Don’t Count Out The U.S. Oil & Gas Industry Just Yet – This is a great thing!

“On one hand, the energy transition is real and here to stay. On the other hand, there are 280 million cars on the road in the U.S. today, 279 million of them running on oil, and the average lifespan of a vehicle is 12 years,” Bob Maguire, managing director of Carlyle Group, October 2020.

For the U.S. oil & gas industry, the struggle through Covid-19 might just be the “most unique year ever.” Thus, with the global economy set to contract 4.4% this year, extrapolating current problems into mid- and long-term forecasts should be met with skepticism. Even looking out a few decades from now, “the end of oil & gas” chant today is speculative, largely based on highly optimistic assumptions about alternatives and unproven technologies that have nowhere near taken root yet.

The reality is that even as we increasingly embrace renewables, oil & gas will remain essential for much longer than some are telling you. Shale has already installed America’s “energy independence” since development took flight in 2008. Sunken prices and demand from the pandemic are no doubt serious issues (e.g., leading to asset write-downs) but there is no indication of any huge structural shift across energy markets. In short, the need for more oil & gas has not somehow just gone away.

With crude oil prices stuck at $35 to $40 a barrel for most of the past many months, producers have been doing all that they can to cut costs and ride out the storm. Although rising back to up over $3.00 per MMBtu as high demand winter kicked off in November, U.S. natural gas prices for the first half of this year were just $1.80, their lowest levels in over 30 years. The U.S. shale industry has therefore obviously seen curtailed production volumes.

But still, for the 2020 average, our crude output is expected to drop just 7%, with marketed gas falling 4% (Figure 1). This is actually pretty remarkable considering the calamity that all markets have been pushing through. Optimism has hardly vanished:

• “ConocoPhillips to Buy Shale Rival Concho for $9.7 Billion,” The Wall Street Journal, October 19, 2020
• “Chevron CVX -1% completes $13B acquisition of Noble Energy NBL 0.0%, Houston Chronicle, October 5, 2020
• “Warren Buffett bets $9.7 billion on a long future for natural gas,” World Oil, July 16, 2020

Hydraulic fracturing (“fracking”) and horizontal drilling for oil & gas, which gives us 85% of U.S. supply, will remain essential because demand for these products will remain essential. An upward trend for the industry could be regained much sooner than some are telling you. U.S. crude production is now up to ~11.1 million b/d, the highest since March, with WTI prices on Friday at ~$47 on the vaccine rollout.

For example, independent researcher Rystad Energy reports that as oil prices improve with rebounding demand (not a surprise since oil has no material substitute), shale activity and output in North America are expected to dramatically rise again. Light tight oil production is projected to reach 13.6 million b/d by 2030, up from 8.2 million b/d this year. As the centerpiece play, output in the Permian basin in West Texas alone could soar 85-90% to over 8 million b/d by 2030.

In fact, Rystad is now warning about a lack of investment in new oil supply to meet rising needs. Because E&P investment in additional output has been understandably down this year (e.g., global oil demand is down 8% to 92 million b/d), we could see a price spike within three to five years. Especially since fields have a natural decline rate of 4-7% per year, a crucial new report from the International Energy Forum and the Boston Consulting Group just concluded the same warning about “peak investment” for oil and gas, hardly “peak demand:”

“Industry investment will have to rise over the next three years by 25 percent yearly from 2020 levels to stave off a crisis…[and]….substantially greater sums will be needed by the end of the decade to ensure sufficient production to guarantee market stability.”

Rystad has oil prices increasing to a strong $70 by 2030 as demand growth renters the picture. U.S. oil use, of course, is unlikely to grow much from its current 19-21 million b/d, but projected absolute drops are overstated. Not just requiring a huge and costly infrastructure build-out, electric cars and other green technologies demand a mining boom that many environmental groups themselves oppose. Still too expensive and inconvenient, even huge percentage gains are unlikely to change the electric cars are a “niche market” reality for some time: “U.S. will see 50% more electric cars by 2030: Fisker CEO,” still putting them at just 2-3% of the total U.S. car fleet.

