Home Economy Covid-19 Makes Foreign Policy the Oil Patch's First Biden Fear

Covid-19 Makes Foreign Policy the Oil Patch's First Biden Fear

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President-elect Joe Biden’s foreign policy could bring sanctions relief to Iran, home of this heavy-water plant, and add a million barrels a day of supply to the oil market.

President-elect Joe Biden’s foreign policy could bring sanctions relief to Iran, home of this heavy-water plant, and add a million barrels a day of supply to the oil market.

Photo: atta kenare/Agence France-Presse/Getty Images

America’s energy industry had been bracing for a potential shift away from the fossil-fuel-friendly Trump administration since last year. Then the Covid-19 pandemic hit, and President-elect Joe Biden’s potential actions affecting domestic oil-and-gas production seem to have lost their teeth in the near term. At the same time, his foreign-policy moves look more significant.

The extent to which Mr. Biden can push his clean-energy agenda will only become clear in January once the two pivotal Senate seats in Georgia are filled, but there are executive orders he can pursue without Congress on his side. Mr. Biden already has said he wouldn’t ban fracking outright, but he has called for ending its use on federally controlled lands.

A ban on new federal permits does have some potential for damage, though not any time soon. New drilling isn’t a priority for energy companies with prices and demand still depressed.

“It’s a very different discussion today than a year ago, when the U.S. was growing oil production one to two million barrels per day a year,” notes Scott Hanold, analyst at RBC Capital Markets. Even if West Texas Intermediate oil prices were sustained at $60 a barrel—they are around $40 today—annual oil production would be likely to grow somewhere around 300,000 barrels a day, “a far cry from the one to two million barrels per day you saw in 2018 and 2019,” he noted.

In 2015, President Barack Obama and Vice President Joe Biden appeared at the White House after an Iran nuclear deal was reached.

In 2015, President Barack Obama and Vice President Joe Biden appeared at the White House after an Iran nuclear deal was reached.

Photo: Andrew Harnik/Associated Press

Instead, a more pressing near-term threat could stem from foreign policy. Mr. Biden favors returning to the 2015 Iran nuclear deal—a move that could bring the major oil producer sanctions relief. According to a research note from RBC, the White House has authority to issue enforcement waivers on sanctions without Congress if it certifies that Iran is meeting its nuclear deal obligations.

A move to sanctions relief could bring as much as a million barrels a day of supply, or about 1% of global production, back to the market in the second half of 2021, RBC notes. A research note from
Morgan Stanley
figures that number could be as much as two million barrels a day, though likely not all at once. There are many moving parts in the global oil market, but such a big addition to supply would harm private energy companies across the board.

Domestic policy could have more of an impact in the long term. Federally controlled areas account for roughly one-quarter of all U.S. oil production. In places such as New Mexico, land ownership looks much like a checkerboard, with federal lands sitting adjacent to state and private acreage, notes Scot Anderson, partner at Hogan Lovells. That will make it a headache for producers with a heavy presence in those states to figure out permits, especially because most drilling today occurs horizontally. Moreover, royalty rates, the percentage of oil revenue that an energy company must share with the underlying landowner, are cheaper for federal lands than for state- and private-owned acreage.

Companies with higher exposure to federal lands, such as
EOG Resources
and
Occidental Petroleum,
already have experienced steeper drops in their share prices relative to peers since before the election when a Biden victory began to look likely. In some cases, the companies have used the downturn to hedge their exposure through consolidation:
Devon Energy’s
announced merger with
WPX Energy,
for example, reduces its exposure to federal lands. And if the U.S.-focused producers face incrementally higher costs because of new regulations, companies with heavy international exposure—for example, supermajors such as
Exxon Mobil
and
Chevron
—could find themselves in a marginally better position.

Mr. Biden’s clean-energy-focused agenda does have potential to shift the fortunes of energy companies—especially if he has Congress on his side. However, the effects might only show once the cloud of the pandemic lifts.