How to Ruin a Perfectly Good Oil and Gas Boom

Over the last several years, oil and gas production has risen steadily, setting production records year after year. These increases were driven mainly by production from tight rock formations using horizontal drilling and hydraulic fracturing.

According to the U.S. Energy Information Agency, the United States exported more petroleum than it imported in 2020, making the United States a net annual petroleum exporter for the first time since at least 1949. It also produced more petroleum than it consumed. Crude oil imports, though, were higher than exports. However, some of the imported crude oil is refined into petroleum products, such as gasoline, heating oil, diesel fuel, and jet fuel, and then exported. As to natural gas, total annual exports generally increased each year from 2000 through 2019 as increases in natural gas production contributed to lower natural gas prices and the competitiveness of natural gas in international markets. In 2019, the United States exported natural gas to about 38 countries and total annual natural gas exports were 4.66 trillion cubic feet, the highest on record, and the United States was a net exporter of natural gas for the third year in a row.

Against this backdrop of robust oil and gas production, the Biden Administration was installed on January 20, 2021. President Biden wasted no time reigniting the war on fossil fuels. Among other things, he rejoined the Paris Agreement on the day he was inaugurated, mandated the use of the “social cost of carbon” when monetizing greenhouse gas impacts, and paused new oil and gas leases on federal lands and in offshore waters.

Under the 2015 Paris Agreement, President Obama pledged that the United States’ nationally determined contribution to greenhouse gas emission (GHG) reduction was 26% to 28% below 2005 levels by 2025. President Biden has now announced that the United States will achieve a 50 – 52% reduction from 2005 levels by 2030 and achieve net zero emissions by 2050. In the Fact Sheet released with the announcement, he also announced a goal to reach “100 percent carbon pollution-free electricity by 2035.”

According to the EPA’s GHG Inventory, Table E-2, total GHG were 7,423 million metric tons of carbon dioxide equivalent (MMT) in 2005. Over the 14 years from 2005 through 2019, total GHG emissions dropped to 6,558.3 MMT, a drop of 864.7 MMT and 11.6%. GHG emissions dropped in 2020 due COVID-related economic restrictions but are expected to rise with renewed economic activity.

However, President Biden’s goals place even greater transformative pressure on the economy and creates a great deal of uncertainty as to how his goals will be achieved in the designated time frames. To achieve the goal of reducing total GHG by 50% from 2005 levels (half of 7,423 MMT is 3,711.5 MMT), an additional 2,846.8 MMT will have to be reduced over the next nine years based on the 2019 level of 6,558.3 MMT. Assuming that the entire electrical generation infrastructure can be changed by 2030 or 2035, a realization of the goal of “100 percent carbon pollution-free electricity by 2035” will not achieve the overall 50% goal, as 2019 emissions from fossil fuel combustion for electric power were only 1,606 MMT. Clearly, reductions from many other sectors of the economy will have to be realized.

The social cost of carbon (SSC) is an estimate of the monetized “damages” associated with incremental increases in greenhouse gas emissions. Its use and value were scaled back under President Trump. However, President Biden issued an executive order requiring its use “when monetizing the value of changes in [GHG] emissions resulting from regulations and other relevant agency action.” An interim SSC was released in February 2021 setting the SSC at $51 per metric ton (at a three percent discount rate) with increases to $85 per metric ton by 2050. Thus, there is a “cost” of $51 for every metric ton of CO2 emitted in 2020. Stated another way, preventing the emission of a ton of CO2 yields $51 in societal value or benefit.

The use of an inflated SSC tends to skew a cost-benefit analysis. The addition of costs associated with the emission of carbon will likely always generate a conclusion that the societal benefits of a proposed rule outweigh its costs. Further, the use of the SSC for “other relevant agency action” means that the SSC will be applied beyond rule-making to a variety of new agency actions. Based on this broad language, Interior may factor in the SSC in its decision to resume oil and gas activities on federal lands.

President Biden also issued an executive order requiring that the Secretary of the Department of Interior “pause new oil and gas leases on public lands or in offshore waters.” The “pause” will be in place pending a “comprehensive review” of “potential climate and other impacts of oil and gas activities on public lands and in offshore waters.”

This is not the first time Interior has been engaged in hindering oil and gas activity. In fiscal year 2007, 7,124 drilling permits were approved on federal lands, but by FY 2016 that number had dwindled to 2,184. There was a bit of a rebound by FY 2020 as 4,226 permits were issued. Further, the new Secretary of the Interior, Deb Haaland, has revoked twelve Trump era orders that were focused on promoting oil and gas development on federal lands and in offshore waters because the orders were “found to be inconsistent with, or present obstacles to,” the policies announced by President Biden.

The Department’s web-site states that the “worsening impacts of climate change pose an imminent threat to our daily lives, critical wildlife habitats and future generations” and the “time for bold action is now.” It is likely that the Interior, as part of its “comprehensive review,” will factor in the SSC in its decision to resume oil and gas activities on federal lands.

