This is an excerpt from the Ralph E. Davis Associates (RED) Weekly E&P Update Newsletter.

Last week, the U.S. District Court for the District of Columbia released a ruling that overturned the results of last fall’s Federal Lease Sale 257. The Court found that the Bureau of Offshore Energy Management (BOEM) had failed to properly consider the environmental impact of the consumption of oil and gas that might ultimately be produced from the leases.

Two regulatory frameworks established by Congressional legislation impact the decision. The first is the Outer Continental Leasing Act (OSCLA), which addresses the exploration and development of federal waters for oil and gas production. The second is the National Environmental Policy Act (NEPA), which requires federal agencies to consider the environmental impact of their various actions. Whereas OSCLA addresses the environmental impacts of the leasing activity itself, the Court reasoned that NEPA requires a broader consideration of the “post-consumption” impacts.

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In late 2020, the BOEM decided that previous Environmental Impact Statements (EISs) relating to Gulf of Mexico lease sales were adequate for future lease sales, and in the final days of the Trump administration announced their intention to hold Lease Sale 257. The Biden administration put a hold on all federal leasing activity immediately after taking office, but legal challenges to the action resulted in the rescheduling of Lease Sale 257. It was held last November, but leases have not yet been awarded.

At issue in the previous EISs is how the production of hydrocarbons from these leases would affect non-U.S. hydrocarbon consumption and the greenhouse gases (GHGs) that would result. The BOEM argued GHG emissions would increase without the Gulf of Mexico development, because the lost production would be offset (at least in part), by production in other parts of the world, and those activities would be more carbon-intensive that production from the deepwater Gulf of Mexico. (Indeed, in a recent personal conversation with a major oil company executive, he mentioned that deepwater Gulf of Mexico production is some of the lowest carbon intensity production globally.)

Where the BOEM ran afoul of the Court, however, is that one of its models indicated that foreign consumption would be higher if the leases sale was held. The BOEM chose to exclude this consumption in their assessment of the environmental impact of the sale, and the Court held this was arbitrary and capricious. Since the BOEM hadn’t adequately considered the full environmental impact of the sale, it shouldn’t have been allowed to proceed.

The approach by the plaintiffs to use the courts to reduce domestic supply and reduce emissions is very troubling. So long as OPEC+ coordinates their output, there isn’t a global free market in oil, and an economic model that assumes one probably isn’t reliable. It seems likely to me that countries with productive capacity will fill the supply void caused by this decision. We’ll end up with lower economic activity at home and increased reliance on foreign sources, yet we’ll be no better off from an emissions perspective. Sounds like a lose-lose proposition to me.

About the Author:

Steve Hendrickson is the president of Ralph E. Davis Associates, an Opportune LLP company. Hendrickson has over 30 years of professional leadership experience in the energy industry with a proven track record of adding value through acquisitions, development and operations. In addition, he possesses extensive knowledge of petroleum economics, energy finance, reserves reporting and data management, and has deep expertise in reservoir engineering, production engineering and technical evaluations. Hendrickson is a licensed professional engineer in the state of Texas and holds an M.S. in Finance from the University of Houston and a B.S. in Chemical Engineering from The University of Texas at Austin. He recently served as a board member of the Society of Petroleum Evaluation Engineers and is a registered FINRA representative.

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