OGV Energy's US Energy Overview - The U-Turn in US Energy Policy

At the start of 2021, the US oil and gas industry is cautiously optimistic amid rising oil prices and apprehensive about the marked shift in the new US Administration’s energy policies.

Operators and oilfield services providers are more optimistic about the industry’s prospects than they were six months ago, but they are bracing themselves for changes in the federal government’s oversight of new lease sales on federal land and in federal waters, and increased scrutiny over the climate impact of new oil and gas infrastructure.

Meanwhile, while the oil price rally had analysts and investors wondering whether US shale producers would abandon the pledge to rein in drilling and return more to shareholders, severe winter storms in the heart of the shale patch in Texas knocked off in the middle of February around one-third of total US oil production and wreaked havoc on pipeline flows and refinery operations. The disruptions sent the price of the US benchmark, West Texas Intermediate, to above $60 per barrel—the highest price since early January 2020, just before the COVID-19 pandemic and the brief OPEC+ break-up sent oil prices into a tailspin with WTI crashing into negative territory for one day in April 2020.

President Biden’s Energy Agenda

On his first day in office, US President Joe Biden started issuing executive orders to reverse many of the policies of former president Donald Trump, including energy policies. President Biden revoked the Presidential Permit for the Keystone XL cross-border pipeline between Canada and the United States, as part of policies to protect the environment and public health. The killing of the pipeline project drew harsh criticism from Canada’s oil-producing province of Alberta, as well as from trade unions in the United States who had supported President Biden’s presidential bid.

TC Energy, the developer of the Keystone XL oil pipeline, stopped construction on the project and let go of 1,000 workers in both the United States and Canada.

A week later, President Biden issued another executive order, to tackle the climate crisis, in which he directed the Secretary of the Interior to pause new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of Federal oil and gas permitting and leasing practices.

In response to the executive order, the American Petroleum Institute (API) warned that limiting domestic energy produced on federal lands and waters would undermine environmental progress, cost American jobs, jeopardise education and conservation funding, and shift the U.S. to greater reliance on foreign energy.

“With a stroke of a pen, the administration is shifting America’s bright energy future into reverse and setting us on a path toward greater reliance on foreign energy produced with lower environmental standards,” API President and CEO Mike Sommers said. “Limiting domestic energy production is nothing more than an ‘import more oil’ policy that runs counter to our shared goal of emissions reductions and will make it harder for local communities to recover from the pandemic.”

According to API, a ban on new leasing on federal land and in federal waters would have energy security, economic, and environmental impacts. US oil imports could rise by 2 million barrels a day by 2030, while US offshore natural gas and oil production could decrease by 68% and 44%, respectively. Nearly 1 million jobs could be lost by 2022, while gross domestic product (GDP) could drop by a cumulative $700 billion by 2030, API said. In addition, lower natural gas production could delay the shift from coal-fired to natural gas-fired power generation, thus increasing coal use and emissions.

The first consequence of President Biden’s order to pause new leasing permits was the Bureau of Ocean Energy Management (BOEM) rescinding the Record of Decision for the oil and gas lease Gulf of Mexico planned for March 2021. This effectively cancelled the lease sale, which would have offered 78.2 million acres for a region-wide Gulf of Mexico lease, or 14,594 unleased blocks, all of the available unleased areas in federal waters of the Gulf of Mexico.

“Cancelling this huge offshore Gulf oil auction helps protect our climate and life on Earth. President Biden understands the urgent need to keep this oil in the ground,” Kristen Monsell, oceans legal director with the Center for Biological Diversity, said.

“A ban on new leasing, if permanent, would mean that by 2035 US offshore oil and gas production would be about 30% lower than if lease sales had continued,” Wood Mackenzie said in a snapshot overview of the Biden Administration effect on the US energy sector.

While most of the attention has been focused on the impact of the policies on oil and gas production in the Gulf of Mexico, Alaska could be affected the most in relative terms, Rystad Energy estimates. According to the independent energy research and business intelligence company, about 72% of Alaska’s remaining recoverable oil resources could stay in the ground, although the effect on production will be felt only after 2030.

“Alaska’s economy is heavily oil-reliant and given this, it’s hard to see renewables replacing the North Slope oil any time soon. Consequently the energy transition push brings unique challenges for the state, which needs to weigh associated direct and indirect job losses, while also replacing the revenue streams for the state and its people,” said Krishan Pal Birda, upstream research analyst at Rystad Energy.

Industry Hopes the Worst of the 2020 is over

If WTI oil prices keep at around $53-55 per barrel throughout 2021, the wave of bankruptcy filings from 2020 is set to subside to pre-pandemic levels, Rystad Energy said at the end of January.

“Last year was arguably the most devastating year in history for the North American oil and gas industry. Even so, Rystad Energy’s analysis concludes that 2020’s round of Chapter 11 filings fast-tracked an overdue reduction in the number of market participants by removing troubled companies and allowing their healthier competitors to remain in the playing field,” Rystad Energy noted.

“In essence, nearly all public E&P producers are now positioned to navigate 2021 without significant bankruptcy risks,” Artem Abramov, Head of Shale Research at Rystad Energy, said, adding that a certain low number of Chapter 11 filings would be an integral part of the oil and gas business.

In 2020, the Texas upstream oil and gas economy suffered a 30% contraction, largely due to the pandemic and the resulting crash in global energy demand, the Texas Alliance of Energy Producers’ Texas Petro Index (TPI) showed in early February. At the end of 2020, the Texas share of total US crude oil production had grown to 44% from 42% in 2019.

“A number of Texas upstream indicators have turned the corner from the worst of the COVID lows, most notably crude oil prices and the monthly statewide rig count,” the Texas Alliance of Energy Producers said.

“That the industry is adding jobs is encouraging, pointing to at least somewhat better times ahead in 2021,” Alliance Petroleum Economist Karr Ingham said. “The Texas Petro Index is poised to find its cyclical trough, hopefully in the first quarter 2021, and begin to register a long and steady recovery from the ravages of COVID in 2020.”

Across the US, oilfield services and equipment sector employment rose by an estimated 8,421 jobs in January 2021, marking the fifth consecutive month of growth, according to preliminary data from the Bureau of Labor Statistics (BLS) and analysis by the Energy Workforce & Technology Council.

The Council’s monthly Oilfield Services and Equipment Employment Report estimates that job losses due to pandemic-related demand destruction totalled 81,061 as of January 2021. Oilfield services employment has dropped by 80,014 jobs since January 2020.

Texas Freeze Boosts Oil & Gas Prices and Disrupts Production

The extreme winter weather in many parts of the US in February, including in Texas, disrupted oil and natural gas production, pipeline flows, power generation, and refinery operations. The lowest temperatures in Texas in three decades cut off one-third of US crude oil production in mid-February, with more than 50% of the output in the Permian estimated to be down. Freezing temperatures and rolling power outages in Texas hampered the pumping of oil, as wellheads froze, electricity was out, and icy roads prevented trucking of sand and water to well sites.

Natural gas prices jumped to above $3 per million British thermal units amid record demand for power and heating across the United States.

US oil production declined by more than 30% in the week of 18 February, and as a result, WTI oil prices shot up to nearly $62 per barrel—the highest price since the first week of January 2020.

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