Interestingly, in order to achieve a “100 percent carbon pollution-free electricity by 2035” and net zero emissions by 2050, a vast number of solar and wind farms will have to be built in a short period of time. Some estimate that an area the size of South Dakota will be required to achieve the 2035 goal and an area the size of five South Dakotas is necessary to achieve the 2050 goal. It is likely that the same federal lands that now support oil and gas development will be utilized to house the large number of wind turbines and solar panels necessary to produce the necessary electricity.

The production and combustion of fossil fuels, including clean burning natural gas, will face obstacles that will curtail growth and likely diminish the levels of current production in order to reach the new GHG emission reduction goals. In announcing the new reduction targets, President Biden did not address the disruption to the oil and gas industry or the economy as a whole which will be associated with such a dramatic decrease in reliance on fossil fuels over such a short time period.

The Social Cost of Carbon Returns

The Biden Administration has elevated concerns about climate change to the center of its decision-making, signaling that the emission of greenhouse gases must be severely curtailed. President Biden, beginning on his first day in office, rejoined the Paris Agreement and issued executive orders stating, among other things, that federal agencies must “immediately commence work to confront the climate crisis.” He has appointed officials to decision-making positions who have expressed their opposition to the use of fossil fuels. For an economy that currently relies heavily on fossil fuels to create low-cost energy, a “war on carbon” could cause unnecessary disruptions.

According to EPA’s Draft Inventory of US Greenhouse Gas Emission and Sinks, 1990 – 2019, the total gross U.S. greenhouse gas emissions in 2019 were 6,577.2 million metric tons of carbon dioxide equivalent. This represented a 2.0 percent increase since 1990 but a 1.7 percent decrease from 2018. The decrease from 2018 is largely due to a decrease in CO2 emissions from fossil fuel combustion, reflecting the continued shift from coal to less carbon intensive natural gas and renewables. Emissions have decreased 12.9 percent since 2005 levels.

Despite these decreases and downward trends, President Biden on January 20, 2021 issued Executive Order 13990. In it, he explained that the “social cost of carbon” is an estimate of the monetized damages associated with incremental increases in greenhouse gas emissions which represents “changes in net agricultural productivity, human health, property damage from increased flood risk, and the value of ecosystem services.” He established the Interagency Working Group on the Social Cost of Greenhouse Gases and ordered that the IWG publish an interim SCC within 30 days.

The IWG met the deadline, issuing an interim SSC in February 2021. The IWG’s SSC was generally a reinstatement of the SSC it had developed prior to being disbanded in January 2017 by President Trump. According to the IWG, the SSC is $51 per metric ton (at a three percent discount rate) which increases to $85 per metric ton in 2050. Thus, there is a cost of $51 for every metric ton of CO2 emitted in 2020. Stated another way, preventing the emission of a ton of CO2 yields $51 in societal value or benefit.

The use of an inflated SSC tends to skew a cost-benefit analysis. For example, in the Regulatory Impact Analysis for the Clean Power Plan, issued by the Obama Administration in 2015, it was estimated that the climate benefits were $2.8 billion by 2020 (at a three percent discount rate) and, when those estimated climate benefits were added to the air quality health co-benefits, the benefits vastly outweighed the estimated compliance costs. The EPA then used that analysis to justify, in part, the issuance of the rule. The addition of costs associated with the emission of carbon will likely always generate a conclusion that the societal benefits of a proposed rule outweigh its compliance costs.

More of the type of cost benefit analysis used in the Clean Power Plan is forthcoming from EPA and other agencies. EO 13990 mandates that “agencies shall use [the interim SSC] when monetizing the value of changes in greenhouse gas emissions resulting from regulations and other relevant agency actions until final values are published.” Thus, the SSC will be used in a host of regulatory determinations over the next four years to justify agency actions. Likely, the SSC will be used to hinder, delay, or deny projects involving fossil fuels. It has been difficult enough over the years to obtain permits for natural gas pipelines, liquified natural gas facilities, and other facilities emitting greenhouse gases or at least contributing to the emission of such gases. Now, with the renewed application of a higher SSC, authorizations for such projects face an even more difficult path to a final permit.

EPA’s 500th Day Victory Lap

On the 500^th day of the Trump Administration, EPA touted its “notable policy achievements,” highlighting nine such achievements in a “promises made, promises kept” format. However, some of the noted achievements are works in progress and perhaps need more concrete results before a ‘mission accomplished’ banner is hung at EPA headquarters.

The nine ‘achievements’ listed by EPA include: withdrawing from the Paris Climate Agreement, ensuring clean air and water, reducing burdensome government regulations, repealing the so-called “Clean Power Plan,” repealing the Waters of the United States Rule, promoting energy dominance, promoting science transparency, ending ‘sue and settle,’ and promoting certainty to the auto industry. Continue reading “EPA’s 500th Day Victory Lap” →