President Joe Biden is expected to call on Congress to pass legislation enacting “use it or lose it” fines on wells that oil companies have leased from the federal government but have not used in years and “on acres of public lands that they are hoarding without producing…Companies that are producing from their leased acres and existing wells will not face higher fees.” The extra fees on federal leased land are on top of rents that the oil companies pay to hold the leases, “bonus bids” paid by the winning bidder at lease sales and the fact that 66 percent of federal leases are currently producing oil.
The Biden administration is clearly continuing its attacks against the oil and gas industry without the appearance of any understanding of its procedures and steps to activate drilling operations, as groups like Western Energy Alliance have pointed out. Currently, there are 37,496 onshore leases in effect and 12,068 nonproducing leases. Not all the nonproducing leases will be developed because exploratory work may find that there is insufficient oil and natural gas on them to make them economic.
Once enough oil has been identified, a number of steps must be undertaken. Companies must put together a complete leasehold, particularly with the long horizontal wells that can cut across multiple leases. Sometimes a new lease is needed to combine with existing leases to make a full unit. Since the leasing ban remains in effect with no onshore lease sales held since 2020, some leases are held up, waiting for new leases or for the government to combine them into a formal operational unit. Also, before allowing development on leases, the government conducts environmental analysis under the National Environmental Policy Act, which often takes years to complete, holding up many leases from becoming productive.
Further, many leases are held up in litigation by environmental groups. For example, Western Energy Alliance is in court defending over 2,200 leases, most of which cannot be developed while those cases are ongoing. Some leases are awaiting other government approvals. There are 4,766 permits to drill awaiting approval by the Department of the Interior’s Bureau of Land Management that Biden administration appointees could approve, enabling companies to move forward with development. However, the Biden administration has stalled on its rate of approving drilling permits, cutting back by 75 percent between April and August 2021, and continuing at a much lower level than in the first half of the year. Currently, there are 8,825 outstanding approved permits, but there are factors that cause companies to wait to drill those wells.
First, because rigs are very expensive, companies must build up a sufficient inventory of permits before rigs can be contracted to ensure the permits stay ahead of the rigs. This is a logistical challenge since these are large facilities that must be moved at great difficulty. Besides obtaining drilling permits to drill on federal lands, rights of way must be acquired to access the lease and for natural gas gathering systems, which can take years to acquire. With the pressure against natural gas flaring from regulators, most companies cannot drill before the gathering lines are in place. Pipelines also need to be in place to ship the oil and natural gas, which the Biden administration has worked against, slowing or stopping pipeline infrastructure. The Keystone XL pipeline that President Biden nixed on his first day in office is a case in point. But, there are many other pipelines that are in limbo, waiting permits to proceed from the federal government.
Further, capital must be acquired. Many companies, particularly the small independents who drill the majority of federal wells, are having difficulty acquiring the credit and capital needed. Anti-oil and gas investors, encouraged by the Biden administration’s nominations for key financial positions, have worked to de-bank and de-capitalize the industry. The financiers and investors are saying no to credit because they see the current oil price hike as a short-term problem. In the long-term, they say the Biden administration does not want the oil and gas business, so they have been reluctant to extend credit to an industry President Biden has said he does not want to continue.
Lastly, the regulatory uncertainty from the Biden administration is having the industry prioritize nonfederal leases over federal leases because there is less regulatory and political risk. The Biden administration has an agenda of regulatory overreach with extensive new regulations in the works. The uncertainty of all the new red tape puts a damper on new investment and development on federal lands.
Other Impediments to More Oil Production
There are other issues holding back production. Along with the difficulty of obtaining capital, there are not enough workers to expand rapidly, longer wait times for parts to be fabricated and supplies shipped, steel shortages for tubes that line the well holes, increased costs for the sand needed for hydraulic fracking and worries that the high prices will not last since there has been so much volatility in the oil price range over the past several months.
Sand used for hydraulic fracturing is made of silica crystals processed from pure sandstone, with a small grain size and round shape that allows natural fluids like oil and water to pass between them. At a drilling site, sand is mixed with water and other materials, then injected into the ground at high pressure to break up shale to release and pump out the oil. The sand becomes a proppant through which hydrocarbons flow. That sand now costs between $40 and $45 per ton, nearly 185 percent higher than last year, reflecting among other things increased transportation costs. Two years ago, sand prices were in the teens. While some of the sand used by drillers in Texas and New Mexico is sourced locally, a lot of the sand is shipped in from Wisconsin via rail. Shortages of labor and transportation capacity have complicated drillers’ efforts since at least early February.
The U.S. price for steel, known as oil-country tubular goods hit $2,400 per ton this month, 100 percent higher than a year ago. The price increase is due to increased demand and concern that Russia’s invasion of Ukraine will stop pipe and tube imports from the region. Russia and Ukraine combined provide about 15 percent of all of the imported metal to the United States. Russia also supplies a key ingredient for welded goods, known as coupling stock. Drillers now have less than 4 months of steel supply left for their wells—levels that were last seen in 2008, in the early days of shale drilling.
The Bakken field in North Dakota could supply as much as 100,000 barrels of additional oil to help ease domestic supply crunches, according to North Dakota’s top oil and gas regulator. Producers have been holding production flat in the Bakken due to ESG pressures and labor shortages. Rig counts have also remained flat due to workforce issues that have made adding rigs difficult.
Economists at the Dallas Federal Reserve project that whatever additional capacity U.S. producers can develop will take a minimum of six months, and that is if everything works perfectly.
Conclusion
President Biden says he wants more domestic oil production but he is doing nothing positive to make that happen. His latest ploy is to place a “use it or lose it” fine on unused oil leases that take years to develop and millions of dollars. A shale well, for example, could cost about $7 million to drill. Oil and gas producers also have to boost wages to find and retain workers. Those higher expenses, along with Biden administration’s tough environmental policy and investors’ pressure to keep costs under control, make producers reluctant to ramp up output. The oil and gas industry is also running into issues with supply chain bottlenecks, as have other industries. As one of America’s most important industries, the oil and gas industry is essential to our economy and—as has been shown with Russia’s invasion of Ukraine—to our national security. While words alone may provide solace for some, it is the continuing negative actions of the Biden administration towards their product that are being heard by the men and women in the oil industry.
