E&P Sector Set to Benefit from Federal Environmental Regulatory Rollbacks

The proposed shelving and delays in implementation of federal environmental regulations should provide a boost to the cost structure of some parts of the U.S. exploration and production (E&P) industry. Still, Fitch Ratings analysts, in a new report, think the short-term benefits derived from regulatory easing will likely be eclipsed by efficiency measures and hydrocarbon pricing as economic drivers for the industry.

Regulations targeted for delay or diminishment include methane emissions control reporting requirements, loosening of flaring rules and requirements to retrofit wells to limit methane emissions, Fitch notes.

The ratings agency anticipates E&P capex and rig counts to grow substantially this year. “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,” analysts said.

The U.S. Energy Information Administration just updated its U.S. crude production projections to 10 million barrels per day in 2018, a high water mark for the industry not seen since 1970. Yet the ratings agency sees environmental restrictions as an ongoing factor that could add risks to the E&P sector. “Fitch believes the U.S. 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,” analysts said. “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.”

– Nicholas Stern, senior editor

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