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Trump Is Taking The Regulatory Shackles Off Oil Drillers. Can The Industry Avoid Messing It Up?

Back in the late 1980s and early 1990s, pickup trucks all over the U.S. oil patch could be seen sporting a bumper sticker that read “Lord, please just give me one more oil boom and I promise not to mess it up.”

Fast forward to 2017 and the first few days of 2018, and the oil and gas industry is being handed the first half of that plea by the Trump Administration in the form of radical shifts from the Obama-era energy and environmental policies of the previous 8 years.  For its own sake, those in the U.S. oil and gas industry today had better take the promise made in that bumper sticker slogan very seriously.  Because if the industry messes this opportunity up, there will be hell to pay the next time the voters decide to put a Democrat in the White House, an inevitability that could come about as soon as 2020.

In just the last week, the Department of the Interior has presented the industry with three major policy reversals that will make it easier and more efficient to conduct drilling and exploration activities on federal lands and in federal waters, but also present major opportunities for the industry to mess things up:

  • On December 29, DOI announced the formal rescission of the Bureau of Land Management’s (BLM) so-called “Fracking Rule,” on the grounds that it was unnecessary and largely duplicative of state regulations.  While that has the advantage of being true, it also means that the industry must take great care in its hydraulic fracturing operations on federal lands in the coming years, as any incident is now bound to attract major media scrutiny, and you can be sure that the industry’s opponents will be keeping a running tab in anticipation of coming back into power in the next Democratic presidency;
  • Also on December 29, DOI’s Bureau of Safety and Environmental Enforcement (BSEE) announced it is embarking on a major overhaul of a pair of safety regulations that the Obama Administration put into effect following the 2010 Deepwater Horizon blowout in the Gulf of Mexico.  While the regulations were in some respects unnecessarily onerous and unworkable, revising them will inevitably place the offshore industry under even more media and public scrutiny, and any incidents that result in spills will now inevitably be blamed on whatever changes are made.  Another very double-edged sword that elevates the need for offshore operators to beef up their own safety processes;
  • And now today, January 4, DOI Secretary Ryan Zinke announced the Administration will pursue a dramatic expansion of the Obama Administration’s 2016 5-year plan for development in the federal OCS.  As announced earlier today, the proposed new 5-year plan would open up more than 90% of the OCS to oil and gas leasing, including vast areas along the Atlantic and Pacific Coasts, the Eastern Gulf of Mexico and off the North Slope of Alaska that have long been off-limits.  Again, a very bold plan that could result in huge increases in investment and production of oil and natural gas here in the U.S., but also an opportunity that the industry must take great care to not “mess up.”

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Why U.S. Oil Producers Might Not Mess Up A Good Thing In 2018

A good friend of mine who runs the government affairs shop at a large independent producer has a favorite saying: You can always count on the oil and gas industry to mess up a good thing. The last time he said that to me was about this time a year ago, when it was apparent that, after a terrible year during which the oil price for West Texas Intermediate (WTI) had sunk as low as $26/bbl, the price would top $50 by the end of the year in the wake of the agreement between OPEC, Russia and several other non-OPEC nations to curtail exports.

We were discussing the probability that, in response to that higher commodity price, the upstream segment of the industry would respond by activating a large number of idled drilling rigs early in 2017 and drill its way right back down to a lower price. Which, of course, is exactly what happened: The industry brought more than 200 additional rigs online during January and February, and another 100 or so during the next couple of months, and the market responded by trading for WTI at $43/bbl by the end of April, even as OPEC and Russia reported high levels of compliance with their lower production quotas.

Now here we are, coming toward the end of another year, and once again we have a situation in which crude prices are ramping up to an even higher level, thanks to steadily rising demand, anticipation that OPEC and Russia will renew their export agreement through 2018, and other favorable market signals. One of those other favorable signals is the fact that the rig count in the U.S. has fallen off by about 70 rigs in the last seven weeks, as shale producers have executed on more conservative drilling budgets during the second half of the year. As a result, the rate of increase in overall domestic oil production has basically leveled off at levels the market can absorb.

So will the U.S. industry mess up a good thing again in 2018? It might surprise my good friend that this time I don’t think it will, at least not to the extent that it did over the first half of 2017. This view could change by the end of December, but right now there are several factors that indicate that, while drilling will definitely pick up again after January 1, it will be a more muted response than we saw this year.

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