Is Biden Giving the Industry an Opportunity to Shine?
(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author.)
When President Biden imposed a moratorium on new oil and gas leasing on federal land and waters, the move drew cheers from persistent foes of the oil and gas industry. It also garnered jeers from industry supporters, who warned of more job losses, higher fuel prices, and a return to greater dependence on foreign sources of oil and gas.
Perhaps unwittingly, Biden may have given the U.S. oil and gas industry the go-ahead to show just how agile it is. Such is a takeaway this week from one of Rigzone’s regular market-watchers. Keep reading for his explanation, along with other perspectives on recent market developments.
Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?
Tom McNulty, Houston-based Principal and Energy Practice leader with Valuescope, Inc.: The new administration has kept its promise – sort of – to halt the issuance of new drilling permits on federal land. I say “sort of” because it does not apply to tribal lands. If I assume that about 10 percent of U.S. production comes from federal land, then this is the thesis being used to argue for WTI support at and above $50. As I’ve said before, the upstream business in North America has been very nimble and efficient, which means it can and will move production to private and state locations to offset any and all declines in production from federal land.
Phil Kangas, US Partner-in-Charge, Energy Advisor, Natural Resources and Mining, Grant Thornton LLP: The Biden campaign had long promised action on climate change, so it was no surprise that cancelling the Keystone XL pipeline was among the very first executive orders (EO) issued. The project had been stopped during the Obama administration for environmental impact concerns, and a return to this policy stance was not unexpected. Just as issuing the Keystone EO could have been anticipated, putting a stop on a project this size is not without predictable consequences. Bloomberg reported that TC Energy followed the Biden EO with 1,000 layoffs in the U.S. and Canada last week. The Alberta Canada Premier Jason Kenney held a press conference the day following Biden’s announcement, demanding immediate retaliatory action by Prime Minister Justin Trudeau and compensation for the unilateral action. Alberta Province, with some of the largest crude repositories in North America, had invested over $1 billion in the pipeline.
Barani Krishnan, Senior Commodities Analyst, Investing.com: The weekly update on inventory data by the U.S. Energy Information Administration (EIA) has been shockingly volatile, with no directional trend set as of late, and that’s really the jolt we’ve been getting every week. Considering that the EIA reported a crude build of more than 4 million barrels for the week to Jan. 15, only to erase all of that with a draw of more than 9 million barrels in the following week to Jan. 22, tells of the curveballs being thrown at the analyst and trading communities each week.
That’s why I’ve been advocating that we wait for at least three to four straight weeks of crude inventory consistency so that we can get a proper read on the stockpile and refining situation. Alas, time and tide, as well as the EIA, wait for no man.
Rigzone: What were some market surprises?
Kangas: The Biden administration’s initial approach to pausing new oil and gas leases on federal land was a surprise. The “Day One” approach was essentially an organizational governance change, shifting authority from local in-state U.S. Bureau of Land Management offices to “targeted and time limited” decision-making within the senior ranks at the Department of the Interior. The move effectively was designed to capture control of the process for the first two months of the administration. Despite substantial push-back from industry groups such as American Petroleum Institute, American Exploration and Production Council, and the Western Energy Alliance, a further moratorium on new oil and gas leases on federal land followed this week.
While some energy investors may find the news unsettling, the drilling suspension impact will be limited. Near-term disruption to operations will be offset by several years of inventory already permitted to E&P producers. The Associated Press reported that Interior officials approved almost 1,400 permits on federal land over a three-month period late last year. These licenses add to the substantial drilling permits available – some 5,600 unused and valid by some estimates, which should sustain production in the short term. The move may also prove beneficial to the privately owned market for E&P drilling, as the moratorium affects only federal land – a fraction of the total U.S.-based drilling. According the U.S. Energy Information Administration, federal lands and waters source less than a quarter of total U.S. crude supplies and 12 percent of U.S. natural gas.
Krishnan: We had a huge uptick in U.S. crude exports, along with a big flow out of Cushing and a million-barrels-per-day drop in imports that apparently combined to bring about this outsized drawdown in crude stocks. As of last week, it appears that refiners dropped their utilization of operable capacity slightly to 81.7 percent from the previous week’s 82.5 percent. So, the 2 million-barrel draw out of Cushing and exports returning to above 3.3 million barrels per day from a previous 2.25 million are the bigger drivers here, along with the drop in imports.
All these make a truly interesting read on the push-and-pull that’s going on as the market continues to adjust forecasts on supply and demand amid the ongoing COVID-19 pandemic. Again, we have gasoline builds resuming higher than expected, with almost 700,000 barrels above forecasts. But diesel-led distillates surprisingly drew down 500,000 barrels more than thought — which has been rare in this space.
McNulty: We all know that the coronavirus disease COVID-19 caused global demand for all petroleum products to fall a lot in 2020. Our own U.S. EIA has just now estimated that consumption of petroleum and other liquid fuels dropped by nine percent in 2020 from 2019. Yes, it’s a big drop. The compelling question is why wasn’t it a lot more? Just how hard will it be for the world’s economies to consistently lower demand for petroleum products, in the service of climate change efforts, if a massive pandemic knocks out nine percent for one year but demand is already rising again in 2021?
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