’s where Americans should be concerned. Future energy strengthens U.S. energy and national security. It’s the foundation for economic and job growth.”

This energy future is put at greater risk with each foregone lease sale.

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