April 20, 2020 is a day which will forever live in infamy for the oil and gas industry. On that day, the price of West Texas Intermediate fell to an unfathomable negative $36.98 per barrel, the first time it had ever gone below zero. It was the nadir of an industry crisis triggered by the sudden onset of the COVID-19 pandemic.
Just one month before, the demand for oil had evaporated as cities and states moved into extended lockdowns and air travel ground to a halt; prices collapsed – from an average of $57.52 in January, to $29.21 in March, to $16.55 in April. For the industry, this spelled calamity. From March until the end of the year, more than 100 US oil and gas companies filed for bankruptcy, while 14% of the workforce was laid off, a loss of some 120,000 jobs.
Many loudly presumed that the industry, already faced with growing competition from renewables, could not possibly hope to recover. Yet, as the editor of Shale Magazine pointed out, “the history of the oil and gas business in the United States is that every time the ‘experts’ all line up to declare it to be dead, it finds a way to come roaring back.”
And come roaring back it has.
As the pandemic dissipated and lockdowns were relaxed, the demand for oil returned. Suddenly, the industry found itself entering into what some are calling “Oil Boom 2021.” By January of 2021, the price of oil had returned to over $50. In March, as if to celebrate some sort of COVID anniversary, it climbed over $60. That same month, the industry hired more people than it ever had in a single month. Now, Goldman Sachs estimates prices will reach $80 per barrel sometime this summer, while Rystad Energy is predicting “record revenues” for the industry.
This boom is not solely the province of oil. In June 2021, the price of natural gas was up 96% from what it was in June of 2020 to $3.215/ MMBtu, the highest price heading into summer since 2017. Alongside higher prices has come spiking production, up to 92.2 billion cubic feet per day from 87.8 a year before.
Perhaps nowhere has this natural gas comeback meant more than the Appalachian Basin in the American northeast, which sits atop the mighty Marcellus Shale. The region produces more natural gas than any OPEC country, more than the entire continents of Africa or South America. Accordingly, a natural gas boom is beginning to facilitate a boom in the region. In just the last few months, regional power players Range Resources and Antero Resources have seen their stock prices jump over 40%, while industry goliath Enbridge is moving forward with plans to expand its infrastructure to produce and ship more gas from the area. Further, movement by the new presidential administration suggests further opportunities for growth in area moving forward. This will be discussed further below.
But in the northeast and across the country, the oil and gas industry has come through the crushing lows of the pandemic, with its sights now firmly set on more dizzying highs.
A Cup of Joe
On October 22, 2020, Joe Biden stood on the presidential debate stage and proclaimed to the nation, “I would transition from the oil industry.” The statement reverberated across the country, serving as the embodiment of then-candidate Biden’s expected ‘green’ regulatory agenda.
As such, Biden’s victory in that year’s presidential election stirred dire warnings from certain segments of the political and energy establishments. The US Chamber of Commerce warned Biden’s purported agenda would destroy 19 million jobs in five years and result in a $4,000 per year cost of living increase, while the American Petroleum Institute cautioned that Biden “could take the US back to a period of energy uncertainty.” World Oil magazine, for its part, called Biden “a menace to sound energy policy,” while numerous media sources spoke of Biden’s “war” on oil and gas.
Now nearly six months into the Biden administration, it can be asked: has President Biden’s agenda imperiled the future of the oil and gas industry? And, more broadly, what exactly is his agenda?
On January 27, President Biden signed an executive order pausing new oil and natural gas leases on federal lands. The response from within the oil and gas industry was perhaps unexpected – not indignation, but something nearer to indifference.
“The headline looks scary, but we don’t see any immediate impact,” declared one industry executive, while Oil and Gas Journal bluntly asserted that the order “does not materially impact the industry.” The reason was that the so-called “pause” did not stop operators with existing leases and permits from drilling or fracking on federal lands, and in fact, most big producers already had “ample inventories of undrilled permits,” enough to last them for years.
However, some wondered what the industry would do if the pause on new leases extended beyond the backlog which companies had amassed. The question was made moot on June 15 when a federal judge ruled against the pause, effectively ending it.
Along with the attempted pause on oil and gas leases, President Biden also issued an executive order cancelling the permit for the Keystone XL pipeline project. Certainly, the death of this pipeline, which had been initially rejected by President Obama in 2015, then fast-tracked by President Trump in 2017, was not seen as a positive development for the oil and gas industry. However, caution is urged when assessing the impacts of this order as it relates to the Biden administration’s attitude towards pipelines in general.
Shortly after the Keystone cancellation, US Energy Secretary Jennifer Granholm asserted “we’re not against pipes […] we want to build more pipes.” Indeed, the Biden administration has already thrown its support behind the Dakota Access Pipeline in North Dakota and the Line 3 pipeline in Minnesota, as well as the Nord Stream 2 pipeline in Europe.
Reimagine and Rebuild
On March 31, President Biden introduced a $2.3 trillion infrastructure plan which his administration asserted would “reimagine and rebuild a new economy.” The plan included substantial investment into ‘green’ initiatives, alongside a proposed cut to oil and gas industry subsidies.