For natural gas, total North American shale gas supply has been at 78 Bcf/d this year, but Rystad reports that it could reach 123 Bcf/d by 2030. This nearly 60% growth in supply will clearly be needed. Even through the first half of this very difficult year, natural gas ranked as the fastest-growing source of electric power in the U.S., rising 9%, compared to 5% for renewables and 4% for nuclear.

U.S. gas generation has been setting records in 2020, even when our power demand has been down 10-15% because of the pandemic. In other words, gas power has been at historic heights at a time when it should have plummeted, reaffirmed by coal retirements and stagnant nuclear (Figure 2).

Looking forward, the push for energy policies that have been embraced by the progressive coastal elites of California, New York, and New England is a dangerous one. The apparent goal to increase the cost of energy while lowering system reliability, for instance, played out horribly in California in September.

Over the past 15-20 years, no other U.S. state has spent anywhere near the amount of money and forced more policy to “get rid of oil & gas” than California. Yet, oil (~45%) and gas (~30%) still meet a whopping 75% of the state’s energy consumption, or even higher than the national average – I’d bet shockingly so to most.

Even more telling of more natural gas, California has a great mild weather advantage, where residents use half of the electricity of other states – but, gas has easily maintained its primary position in the power sector, at almost 45% of total generation this year. We must heed the reality check:

• “California approves extending the lives of four aging gas plants.”
• “The High Cost of California Electricity Is Increasing Poverty.”
• “Latino Leaders Are Fighting California’s ‘Unbelievably Regressive’ Climate Policies.”

By far our main source of electricity at 40% of generation, U.S. natural gas demand could be much higher than some are telling you. For example, our National Renewable Energy Laboratory itself finds that the environmental goal to electrify transportation, buildings, and industry could surge U.S. electricity needs by as much as 65% by 2050 – an enormous shift since our power consumption has been flat for well over a decade.

Gloomy forecasts for gas like to ignore this pending leap in U.S. power consumption, but the fact remains: “Deep Electrification’ Means More Natural Gas.” Not just wanting a massive fleet of electricity-devouring cars, Joe Biden, for instance, agrees with President Trump and seeks a manufacturing and infrastructure boom, surely one that will require large amounts of energy input to occur.

This would clearly benefit oil & gas because they supply 69% of our energy needs, while wind and solar are less than 4%. Most ironically, this dominance means that renewables themselves are highly dependent on oil & gas as energy inputs for development and construction. Experts at the University of Michigan confirm: “Shale Gas: A Game Changer for US Manufacturing.”

The fact that electrification, a manufacturing reshoring, and an infrastructure boom could very easily surge our need for primary energy (and electricity as a secondary source) is one that very few seem interested in talking about. Although we keep hearing about studies concluding that renewables are now the cheapest sources of energy, they too frequently ignore critical problems that manifest themselves in real-life application:

1)  Wind and solar are intermittent, so they require an additional cost of backup “spinning reserve” (usually from low-cost gas or “far more expensive” batteries) – these gas plants are often subsidized by the system operator, an added cost for renewables that hardly ever gets incorporated in studies that promote them.

2)  A much bigger wind and solar build-out will require costly and very hard-to-site high-voltage, long-distance transmission lines to get the power from the good resource areas to our population centers (e.g., Great Plains wind power brought to Chicago). Transmission lines often face more regulatory hurdles than pipelines.

3)  As they continue to mature, cost reductions and more growth for renewables will not prove unlimited. And what will happen if/when the high subsidies disappear? How will renewables bring in huge tax revenues like oil & gas do? These are just few of the many questions that are never getting asked about the “energy transition.”

Less gasoline derived from oil, for instance, will mean less tax revenues to build and maintain bridges and roads, as the industry provides tens of billions of dollars for governments across the country: “Oil And Gas Revenues Drive Education Funding In New Mexico, Colorado.” Even for trying to displace oil, however, a transportation fuel that is still our main source of primary energy at 37% of supply, it also goes ignored that wind and solar, as sources of electricity, effectively have nothing to do with our efforts.

