On the back of Russia’s invasion of Ukraine, crude oil prices jumped above $100 a barrel, and the average cost of U.S. gasoline has surpassed $4 a gallon. [bold, links added]
Yet domestic oil production has barely budged over the past two years and remains stuck below 12 million barrels a day, 10% to 15% below the pre-pandemic high.
The total U.S. oil rig count has bounced back, but only to roughly 75% of the recent peak in March 2020.
Major U.S. shale producers, particularly ones in the Permian Basin of Texas, have a break-even oil price close to $30 a barrel, so why isn’t American supply responding to price signals from the global market?
First and foremost, U.S. shale got a wake-up call about its business model in 2020.
That’s when the combination of an OPEC+ oil-market-share battle and pandemic lockdowns briefly turned crude oil prices negative and decimated the energy sector, driving more than 100 North American oil and gas companies into bankruptcy by year-end.
After largely giving lip service to shareholder activists following the 2014 shale crash, almost every U.S. energy company has also embraced the need for capital spending restraint and generating free cash flow rather than simply expanding production.
Flat or up slightly (5% or less) is the new production growth paradigm, and living within cash flow is paramount.
This fiscal discipline held through 2021 even as crude oil prices doubled and continues to hold despite a roughly $30-a-barrel price jump since the beginning of 2022.
Last year energy rebounded from the annus horribilis of 2020 and became the best-performing sector in the U.S. equity and debt markets.
Energy-company management teams don’t want to rock this boat, especially given regulatory clouds looming over the industry.
Feeding into the U.S. industry’s self-imposed choke valve on aggregate oil volumes is the outlook for restricted drilling growth and market access in coming years, which is where the Biden administration’s anti-fossil-fuel policies come into play.
U.S. oil and gas producers need to extend their drilling inventories and permit runways further into the future because the Biden White House is canceling or slow-walking leases on federal lands while clawing back acreage for national monuments.
The administration also is taking advantage of environmental and endangered-species statutes to curtail drilling on private land.
New energy infrastructure projects—including interstate pipelines and liquefied natural gas export facilities—are subject to a global climate test, a charge for the social cost of carbon, and environmental-justice standards.
All this will have a chilling effect on new projects and further reinforce industry consolidation.
The main risk to the industry over the next decade is not the potential for oil and gas demand to go down because of the global energy transition away from fossil fuels.
It is the high likelihood of more energy supply-chain bottlenecks created by government officials.
A supply-constrained scenario would be bullish for oil prices, giving producers even more incentive to keep hydrocarbon reserves in the ground now to produce them at higher realized prices down the road.
As seen by the four legally paralyzed years of the Trump administration, even if Republicans regain the White House in 2024, not much would change with regard to the inexorable march toward 2030, the year of the climate rapture set by the United Nations.
U.S. energy companies have begun to wise up to the threat that the theory of man-made climate change poses to the industry.
Since the Paris Agreement’s signing in 2015, the global goal of decreasing carbon emissions has provided moral justification for an all-out regulatory assault.
The latest front is the sustainable-investment movement sweeping Wall Street, which has climate action as its top Environmental, Social and Governance (ESG) objective.
U.S. and European financial regulators are pushing through mandatory reporting standards on sustainability.
This is the first step toward screening and excluding politically incorrect industries such as oil and gas from investment portfolios.
As the intertwined climate-change and sustainability movements gain momentum between now and 2030, the lending and capital markets are likely to become more hostile toward traditional energy.
U.S. shale companies will need to ensure their ability to self-fund from operations and run with less balance-sheet debt to reduce their dependence on financing from the banking system and institutional investors.
Consequently, corporate sustainability doctrine provides another strong argument for U.S. energy companies to maintain the status quo of slow to no production growth and to continue living within cash flow over the long term.
Ironically, all the defensive measures now being taken by the U.S. shale industry make it more attractive—and sustainable—from an investment perspective.
On top of production and spending discipline and stronger energy commodity prices, some shale players are merging to build critical mass, both in operating scale and financial-market capitalization.
h/t Steve B.
Read rest at WSJ
Nice to see an article on the oil & gas industry where the author has actual KNOWLEDGE of the industry. The “energy transition” from fossil fuels to the “Next Big Thing” is going to take DECADES whether the environmental activists like it or not. We need to “pace” ourselves and get an intelligent, well informed & coherent national energy discussion started. Anything less than that will continue to be a disservice to our country & our national security…
Randy, this is a very sensible comment. Those who have no knowledge of the oil industry cannot imagine the lead-time required from finding hydrocarbons, to eventual production and the end result flows out of the pump nozzle at the fuel station. It is a massive undertaking for many people along the way, yet it is all taken for granted and to make it worse, those people who know nothing, then criticise the oil companies.
There is so much that the oil co’s contribute to the life-style we have today. There is nothing around us that doesn’t have a petroleum product included in its manufacture. The one material that most people may not know about is “plastics – of all types”. Without specific by-products from the refining process we wouldn’t have plastics AND the ability to make a plastic product that is flexible, is thanks to the chemical engineers in the oil industry.
One other point. There are cables for electricity and communications that connect us to everything. The material on the outside of all those cables is “insulation” that prevents people from being electrocuted. The manufacture of that insulation is dependent on the oil companies. Without it, we would be in serious trouble.
Remember – this includes all the cables in cars, trucks, tractors and aircraft as well and let us not forget the cell / mobile phone. All of the plastics in those devices would not exist if it weren’t for the oil companies.
Finally, next time you get on a plane and see the fuel tanker and the operator out the window filling your plane with jet fuel, remember, that man is highly trained and has your safety as a high priority in what he does. He is the front-line of the oi industry which contributes a massive amount of technology though billions of dollars worth of equipment to support our lives every day.
“First and foremost, U.S. shale got a wake-up call about its business model in 2020. That’s when the combination of an OPEC+ oil-market-share battle and pandemic lockdowns briefly turned crude oil prices negative and decimated the energy sector, driving more than 100 North American oil and gas companies into bankruptcy by year-end.” Do you remember the response of the Saudi’s and Russia at that time? They did all they could to bury the US shale industry, and they were very effective in doing so. Give Putin credit for foresight. I don’t know what you can say about the Saudi’s other than they obviously no longer see themselves as aligned with the US. And Biden is certainly (stupidly) promoting that result.