Of course, as with most proposals of this nature, what the plan might include by the time it becomes legislation is currently unknown. As of this writing, negotiations are ongoing and already the proposal has been lowered to $1.7 trillion.
It has been argued that any significant infrastructure spending, even that which is ‘green’ focused, will inherently boost the oil and gas industry due to increased demand brought about by increased construction activity. In fact, Rystad Energy is predicting an extra 350,000 barrels of oil per day will be needed in 2021 thanks to infrastructure spending, and an extra 900,000 per day in 2022, a phenomenon which it is calling the “Biden Boost.”
Clean Up Opportunity
There is at least one piece of the infrastructure proposal which currently enjoys bipartisan support, and thus is likely to be included in any eventual legislation. Within the proposal, $16 billion is allocated towards plugging abandoned oil and gas wells, while an additional $5 billion is put towards the remediation and redevelopment of toxic Brownfield and Superfund sites.
This is particularly good news for the Appalachian Basin, which has by far the highest number of abandoned wells in the nation. Better still, President Biden has expressed his desire to pay those cleaning up “at the same price that they would charge to dig those wells,” suggesting the impending creation of much-needed good jobs in the region.
It should be noted how proposed funding for site cleanup directly relates to the “opportunity zones” created by the 2017 Tax Cuts and Jobs Act. According to the Act, investing in designated opportunity zones, which include many toxic sites around the country, allows investors to defer or avoid capital gains taxes for said investments. As President Biden was promoting site cleanup in his infrastructure proposal, he was also bringing two of the architects of the opportunity zone program into key positions within his administration. This has led some to speculate that the potential exists for a more “targeted version” of opportunity zones, one which would allow investors access to both infrastructure funding and opportunity zone tax benefits simultaneously. This certainly warrants further attention moving forward.
The “Biden Boost”
“Oil and gas sector enjoys best first months of an administration under Biden since Roosevelt’s first term in 1933,” trumpeted a June 11 Financial Times headline.
Whether this is because of the Biden administration or in spite of it is up for debate. Either way, contrary to the dire warnings which greeted his election, President Biden has not brought about the demise of the US oil and gas industry thus far. Whatever the President’s agenda, the industry has entered into something of a boom.
McKinsey called the pandemic a “catalytic moment” for the oil and gas industry, one which will “accelerate permanent shifts in the industry’s ecosystem, with new future opportunities.” Looking at these shifts and opportunities, two overarching trends emerge which are set to shape the industry in the years and decades to come.
The Companies Are Better
Due to the extreme pressures of pandemic, oil and gas companies spent much of 2020 feverishly cutting costs, increasing efficiencies, and undergoing digital transformations in their operations just to survive. Though they may have been forced to change by COVID, in the end, they have changed for the better. As Forbes Magazine put it, “the companies who have lived to survive it will pretty much all come out the other side as more cost-effective and efficient companies.”
Further, having seen the worst of times, oil and gas companies are now undertaking a healthier restraint in their operations. Prior to the pandemic, boom times meant that companies would typically reinvest 120% to 130% of their cash flow into new production; they would spend everything they made, and borrow against future earnings, to drill and frack new wells. Post-pandemic, this number has dropped to about 70%, leaving ample profits for shareholders. This, combined with increased cost-effectiveness and efficiency, has made oil and gas more attractive to investors, meaning a greater access to capital and stronger businesses.
Climate Change Collaboration
Contrary to the traditional antagonism presented in mainstream discussion, collaboration between the oil and gas industry and renewables is both necessary and expected to address climate change.
Natural gas, for one, has been called “key to fighting climate change.” Consider, natural gas emits 50% less CO2 than coal, while coal provides 27% of global energy. This means that a switch from coal to natural gas holds the potential to dramatically reduce CO2 emissions. In fact, the International Energy Agency estimates that substituting gas for coal has already saved 550 million tons of CO2 emissions globally, while in the US, the Energy Information Administration attributes the country’s 32% reduction in emissions since 2005 largely to switch from coal to gas.
Further, as the US moves towards the electrification of transportation, buildings, and industry, estimates are that electricity needs could increase 65% by 2050. Currently, natural gas is the largest source of electricity generation in the country, and is expected to account for more electricity than all other sources combined by 2050. In short, “electrification means more natural gas.” Again, this stands as particularly promising to the Appalachian Basin, the world’s premier natural gas producer.
Crucially, collaboration against climate change is not something which the oil and gas industry is shying away from. Many companies have announced net-zero goals, while investing in the electrification of their operations and implementing low-carbon solutions. In fact, one need only look at the American Petroleum Institute’s seminal ‘Climate Action Framework’ to see the direction the industry is heading. There, the API commits to the mitigation of emissions in operations, calls for economy-wide carbon pricing, and presents a plan of action to accelerate technology and innovation.
The US oil and gas industry underwent a pandemic-fueled evolution 2020, returning from the depths of despair with an increased efficiency and profitability, and entering into a boom which seems set to continue regardless of who occupies the White House. The future seems bright, punctuated by collaboration on climate change led by natural gas.
In 1897, with rumors of his death spreading across the globe, Mark Twain is said to have written, “the reports of my death are greatly exaggerated.”
And so it is for the oil and gas industry.