Climate Policy Uncertainty Shocks and Energy Exploration: An Analysis of U.S. Oil and Natural Gas Producing Regions

ABSTRACT Drilled but uncompleted wells (DUCs) are a key operational component for oil and natural gas exploration and production (E&P) companies in managing market‐related uncertainties. We analyze the behavior of drilling rigs along with DUCs and the role of climate policy uncertainty across four major U.S. oil and natural gas producing regions using structural vector autoregressive models. Our results reveal that an orthogonalized oil price shock increases the number of drilling rigs and reduces the number of DUCs in each region, while an oil price volatility shock reduces the number of drilling rigs and increases the number of DUCs in each region. We find that a climate policy uncertainty shock has no significant impact on DUCs in oil producing regions. However, for the natural gas producing regions, Haynesville and Appalachia, we show that a climate policy uncertainty shock increases the number of drilling rigs. The results are robust across the three remaining energy producing regions in the U.S. as well as alternative measures of energy prices and identification restrictions. Our findings demonstrate the responsiveness of natural gas production to climate policy uncertainty and align with the industry view that natural gas serves as a bridge fuel in the energy transition.