January 29, 2020
Most severe implications expected in Permian Delaware, NM
Recent analysis conducted by Rystad Energy suggests that if the fracking activity were to be eliminated on federal acreage – in accordance with a stated policy goal of at least one presidential candidate – the result would be a widespread shift of capital from federal to private and state-owned acreage in a bid to replace the lost oil volumes. In other words, a potential fracking ban would likely have a little immediate impact on nationwide oil and gas production figures.
“Even in the long-term, the impact might be quite negligible as seen from the greater industry perspective,” says Artem Abramov, Head of Shale Research at Rystad Energy. “However, the effects of such a ban could have stronger negative effects on one key shale producing region in particular – the New Mexico portion of the prolific Permian Delaware Basin.”
New Mexico has more than half of the most prospective property under federal acreage, in Eddy and Lea counties. While there is federally-owned land across the nation and in each individual state, the distribution is not uniform and is generally more concentrated in the west, especially in the Rockies and along the West Coast. There are 10 states in the US (excluding Alaska and the Gulf of Mexico) with more than 20,000 square miles of land owned by the federal government, of which three states can be viewed as important contributors to domestic hydrocarbon production – Wyoming, New Mexico, and Colorado – each of which has between 40,000 and 50,000 square miles of federal land.
“New Mexico has the highest relative contribution to activity on federal acreage, where the share of federal lands has been fluctuating at around 60% in recent years. Both Wyoming and North Dakota saw the share of federal acreage, relative to total activity, at close to 25% in the three-year period from 2017 through 2019, whereas horizontal activity on Colorado’s federal land is insignificant,” says Abramov.
Oil production from federal lands surpassed 1 million bpd during the summer of 2019, doubling over the most recent two-year period. New Mexico accounted for the largest share of oil production growth in 2018-2019, as shown in the chart above. In North Dakota, federal lands represent only 6% of the overall territory, but much of that acreage is concentrated within the core Bakken shale basin; this explains the state’s high contribution of production from federal property.
Total gas production on federal lands in the US Lower 48 excluding GoM exhibits a lower growth rate, largely due to the vast gas production base coming from western and central Wyoming. Still, gas production increased by about 50% between the second half of 2016 and the third quarter of 2019. Associated gas output from Delaware New Mexico’s federal acreage was a key growth driver, yet significant additional contributions came from the Utica Shale in Ohio.
In Delaware New Mexico, the federal land share of total activity varies significantly depending on the operator. For the largest operator in Delaware New Mexico – EOG Resources – only 40% of the wells that it fracked since 2017 were on federal acreage. Other operators are more intertwined with the federal government: between 63% and 82% of Oxy, Devon and Concho completions in Delaware NM were on federal land. Two other big operators with a low share of fracking on federal lands are Matador Resources and Marathon Oil, both with 25-27% of completions on federal land. Cimarex and Chevron exhibit the highest recent focus on federal land in New Mexico, with 87-90% of activity happening there.
"A majority of significant Delaware New Mexico operators can maintain activity levels at the current pace (average of 2018-2019) for more than 20 years. If federal acreage is no longer accessible, the inventory size would decrease, but we would still see 10+ years’ inventory at the current pace for most operators, and as much as 19+ years for about half of the group. Needless to say, most of these companies have equally commercial opportunities on the Texas side of the Delaware basin, where federal acreage is practically non-existent,” states Abramov.
From a valuation perspective, a fracking ban would theoretically affect the full acreage potential and hence negatively impact the total portfolio value for some E&Ps. Rystad Energy research indicates that as much as $36.5 billion in upstream asset value could be lost in Delaware New Mexico alone. “Even if a fracking ban were to be implemented on federal lands, it is our view that this loss would not be entirely reflected in market movements. This is partly because the market currently puts little value on the long-term acreage potential, and also because the loss in value of federal acreage will result in front-loaded development of private and state-owned acreage. In practice, the loss in federal acreage value will be absorbed by the gain in the value of other acreage,” concludes Abramov.
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