President-elect Joe Biden has outlined an ambitious environmental agenda, centered around a goal of “transitioning away” from the fossil fuel industry.
His proposals — from adopting tougher methane regulations to incentives for Americans to buy cars that do not run on gasoline — could have an outsized impact in Texas, which produces the most crude oil and natural gas in the country.
In some respects, the writing has been on the wall when it comes to the future of environmental policy, and big oil and gas companies were contemplating their role in a net-zero carbon future before Biden’s election.
But in Texas, where small, independent operators play a significant role in oil production, Biden’s policies could pack more of a punch.
Among Biden’s policy proposals:
- Required disclosure of climate risks from public companies.
- A commitment to end new drilling permits for federal lands.
- A pledge to eliminate tax subsidies for the oil and gas industry.
“To the extent that there will be effects, those effects would be felt primarily by smaller producers,” said Sheila Olmstead, professor of public affairs at the LBJ School of Public Affairs at the University of Texas. She served as the senior economist for energy and the environment at the President's Council of Economic Advisers under President Barack Obama.
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Biden’s stance on environmental issues is a complete reversal from the Trump administration and differs greatly from state policy in place in Texas, where oil and gas regulators are known for close ties to the industry they oversee and have pledged to push back against any new regulations that could burden the state’s producers.
Concern from industry leaders has been heightened by the recent economic turmoil spurred by the coronavirus pandemic.
The industry has started to bounce back and economists say they are cautiously optimistic about the pace of recovery, but some fear more aggressive regulations from the federal government could dampen those efforts.
“It makes it more scary,” said Karr Ingham, consulting petroleum economist for the Texas Alliance of Energy Producers. “Some of the more politically charged statements out there are that the pandemic has created an opportunity to just continue down the path that we’re on, which is to say a smaller oil and gas business with fewer companies, fewer employees and fewer barrels being produced and so on and so forth. So yeah, it makes it a little more scary.”
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Small producers
Some major oil and gas companies have indicated a willingness to work with the Biden administration on some proposals, specifically reducing methane emissions by plugging leaks.
ExxonMobil, BP and Shell all tried to stop the Trump administration’s rollbacks of methane regulations and have argued in favor of federal oversight on the issue, according to Bloomberg.
SWEPI LP, a subsidiary of Royal Dutch Shell, said in 2019 comments to the Environmental Protection Agency that this approach is “critically important for ensuring natural gas plays a vital role in transitioning to a low-carbon energy future and economy.”
ExxonMobil and BP have both pledged to cut their total methane emissions. Given that methane is the largest component of natural gas, cutting down on emissions means more product stays in pipes and is available for companies to sell.
The oil and gas industry in Texas is certainly these big energy players that are based in Houston and have refineries, but at the same time it is thousands and thousands of small business-supply chain businesses, wildcatters and guys who are running around West Texas producing oil.
“But this oil and gas industry, if you think about the BPs and the Exxon’s of the world, is much different from what Texas knows as the oil and gas industry,” said Frank Maisano, a principal at the law firm Bracewell, which represents numerous energy companies. “The oil and gas industry in Texas is certainly these big energy players that are based in Houston and have refineries, but at the same time it is thousands and thousands of small business-supply chain businesses, wildcatters and guys who are running around West Texas producing oil.”
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For these smaller operations, complying with new regulations could come with additional expenses that, in some cases, could push companies out of business.
“If you do that, then conceivably you’re still left with companies that are producing oil and gas, they’re just much larger,” Ingham said. “And you’ve eliminated a great deal of the fabric of the industry that’s been around for decades upon decades in the state of Texas.”
Diverse economy
Petroleum started to dominate Texas in the early 20th century, displacing agriculture as the driving force behind the state’s economy.
Today, the state produces 41.4% of the nation's crude oil output and 23.9% of natural gas — a larger share than any other state.
While the state’s economy is dependent on numerous industries, oil and gas comprises between 30% and 35% of the gross state product, an estimate based on direct and indirect impacts.
“Even though we’re the No. 1 U.S. producer, the Texas economy is pretty well diversified if you compare it to a state like Alaska or Oklahoma, where a dip in oil prices has a really immediate and noticeable effect on the state’s economic texture,” Olmstead said.
But as the industry navigated economic shutdowns prompted by the pandemic and an early-2020 price war between Saudi Arabia and Russia put the squeeze on producers in Texas, production fell and the price per barrel dropped.
“Prior to the pandemic, we were producing more oil and natural gas domestically than any time in history, creating jobs, helping our economy, and providing much needed funding for education and other government priorities,” said Wayne Christian, one of the state’s three statewide elected members of the Texas Railroad Commission, which regulates the state's oil and gas industry. “Oil is slowly recovering with WTI (West Texas Intermediate, a crude oil benchmark) hitting $50, that is all in jeopardy if these proposals go into effect.”
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Pushing back
Similarly to how state leaders challenged Obama-era environmental policies, Texas officials are prepared to push back against any Biden efforts they view as overly burdensome for the industry.
“My agency is preparing to fight any and all overly egregious regulations to support the industry that funds one third of our state's economy,” said Christi Craddick, who serves as chair of the Texas Railroad Commission.
There are a few avenues by which the state could reject policies from the incoming administration — including through enforcement and the courts.
The regulatory framework for environmental policies and those affecting the oil and gas industry varies, but states play a significant role when it comes to monitoring and enforcement.
“States can react in different ways,” Olmstead said. “Some of that is capacity, whether they have the funding and the wherewithal and administrative capability to do the job right. Some of it is just pure support, whether the state is on the whole supportive.”
Texas also has shown a willingness to challenge in court policies deemed unfriendly to the oil and gas industry.
In 2015, Texas sued the EPA over Obama’s Clean Power Plan, which required states to reduce carbon emissions by transitioning from coal power to natural gas and renewables.
The case made its way to the U.S. Supreme Court, where justices hit the pause button on implementation of the plan.
Either way, it is clear Biden’s proposals could face a stiff challenge from Texas officials and the oil and gas industry itself. Another hurdle Biden is likely to encounter: changing the desires of consumers.
The reason oil and gas producers remain in business today, to the great consternation of people who wish it didn’t, is very simple: There is a demand for that product.
“The only reason that anybody gets out of bed in the state of Texas and goes and produces a barrel of crude oil, is that there is a demand for that barrel of crude oil,” Ingham said. “It is going to get sold into the marketplace and it is going to get turned into something: gasoline, diesel fuel, jet fuel, plastics, a petrochemical of some sort — you name it.
“The reason oil and gas producers remain in business today, to the great consternation of people who wish it didn’t, is very simple: There is a demand for that product.”
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