The Biden administration comes into office with an ambitious program to accelerate the transition to a low-carbon economy where greenhouse gases (GHG) are either not emitted or captured and stored to curb global warming. This marks a sharp departure from the energy policies of the last four years and portends both risks and opportunities for the oil and gas sector.
President Biden wants to put the United States on a different energy path, arriving in the White House with what he feels is a mandate to act on climate change. He put together an ambitious plan, campaigned thoroughly on it, scored a convincing victory both in the popular vote and electoral college while Democrats kept their majority in the House and regained control of the Senate. Once in office, he lost no time elevating climate to a top national priority, nominated domestic and international climate czars, and established a climate task force to coordinate governmental action across federal agencies, all of which started reversing four years of environmental deregulation.
President Biden has committed the United States to curb carbon emissions by 50% by 2030 (compared to 2005 levels), decarbonizing the power sector by 2035, and achieving carbon neutrality by 2050.
He already proposed a $2.3T infrastructure bill that includes at least $700bn in sustainability initiatives, and the Progressive Democrats are clamoring for more. It is not clear that President Biden will be able to get the totality of his package through this evenly divided Congress. However, through executive and regulatory change, his administration can still deliver significant change requiring adaptation and innovation from the sector.
Besides, the geopolitical context remains deeply uncertain. In the short term, a post-COVID economic rebound around the world will lead to increased demand for oil and gas and support the recent upward movement in prices. As oil price rises, tensions are rising inside the OPEC+ group. While it made sense for major producers to curb production to end/reverse downward pressure on price as a result of the COVID demand destruction - everyone shared a common interest in halting the decline and restoring stability. It will be harder to maintain the same level of cohesion as prices rise, and national interests start diverging.
Saudi Arabia announced last month that it would increase production in April, showing confidence in the post-COVID recovery, but also highlighting its unilateral approach. Another source of uncertainty comes from the administration’s effort to relaunch JCPOA negotiations with Iran. Successful negotiations leading to a lifting of US sanctions could bring Iran’s crude oil output back on the international markets, increasing supply to the point of putting downward pressure on oil prices, especially if the rebound falters. The sanctions in place since 2018 have cut output in half. On the other hand, unsuccessful negotiations with Iran could trigger tumult for global oil markets if Iran, as it has done before, chooses to disrupt global supply by threatening or hijacking tankers or striking oil production or cyber-infrastructure, leading to increased price volatility. Recent public warnings by US CENTCOM to Iran against striking oil installations in Saudi Arabia and Iraq indicate that the threat is material and current.
Key changes to watch for:
- Under the Biden administration, the rules used to evaluate new regulations will change and take a holistic approach. In a little-noticed Executive Order signed on January 20, Biden asked the OMB to expand the criteria used to assess the feasibility of regulatory changes to promote “public health and safety, economic growth, social welfare, racial justice, environmental stewardship, human dignity, equity, and the interests of future generations.” These expanded criteria will include second and third-order effects that are not considered now, changing the cost-benefit analysis of climate change regulations, and altering the relative value of brown and green investments. It will also likely empower stakeholders, such as local communities and activists, to utilize these new considerations in challenging new O&G projects, including infrastructure projects (i.e., pipelines).
- The Biden administration will likely reinforce the federal government’s role in climate risk assessment and modeling, which had been weakened or disbanded under the Trump administration. It is also likely to revise the way carbon is priced to calculate the cost-benefit of climate change policies. Under the Biden plan, that price is expected to go up, making fossil fuel alternatives more cost-effective. It will likely revise down a Trump administration decision in favor of higher royalty fees for oil and gas enacted last year. Typically, these actions can be adopted through directives, making their implementation quick and easy and avoiding a stalemate in Congress.
- The Biden administration has imposed a temporary moratorium and is expected to propose new rules tightening conditions for drilling and extraction on federal land and offshore waters, curbing exploration and production activity, and hindering the development and/or the retrofitting of pipelines. The moratorium on all federal land leasing pending review and the DOI cancellation of 70 drilling permits has already been enacted. The Keystone pipeline and two leases in Cook Inlet and the Gulf of Mexico (lease sale 257) have also been canceled. Other projects such as the Willow project in Alaska or drilling in the Arctic National Wildlife Refuge could be reversed too, but it will be more cumbersome as any reversal will require regulatory consultation and/or legislative action. It is worth noting that curbs on drilling and extracting are likely to put the Biden administration at odds with labor unions that fear the disappearance of jobs in communities that have been hit hard (and not particularly well taken care of) by deindustrialization. Labor unions whose membership were slated to work on the Keystone pipeline have already publicly aired their dissent to its cancellation. Labor unions are a key traditional Democratic constituency that candidate Biden fought hard to regain in 2020.
