On November 18, 2020, the LSU Center for Energy Studies released the 2021 edition of the Gulf Coast Energy Outlook (GCEO). The 2021 GCEO examines the impacts of the COVID-19 pandemic, the 2020 hurricane season, trade negotiations with China, and potential policies of a Biden administration on the region’s upstream oil and gas activity, downstream investments in refining and petrochemicals, energy exports, electricity demand, and energy sector-specific employment. David E. Dismukes, executive director and professor, LSU Center for Energy Studies, and Greg Upton, associate professor, LSU Center for Energy Studies, authored the report.
In March of 2020, the outlook for the energy industry changed rapidly when the COVID-19 pandemic essentially shut down the global economy. Oil markets were rocked by a historic decline in demand and a failed OPEC deal to curtail output and sustain prices. For its economic modeling, the GCEO assumes that COVID-19 attenuates globally and that the world will return to some level of normalcy over the next two years. The GCEO assumes that trade talks with China will not deteriorate, that new tariffs will not be implemented, and that export commitments on net do not impact demand for Gulf Coast energy products. The GCEO also assumes that the Biden policy of banning permits offshore will not go into effect, at least over the forecast horizon. If some version of this proposed policy were to be enacted, it could have significant negative economic implications for the Gulf Coast region.
As if a global pandemic were not enough, 12 major hurricanes were recorded, with five reaching Category 3 status or higher. For the first time in recorded history, five named storms made landfall in Louisiana. Most notably, on August 15, Hurricane Laura, the strongest hurricane on record in the state’s history, made landfall in Cameron Parish, Louisiana. Hurricane Laura made landfall as a Category 4 and caused billions of dollars of damage across many sectors of the economy, including damage to elec- tricity infrastructure, agricultural products such as forestry5, and of course damage to residential homes and local businesses. Fewer than three weeks later, Hurricane Sally made landfall as a Category 2 hurricane near Gulf Shores, Alabama. Hurricane Delta made landfall on October 9 as a Category 2 also near Lake Charles. Finally, on October 28, Hurricane Zeta made landfall in southeast Louisiana.
Perhaps most notably for our purposes, the Lake Charles area in southwest Louisiana has been ground zero for billions in infrastructural investments in the refining, chemical manufacturing, and export of natural gas in the form of liquefied natural gas. In fact, over 40 percent of the energy infrastructure investment made in Louisiana over the past decade has been in the Lake Charles area.
Workers in the energy processing and export industry in the region have confirmed that the industry was incredibly resilient through these hurricanes. Perhaps most notably, news reports have confirmed that neither Cheniere’s Sabine Pass nor the Cameron LNG facility experienced major damage during Hurricane Laura and are now back up and running. Industry insiders reported that this was an important litmus test for other LNG export facilities that are weighing the risk of hurricane damage. The most nota- ble damage to an individual plant was a fire at BioLab in Westlake Chemical’s Lake Charles Complex.
In terms of electricity infrastructure, while final numbers are not yet released, Entergy alone has reported $1.4 billion in damage associated with Laura, with the plurality of this damage on trans- mission infrastructure. Entergy reported 1,285 transmission structures destroyed, with another 492 damaged, and 297 substations out. Both SWEPCO and Cleco have also reported significant damage, but at the time of this writing specific public damage estimates have not yet been released. At the peak over 600,000 customers had power outages.
What a Biden Presidency Could Mean for the Energy Industry
At the time of this writing, the U.S. has undergone a presidential election, but the final outcome is not yet known. This election was particularly unique in that presidential candidate Biden made history as the first nominee for president from a major party in modern U.S. history to propose the ban of new oil and gas permitting on public lands and waters. Further, he proposed modifying royalties to account for climate costs. The Gulf Coast region will perhaps be the most impacted if these policies are enacted.
What could this mean for the industry? Consider the two regulatory steps taken to drill for oil and gas in federal waters in the Gulf of Mexico.
Leasing: When a company wants to drill for oil or natural gas in the federal waters of the Gulf of Mexico, it must first obtain a lease. Federal waters are beyond three miles from the Louisiana, Mississippi, and Alabama shorelines and nine miles from the Texas shoreline. The Bureau of Ocean Energy Management (BOEM), part of the U.S. Department of the Interior, conducts lease sales. Companies bid on lease tracts and the winner of those bids is awarded the lease in exchange for a payment that is determined by the result of the auction. This payment is called a “bonus” payment.
Permitting: Once a lease is obtained, the private company will next have to obtain a permit to drill a well from the Bureau of Safety and Environmental Enforcement (BSEE). The permit to drill gives the operator approval to begin the process of drilling the well and requires the operator to show that they will meet environmental and safety regulations. Once the well is drilled and oil and natural gas is sold to the market, the operator will then pay the federal government royalties.
According to Joe Biden’s plan for climate change, there are two changes to this process. First, his plan calls to ban new oil and gas permitting on public lands and waters, which would include the Gulf of Mexico. Second, the plan calls for the modification of royalties to account for climate costs. For perspective, royalties currently range from about 12 to 20 percent, depending on a number of factors.
While modification of royalties could impact the economics of offshore drilling, because compa- nies bid based on the expected economics, this would likely cost the federal government money in up-front bonus payments. The net effect of this is an empirical question that the GCEO will not address directly.
But, the effect of an outright ban on new permitting would have a clear negative effect on the offshore industry. A few things would likely occur if this policy were enacted as stated. First, there would likely be some drilling over the next several years, as companies that have already received permits would presumably be able to drill these wells. But nonetheless, this would slow drilling. A recent Wood Mackenzie report considers four scenarios of what the Biden policy could entail. It is simply not possible to know which, if any, of these scenarios will actually be enacted. •