In 2019, the U.S. consumed over 400 million gallons of gasoline per day, a market that more wind and solar will not change. Electricity accounts for less than 1% of our oil demand and less than 40% of our energy demand. And Joe Biden’s electric rail dream might already be dead even before it started: “Want to fight climate change, Gov. Newsom? Stop the high-speed rail boondoggle.” And the lingering Covid-19 effects could actually turn people away from the public transportation that some policymakers want to force upon us to cut oil usage – and take away our personal mobility freedoms.

Let me be clear: Americans still vote, and I predict that voters will not stand for the high carbon taxes, excessive costs, and curtailed energy options (just to name a few) that some policymakers want to force upon us. Even the most progressive states are proving this to be true: “Washington State’s third attempt at carbon pricing failed.”

Both political parties must work together to find a balanced energy-environment approach. Paris’ Yellow Vests movement showed that the people will not stand for anything different.

Looking forward, the U.S. oil & gas industry has been innovating throughout its 150-plus year life, and the future will be no different. The fracking revolution itself is the result of this constant evolution. We have to continually ask ourselves: what will be the next great advancement? This is why picking winners and losers with energy policy is not just unfair but could actually block our energy and environment goals. Leading electricity experts right down the street from me at Carnegie Mellon warned us about this long ago.

For example, for sustainability and net-zero targets, the advancement for oil & gas continues apace: “Oil majors say progress ‘significant’ on upstream methane, carbon intensity.” As for the other major greenhouse gas, “The U.S. Oil & Gas Industry Is Cutting Methane Emissions.” The International Energy Agency has reported that more gas is why the U.S. has lowered CO2 emissions faster than any other country ever. Just affirmed by Karen Harbert, CEO of the American Gas Association:

“Through the Natural Gas Sustainability Initiative, a joint effort with electric utilities, pipelines and producers, we have created industry-wide environmental, social, governance (ESG) reporting metrics. Natural gas utilities remain an excellent choice for investors and we will provide the data and metrics they need to show our commitment to progress on all ESG fronts.”

Net-zero carbon BP, for instance, plans to double its liquefied natural gas (LNG) portfolio by 2030. Shell is installing net-zero LNG cargoes to bring clean, modern energy to an overwhelming energy-deprived world where some three billion humans inexplicably still rely on biomass for energy (wood, dung, crop waste).

An LNG cargo can offset CO2 emissions from either the full lifecycle of the gas supply itself, including upstream gas production, liquefaction, shipping, and end-user combustion, or just a part of it. Total just delivered a net-zero LNG cargo to China, offset with Verified Carbon Standards emissions certificates financing a wind farm and a forest project. Some 8-10 carbon-neutral LNG cargoes have been sold so far, with more tenders in the works.

U.S. LNG shippers must also start to factor in how much coal their products will displace to lower greenhouse gas emissions, needing to better quantify the environmental benefits of their operations. When combusted, gas emits 50% less CO2 than coal and has far less criteria pollutants to clear hazy urban skies.

The truth is that the pushback on U.S. LNG exports is a pro-coal for Asia position. China and India, for instance, are still overwhelmingly coal-based economies. And the ASEAN bloc is also part of a global build-out that has 500,000 MW of coal power capacity planned or under construction – or about what Japan and Germany together have from all sources. U.S. LNG is absolutely essential to bringing a viable coal alternative to significantly lower emissions.

Indeed, an obvious wake-up call for the anti-LNG crowd: “Thermal coal demand to rise in 2021.”

While our LNG exports 70% for the first half of this year because of low demand and prices globally, the great comeback has been won and we are now at record levels. In early-December U.S. LNG feed gas demand hit a staggering 11.5 Bcf/d. We are still on pace to become the largest seller by 2025 or before.

The Trump administration’s LNG supply time extensions for seven LNG licenses to 2050 give our industry the ability to compete worldwide and provide security for longer-term contracts and assurance for investors. The hunger is clearly there because natural gas has much broader support than some are telling you: “Natural gas viewed more positively than other fossil fuels across 20 global publics,” with support from 70% of those polled.

Even new clean markets are emerging for gas: just out from The Wall Street Journal: “Natural Gas, Propane Are Early Winners in Quest for Clean Ship Fuels.”