- The SEC will implement and enforce stricter corporate climate risk disclosure rules to mitigate the risks posed by climate change to the stability of the financial system. The SEC will be joining the growing coalition of institutional investors (pension funds, Blackrock, banks) and global regulators and Central banks that want to redirect capital away from fossil fuels into low-carbon alternatives. These SEC rules will address the physical impact of climate change as well as the impacts of legislation, regulation, and international agreements on business trends and will impose a cost on publicly traded companies. These changes can be implemented by the executive branch at its own discretion under existing laws. We expect these trends to adversely impact the conditions (price and origin) in which fossil fuel corporates will be able to access capital and/or finance projects.
- The administration plans to leverage the federal government's buying power to support "robust climate action.” This includes leveraging all procurement activities available to support building a fleet of EVs for federal, state, local, and tribal governments to help achieve a carbon-free power sector by 2035. It also includes directing agencies to consider energy efficiencies in making procurement decisions, pointing to a reversal of the Trump administration policy on car and building energy efficiency standards, potentially lowering energy demand. Most of the energy standards stem from regulations and may require extensive consultations before being enacted. According to the climate change Executive Order, the administration intends to extend this guidance to contractors of the federal government.
- Methane leakage from wells and pipelines has come under increased scrutiny. A recent report from the IEA indicates that methane leaks are the second largest contributor to climate change. The agency advocates strong “proactive regulations” so that the oil and gas sector limits, as much as possible, the environmental impact of its supply. The Biden administration intends to restore methane leakage controls the Trump administration loosened, but this is very likely to be another lengthy regulatory process and could lead to court challenges. Small and medium-sized businesses will likely bear the brunt of the effort, leading to higher operational costs.
- The green transition cannot happen without massive investment in innovation, green technology, and carbon capture technology that mitigates the use of oil and gas, which fuels must remain part of the energy mix. The DoE will be the lead agency for managing what the Biden team has promised to be $400bn over the next 10 years. There is always support in Congress for funding R&D programs, but the scale of the request is much larger than past programs and might be an obstacle. Regardless, there will be funds available to innovate in carbon capture and sequestration, allowing the oil and gas sector to remain a key component of the energy mix in a low-carbon environment.
- The Biden administration has been equivocal on the role of natural gas and has not taken a decisive position on LNG exports. At her confirmation hearing, Granholm vowed to follow the public interest requirements demanded by federal law when reviewing LNG infrastructure projects. She indicated that she looks favorably on gas exports to areas where NG would displace coal, such as the Caribbean. Other areas could include Asia and Poland. But she also warned that natural gas producers might need to further reduce their carbon footprint to continue/expand exports as new international carbon-intensity requirements are implemented. Last month, the French Government vetoed a contract between Engie and a US provider because the natural gas was too “dirty.”
- As the US, China, and the EU are now engaged in a race for climate leadership, standards, and regulations risk diverging, increasing regulatory divergence and deepening competitive distortions. Such divergence is likely to lead to the imposition of a carbon border adjustment mechanism. The EU will propose a mechanism to that effect in 2021 to enter into force in January 2023 (at the earliest), prompting China to demand consultations with the EU on the topic, and Japan to announce that they would consider a similar mechanism when the EU implements one. The US is also consulting with the EU on the topic. Meanwhile, the Canadian Central Bank has publicly said that Canada might need one to level the playing field between countries. The selective implementation of carbon border adjustment tax will increase the cost of trade and likely change the trade flows as well.
- International oil majors will likely respond differently to these emerging constraints and opportunities than smaller producers with no international exposure. The changing behavior of the oil majors could dramatically affect the markets accessible to smaller producers and they step into areas abandoned by the majors in their attempt to be green.
Whether the Biden administration succeeds in implementing the totality of its agenda remains to be seen. Whatever path it takes, directives, regulations, or legislative, it will likely face legal action from parties adversely affected by its policies and a judiciary much more conservative than under the Obama administration, resulting in lengthy battles, delayed implementation, and prolonged uncertainty.
 A carbon border adjustment mechanism (CBAM) is a levy on imported goods by carbon-taxing countries on goods and services from non-carbon-taxing countries. It is designed to address unfair competition and carbon leakage.
© Copyright 2021. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.