By Jinjoo Lee
Donald Trump has promised to remove Biden-era regulatory barriers to drilling oil and gas, and that has become even easier with Republicans' House majority. Over the weekend, Trump nominated Chris Wright, an outspoken fossil-fuel champion, as energy secretary, further cementing the new administration's pro-drilling stance. It isn't exactly music to the ears of the biggest oil producers, though.
Take methane emissions regulation, which the Trump administration might roll back. Industry lobbying groups such as the American Petroleum Institute and the American Exploration and Production Council oppose the methane fee that was part of the Inflation Reduction Act. The fee starts at $900 per metric ton of methane emissions from operations -- such as from wells and pipelines -- that exceed a specified level this year, and steps up gradually to $1,500 in 2026 and beyond. Interestingly, Exxon Mobil has expressed support for the methane fee, and TotalEnergies' chief executive has warned that rolling back methane regulations would ruin the industry's reputation.
Leading oilmen haven't suddenly become Greenpeace activists -- strict regulations tend to work in their interest. Larger companies can afford to comply with them while smaller ones often can't. Stringent rules can put these smaller companies out of business or force them to sell to larger producers. Notably, producers that had higher methane intensity than peers back in 2020 -- such as PDC Energy and Callon Petroleum -- have since been gobbled up by larger companies.
In a press briefing on Tuesday, API Chief Executive Mike Sommers said all of its members believe that the methane fee -- as proposed by the Biden administration -- is excessive, but that there is a split between some members who think some kind of fee is reasonable and others who want to see it scrapped altogether.
It isn't yet clear exactly how much companies might owe in methane fees -- the EPA's final rules on that were only announced on Tuesday. Based on analysis conducted earlier this year, Wood Mackenzie U.S. upstream energy analyst Ryan Duman suspects the fees will probably hit the smaller producers disproportionately while some of the biggest producers might not even be subject to it. Small-capitalization oil and gas producers' methane intensity declined by a third between 2019 and 2023, while that of major oil companies fell by 57% over that period, according to data from Wood Mackenzie.
Other barriers to drilling under Biden were more burdensome to smaller companies and are likely to get eased under Trump. Greater environmental scrutiny in the permitting process for leasing on federal lands, for example, has increased the amount of legwork companies need to do to get drilling permits, according to Duman. Smaller companies simply don't have access to the same resources to get through those processes.
Another Biden-era order that will almost certainly get reversed is the pause on liquefied natural gas export permits. A permanent ban would have been bad news for all prospective U.S. LNG exporters, but the pause probably made it easier for the incumbents to negotiate contracts with potential buyers.
Sure, Biden pushed enormous subsidies for green energy and tried to discourage fossil-fuel production, but his term hasn't been so shabby for big oil companies. In the four years through the end of 2024, the four largest companies in the S&P Oil & Gas Exploration & Production Industry Index are expected to have generated more than $330 billion in free cash flow, according to FactSet. Under Trump, they generated just $91 billion.
Covid and the invasion of Ukraine played a role. Historically, though, traditional energy has performed slightly better under Democrats, notes Arjun Murti, partner at energy advisory firm Veriten. That is because they tend to favor putting roadblocks on new supply, which helps limit capital spending and boost oil prices, he says. And those roadblocks tend to be more damaging to small producers rather than giants.
Most oil and gas producers are probably celebrating the Republican sweep in government. The largest ones aren't cheering as loudly.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
(END) Dow Jones Newswires
November 18, 2024 07:00 ET (12:00 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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