“Drill, Baby, Drill” Is A Slogan, Not A Business Plan

If you're anticipating a big oil and gas drilling boom to happen during the coming second term for President-elect Donald Trump, you would do well to temper that expectation. Those who have been loyal readers of my stories over the years know my firm belief is that government policy drives much of what happens in the energy space, and that hasn't changed.

But companies' business plans are set to respond to and exploit both public policies and market realities, and that is not going to change. Thus, while federal energy policy actions in a 2nd Trump term will certainly be more pro-oil and gas business than they've been during the Biden/Harris years, company management teams will remain bound by market realities that strongly advocate against mounting a new US-focused drilling boom.

Powerful Market Forces Shape Drilling Plans

Across the last several years, US oil and gas upstream companies have steadily diminished their drilling budgets, even in times of relatively high oil prices. While 2020 was an anomaly due to the COVID pandemic, it is fair to point out that the Enverus domestic count of active drilling rigs has steadily dropped across the last three years. It has fallen 15% in the most recent 12 months despite the domestic WTI index price hovering in a range of $70-$85 per barrel.

The current number of active rigs as of this writing - 615, per Enverus - is less than half the number of rigs that were active across most of Trump's first term in office. Those years represent the latter stages of the big drilling and fracking boom in the prolific Permian Basin. The Permian is of course the largest oil producing basin in the US, as well as its second-biggest natural gas basin, behind only the Marcellus/Utica region of the Appalachian Basin.

Since that time, though, the Permian and other big shale oil and gas production areas have moved into the more mature, development phase of their life's cycles, a phase in which drilling is reduced given that most of the prime locations have already been accessed. In this phase, companies tend to focus more on cutting costs, streamlining operations, and maintaining or raising production through the application of advancing technologies.

It's important to keep in mind that most of these upstream companies took on a great deal of debt in order to finance the rapid drilling-out of these prolific formations. More than 100 upstream shale companies paid the price by being forced into bankruptcies during the multiple oil price busts in the last decade.

The companies that have thrived and continued growing across that period of time tend to be those who were most effective at cutting debt loads and controlling costs during the same period. Those are the companies which have also been best positioned to grow their resource base via acquisitions during the wave of shale consolidation that has taken place in more recent times.

Corporate producers, like ExxonMobil , Chevron , ConocoPhillips , and Diamondback Energy , that have emerged as the big winners as we now enter the latter stages of the shale consolidation process, are unlikely to suddenly decided to jump off into another phase of big drilling budgets that result in hundreds of newly activated rigs regardless of any policy actions coming out of Washington, DC.

Leasing And Permitting Should Be A Priority

In fact, when I asked Tim Stewart, President of the DC-based US Oil & Gas Association , if he thought a second Trump presidency would put the industry into another boom, his answer was succint: "The market will take care of the rate of E&P activity." Exactly. The market will dictate, and the markets have been dictating for four years now that companies focus on cost control, efficiency, and rates of return on capital.

However, Stewart did focus on one obvious area in which Trump can show quick action. "We must have access to federal lands and waters to have balanced energy production all across the country," he told me, adding, "The area where a Trump 2.0 Administration can really make a difference is breathing life back into the federal leasing and permitting process."

Officials in the Biden/Harris Department of Interior, including Interior Sec. Deb Haaland, have resorted to numerous means of keeping the federal leasing process largely inactive despite statutory requirements for holding regular lease sales and several adverse court orders. This will be an area of low-hanging fruit in which Trump will be able to show quick progress.

I asked Karr Ingham, President of the Texas Alliance of Energy Producers , if he had a concern that reopening the leasing and permitting processes could lead to another period in which US production rises too rapidly and results in another price crash. His answer was emphatic: "NO. We get what we get," he said. "The industry can't complain about burdensome, costly regulation, which by definition is activity-limiting, and then turn around and complain that lifting those burdens results in higher production, if in fact it does. Markets, as always, will sort this out."

There's that M-word again.

The Bottom Line

What we have here is a recurring theme: While "Drill, Baby, Drill" was a talking point across all three of Trump's presidential campaigns, the industry itself is unlikely to respond in that manner to more favorable policies that are bound to be a feature of Trump's second term. While public policy can be a powerful force in the oil and gas sector, market forces remain more powerful still.

Trump's policy actions are more likely to have significant impacts in other parts of the energy sector, though, and I will discuss those in future pieces.