The proposed rollbacks and delayed implementations of a number of federal environmental regulations should modestly benefit the cost structure of parts of the US exploration and production (E&P) industry, Fitch Ratings says. However, this is likely to have only a small effect on the E&P industry’s activity levels in the short term, with efficiency gains and hydrocarbon pricing continuing to be a much bigger driver of overall activity levels. Furthermore, regulatory relief may only be temporary with greenhouse gas emissions remaining a significant regulatory theme despite the recent US exit from the Paris Agreement.

The federal regulations set for rollback or delayed implementation include methane emissions control reporting requirements, requirements to retrofit wells and other equipment to limit fugitive methane emissions, and easing of flaring rules. These regulations are largely the domain of the United States Environmental Protection Agency and the Department of the Interior.

Fitch expects E&P capex and rig counts to increase markedly in 2017 as regulatory change is not likely to be the principal driver. Rising capex and output should continue to be largely driven by efficiency gains, including the ability of operators to further increase lateral drilling lengths along with an increase of proppant loadings and conducting acreage swaps or acreage acquisitions to further core up and optimize techniques for developing multiple stacked pay zones from a single location simultaneously.

Fitch expects the economics of the best parts of the shale patch will continue to improve as incremental efficiencies are realized, resulting in additional volume increases. The United States Energy Information Administration recently revised its projections for US crude production up to 10 million barrels per day in 2018, a level which would exceed the previous record set in 1970.

The potential for regulatory relief could also be limited. Fitch believes the US withdrawal from the Paris Agreement may create offsetting risks for the industry, which are difficult to quantify, including the risk that opposition becomes more entrenched at the state and local levels even as it eases at the federal level. The response from mayors and governors around the country to the Paris Agreement exit underscore there is substantial political support for emissions regulation on both the state and local level.

Increased difficulty in gaining permits for and approving pipeline infrastructure at the state level is one example. New York State blocked the National Fuel Gas Northern Access Pipeline and Williams Constitution natural gas pipelines due to water certificate issues. The decision to withdraw from the Paris Agreement removes the regulatory certainty from having an established carbon pricing framework and opens the industry to the possibility of more severe regulation under a future administration.

Source: Fitch Ratings