OGV Energy's US Energy Review - September 2022

The Inflation Reduction Act and its implications for the US oil and gas sector was the highlight of the past month in the American energy industry, where the oilfield services sector added more jobs for a ninth month in a row and where high liquefied natural gas exports made the United States the world’s top LNG exporter.   

Inflation Reduction Act

US President Joe Biden signed in August the Inflation Reduction Act which is aimed at lowering costs for families, fighting climate change, reducing the deficit, and finally asking the largest corporations to pay their fair share, the White House says.

The legislation seeks to reduce greenhouse gas emissions by about 1 gigatonne in 2030, or a billion metric tons, as well as deploy clean energy and reduce particle pollution from fossil fuels.

According to Wood Mackenzie, the Inflation Reduction Act will accelerate decarbonisation, with over $300 billion allocated to spur investments in zero-carbon power generation supply, emissions reduction technology, and electrification and energy efficiency programmes. The legislation is expected to spark a boom in decarbonisation technologies over the next ten years, says Chris Seiple, Vice Chairman, Energy Transition and Power & Renewables, at WoodMac. The Inflation Reduction Act (IRA) will bring much-needed long-term certainty to the renewables sector, with solar power a major beneficiary, Seiple said. Clean hydrogen, EV uptake, and wind power installations are also set to accelerate under the IRA. The law will also unlock over $160 billion of investment in energy storage through 2031, with energy storage forecast to soar to 135 GW in ten years’ time, according to WoodMac estimates. 

“Later this year at the G20 and COP27 meetings, the US will gain new credibility as a global leader on climate change. With the wind at its back, the nation can encourage the world to expand policy goals that reach for a net zero emissions pathway,” Seiple said.

Still, per Rystad Energy research, there could be significant growing pains in the coming years for the clean energy industry in the United States.

“Contrary to its title, the US Inflation Reduction Act will usher in more energy service inflation in the next 18 months as the incentives offered to manufacturers struggle to keep up with the increased demand triggered by the bill,” the independent energy research firm said days before the bill became law. 

“There will be a positive impact on domestic energy security and the US’ position in the global low-carbon supply chain, but significant growing pains are likely in the coming years,” Rystad Energy reckons.

“Cost inflation in the US energy industry has hit operators, manufacturers and suppliers hard – and the Inflation Reduction Act shows no signs of addressing that in the near term,” said Matthew Fitzsimmons, senior vice president with Rystad Energy.

“The fate of the industry’s future inflation or deflation lies firmly in the hands of the Chinese, fittingly, as US policymakers attempt to build and strengthen a domestic supply chain and attempt to avoid such reliance in the future,” Fitzsimmons noted.

The Inflation Reduction Act could also pose new challenges to recruitment in the oil and gas industry, Rystad says.

The number of unemployed American workers actively looking for oil and gas jobs has been at its lowest since 2005.

“While previous wage premiums have saved the day and enticed workers to help grow domestic oil and gas production previously, the bill will pose new competitive challenges for oil and gas recruitment,” the research firm adds.

Oil & Gas Industry Criticises Inflation Reduction Act

While analysts expect the clean energy sector to be a major beneficiary of the legislation, the biggest oil lobby said the Inflation Reduction Act fell short of addressing America’s long-term energy needs and imposed more costs on households. 

“While the Inflation Reduction Act takes important steps toward new oil and gas leasing and investments in carbon capture and storage, it falls well short of addressing America’s long-term energy needs and further discourages needed investment in oil and gas,” American Petroleum Institute (API) President and CEO Mike Sommers said. 

“API shares the goal of addressing climate change, as evidenced in the policies we support and in the actions that our industry is taking every day. However, the considerable tax increases are simply the wrong policies at the wrong time,” Sommers added.

“From a new corporate minimum tax to an $11.7 billion tax on crude oil and petroleum products to a new natural gas tax, this legislation imposes additional costs on American families and businesses at a time when policymakers should be looking for solutions to provide relief.”

According to Sommers, the bill also fails to address permitting reform, which API views as essential to effectively delivering affordable, reliable energy to consumers in a growing economy.

US Shale Set for $10 Billion Losses from Hedging

US shale producers that have hedged output at lower prices last year are expected to lose from the derivative hedging if oil prices stay around $100 per barrel, Rystad Energy research showed in the middle of August. Derivative hedging losses could be more than more than $10 billion, the energy intelligence firm says.

“Those who hedged at lower prices last year are in line to suffer significant associated losses as their contracts mean they cannot capitalize on sky-high prices,” Rystad Energy reckons.
Still, despite the hedging losses, cash flows and net earnings hit record highs at many shale producers in the second quarter, Rystad Energy notes.

“With huge losses on the table, operators have been frantically adapting their hedging strategies to minimize losses this year and next. As a result, we may not have seen peak cash flow in the industry yet, which is hard to believe given the soaring financials reported in recent weeks,” said Rystad Energy Vice President Alisa Lukash.

Employment in US Oil & Gas Sector Continues To Rise

Meanwhile, employment in the US oil and gas industry continues to grow, per the latest statistics and industry estimates.

Employment in the US oilfield services and equipment sector rose by an estimated 7,131 jobs to 643,092 in July, preliminary data from the Bureau of Labor Statistics (BLS) and analysis by the Energy Workforce & Technology Council showed in early August.

The data reported is the highest since September 2021 when total jobs rebounded to 643,057, but still off the pre-pandemic mark in February 2020 of 706,528.

“The July job increases are very encouraging as our sector continues to rebuild the workforce from pandemic losses. Our industry is meeting the challenge of growing global demand by producing at almost pre-pandemic levels, reducing emissions industry wide, all while continuing to make gains in the workforce,” said Leslie Beyer, CEO, Energy Workforce & Technology Council.

In Texas, job growth in the upstream sector continued in July, with upstream employment in the biggest oil-producing state in the US topping 200,000 for the first time since March 2020, the Texas Oil and Gas Association (TXOGA) said on 19 August, citing data from the Texas Workforce Commission.

Texas’s upstream oil and natural gas employment grew in July by 6,800 jobs from June, the second highest monthly increase in data history since Texas Workforce Commission’s online data became available to the public in 1990, TXOGA said.   

Since the low point in employment September of 2020, the oil and gas industry has added 45,800 upstream jobs in Texas. At 202,800 upstream jobs, July 2022 jobs were up by 35,400 – or 21.1% – from July 2021. Employment in July 2022 topped 200,000 jobs for the first time since March of 2020, TXOGA noted.  

The US Becomes World’s Largest LNG Exporter

High demand for LNG, especially in Europe, high gas and LNG prices globally, and increased US export capacity made the United States the world’s largest LNG exporter in the first half of 2022, the US Energy Information Administration (EIA) said at the end of July.

US LNG exports rose by 12% in the first half of 2022 compared with the second half of 2021, averaging 11.2 billion cubic feet per day (Bcf/d), the EIA said.

During the first five months of 2022, most US LNG exports went to the EU and the UK, accounting for 64%, or 7.3 Bcf/d, of the total US LNG exports, the US administration noted.

Commenting on the news, Tim Tarpley, SVP Government Affairs & Counsel for the Energy Workforce & Technology Council, wrote in an analysis about the prospects of US LNG exports in light of Russia’s cuts in pipeline gas supply to Europe.

“This weaponization of gas means that our allies in Europe continue to look for reliable and long-term sources of gas to power their economies and keep their populations warm as winter descends on Europe. This situation presents an opportunity for the United States to open up a huge market for LNG that will sustain itself for many years.”  

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