What Does a Joe Biden Presidency Look Like for the Oil and Gas Industry?
If Joe Biden wins the election, January 20, 2021, will be the end of the oil and gas industry in Texas, right? Fracking will be banned, the rigs will be laid down and we will move to electric cars. At least those are some of the things that come to mind when someone mentions a Biden administration in the White House. In this article, we will attempt to explain what a Biden presidency would actually look like for a mineral owner and what, if any, effects it would have on the way we do business. The good news for private mineral owners and buyers in Texas is that we don’t expect much change at all.
While many of the democrats running for president have stated that they were in favor of a “ban on fracking,” Joe Biden has not publicly supported such a ban. In fact, the opposite is true. At a CNN Town Hall in September 2019, Joe Biden stated that he does not support such a ban,. Furthermore, assuming he was in favor of banning fracking, such a ban would be difficult to implement on a local or state level and would more likely only apply to activity on federal lands, of which there is little in Texas. This is one of the myriad reasons that Bellatorum focuses on purchasing minerals in Texas where the legal and political landscape is favorable to oil and gas production and individual landowner rights in general.
Electrical production accounts for ~30% of US demand for natural gas. While it is true that the Biden energy policy focuses on a transition to cleaner sources for electricity, this transition isn’t expected to happen before 2035. In 2019, Americans used 2.58 trillion kWh of electricity. Fossil fuels generated 63% of America’s energy with more than 60% of that (1.582 trillion kWh) being generated from ~11.5 trillion cubic feet of natural gas. A 2.5-3 MW wind turbine produces 6 million kWh of electricity. To replace all of the electricity produced by natural gas would require more than 260,000 of these wind turbines assuming flat demand. Given that the average wind turbine requires 1.875-2.625 acres of land and costs $3-5 million this would require between 500,000 and 700,000 acres of land and between $791 billion -$1.318 trillion to be dedicated to new wind farms, not accounting for the land and costs needed for additional infrastructure. This represents more than 1/5 of the 2020 federal budget and an area approaching the size of our smallest state, and almost twice the size of Houston, Texas. Additionally, each new wind turbine requires large amounts of material and fossil fuels for completion, requiring 900 tons of steel, 2,500 tons of concrete, and 45 tons of non-recyclable plastics. It is impractical to assume that this is going to occur overnight or result in a material near-term decrease in the demand for natural gas, particularly when balanced with an increase in international demand for liquified natural gas (“LNG”). This also doesn’t account for the additional demand for electricity brought on by the proposed switch to electric vehicles, which brings us to our next point, transportation.
The Biden energy policy calls for a gradual switch to electric vehicles and a general shift away from fossil fuels in the transportation sector. There are currently an estimated 287.3 million vehicles registered in the United States, a number that has increased by about five million per year over the past eight years. The Biden plan targets replacing up to 63 million conventional cars over the next ten years, an average of 6.3 million vehicles per year. At the end of ten years, if this target is met, 224.3 million of the conventional cars on the road today will still be on the road ten years from now. If the trend continues, and half of the new cars purchased are electric, which would be quite a leap given that only eight percent of the vehicles purchased in Q1 2020 were alternative fuel vehicles, one could expect that there are 275 million conventional vehicles and 63 million electric vehicles on the road in 2030. As compared to the 287 million conventional vehicles currently on the road, this would result in a modest decrease in the US transportation sector’s fossil fuel demand, which is offset by a need for an additional 18 billion kWh of demand for electricity that must somehow be produced.
Tax and Regulatory
The Biden climate plan may implement additional regulatory requirements on the exploration for and production of oil and gas, for example, “aggressive methane pollution limits for new and existing oil and gas operations,” and more aggressive enforcement of current regulations. The Biden plan also calls for the elimination of “subsidies” which are generally understood to be the tax treatment of Intangible Drilling Costs (“IDC”) and certain tax treatments of pass-through entities. These actions may impact the industry as a whole, but on balance will affect producers much more than private mineral owners who as non-working interest owners are insulated from the additional costs producers will be burdened with from these policies.
The Biden administration’s proposed domestic policies may result in a decrease in domestic demand for fossil fuels, but this decrease will happen over time and be gradual. Also consider that many of these policy changes cannot occur with an executive action alone and requires legislative action, or at least the cooperation of the legislative branch, which is not a certainty. Other market forces will also mitigate or amplify the effects on demand that the policies of any administration attempt to implement. Furthermore, international demand for American oil and natural gas will increase as a result of Biden’s focus on reducing worldwide greenhouse gas emissions.
Biden plans on recommitting to the Paris Agreement and leading an “effort to get every major country to ramp up the ambition of their domestic climate targets.” The policy prohibits many organizations from financing coal-fired power plants and incentivizes natural gas plants, which will increase international demand for clean-burning natural gas. Combining this with the Energy Information Administration (EIA) estimates of a 50% increase in energy consumption by 2050 (worldwide natural gas consumption increasing by 40% and more than 20% for liquid fuels) due to the rising populations and standards of living in developing nations reflects a long-term need that will support the oil and gas industry.
The United States oil and gas industry is well situated to take advantage of this increased demand, as LNG export capacity continues to rise, and low-cost supply exists to fill the increased demand. In particular, Texas mineral owners are well positioned, due to their geographic proximity to liquification plants being planned for the Gulf of Mexico. In addition to LNG exports, the Biden policy calls for a more integrated energy grid to Central America and Colombia, perhaps providing an additional market for Permian associated gas, and further advantaging Texas mineral owners, decreasing basin differentials, and providing additional revenue to those mineral owners.
What the Future Holds
The uncertainty created by the upcoming election, with the possibility of a Democratic president implementing a climate policy that impacts domestic oil and gas production does create some risk to the oil and gas industry. However, this risk is greater for producers than mineral owners, given that many of the policies will affect either tax treatment or regulations that apply to producers, or are limited to federally-owned minerals where the executive branch has a greater ability to control or restrict activity. While private mineral owners in the United States in general face limited political risk, we think that the Texas mineral owner faces less risk than those in other states due to the favorable laws and political climate that currently exist in Texas. While it continues to be wise for mineral owners to monitor politics and policy as they relate to mineral ownership, we see no reason for mineral owners to modify their strategy or behavior due strictly to the upcoming election.