November 2021

The last barrel

You can’t have it both ways
Craig Fleming / World Oil

Over the past several months, the results of reckless U.S. green energy policies have become increasingly apparent. During his
first month in office, President Biden (acting as a blue marionette) launched an aggressive environmental campaign, designed to phase out the U.S. petroleum industry, along with the immense value it provides our country in terms of energy independence and employment opportunities.

The attack continued when the Biden administration proposed new methane regulations at the COP26 meeting in Glasgow, Scotland. The proposed legislation was surprisingly supported by API, which stated, “we support the direct regulation of methane from new and existing sources and are committed to building on the progress we have achieved in reducing methane emissions.” API’s turncoat position was quickly exposed and rebutted by Texas RRC Chairman Wayne Christian, who blasted Biden’s pro-OPEC, anti-U.S. energy industry position. “The Biden administration continues their efforts to tax and regulate the oil and gas industry out of existence. These policies will kill jobs, stifle economic growth and make America more reliant on foreign nations to provide reliable energy. It’s hypocritical to kill clean fossil fuel jobs here, in America, claiming it ensures a clean environment, and then beg our foreign adversaries to produce more, using much less environment-friendly methods.”

Demand comes roaring back. Despite dire predictions by analysts and consulting firms that changes in work and travel habits created by Covid would cause a sustained transition away from oil, demand has returned to pre-pandemic levels. According to BP, the world’s daily requirement is now above the key 100-MMbopd level, last seen before the pandemic. “Sometime next year, demand will be above pre-Covid levels,” says BP CFO Murray Auchincloss. The return to 100 MMbopd has happened, despite the fact that air travel has yet to fully recover. The resurgence is pushing prices to multi-year highs and threatening the world’s economic recovery, due to significant constraints in energy supplies.

OPEC+ smirks at Biden’s request. In an astonishing display of political/business naiveite, President Biden called on OPEC+ to raise oil production faster than planned, to help reduce gasoline prices in the U.S. Biden stated, “the idea that Russia and Saudi Arabia are not going to pump more oil, so people can have gasoline to get to and from work, is not right.” (Really, Mr. President—”not right”?) The request was quickly dismissed by several key members, including Iraq, Algeria, Angola and Nigeria. Kuwait said the cartel should stick with its plan to increase output gradually, because oil markets were well-balanced. OPEC said boosting daily production by 400,000 bbl, each month, is working, and there is no need to deviate from the plan.

In November, Biden acknowledged that OPEC+ would not increase crude output enough to meet U.S. demands and left the door open to a range of “options.” In another move that demonstrates Biden’s lack of a grasp on reality, the administration suggested that tapping the Strategic Petroleum Reserve would help reduce gasoline prices. This “solution” was quickly rebuked by the EIA, which stated, “the impact on oil prices after releasing crude from strategic reserves would be temporary.”

Oil majors showing restraint, too. With oil prices at multi-year highs, the majors are producing the most cash in years, but experts don’t predict they will spend the capital on exploration or development drilling to combat shortages in Europe and China this winter. Exxon Mobil, Shell and Chevron confirmed that they will spend the majority of their windfall profits on share buybacks and dividends. Capital expenditures will rise next year, but the increases come off 2021’s exceptionally low base and within frameworks established before the recent surge in fossil fuel prices.

It’s a significant change in strategy from previous crude price rallies, when emerging U.S. shale plays and fears over fossil fuel shortages prompted a massive upswing in capital spending. That boom ended painfully for the industry, with a massive build-up in the DUC inventory (stranded capital/lost revenue opportunity). This time around, the majors are content to take the cash and return it to shareholders, who are weary of poor returns over the last decade and concerned about the companies’ significant climate risk.

Catch-22. The conservative capex approach is because the majors are stuck between two extreme populations—the ESG advocates and cash-flow hungry shareholders, said Stewart Glickman, CFRA Research. Producers can satisfy both groups by not ramping up spending on fossil fuels. But that’s bad for consumers crying out for more supply. Europe and Asia are competing for natural gas, sending prices to record levels, while the U.S. and India have asked OPEC+ to produce more oil. China has called on state-owned companies to secure energy supplies at any cost. Chevron generated the most free-cash flow in its 142-year history during the third quarter but intends to keep capital spending 20% below pre-Covid levels next year while increasing share buybacks. Chevron’s 2022 capital budget will come in between $15 billion to $17 billion, 60% below 2014 levels, according to CFO Pierre Breber.

Biden—OPEC’s best friend. At the recent ADIPEC conference, Oxy CEO Vicki Hollub said, “Biden should focus on raising U.S. production rather than putting pressure on OPEC+ to fill the supply gap. If the administration wants more supply, they should ask U.S. producers first.” It’s difficult to fathom (shocking) a U.S. President throttling the U.S. petroleum industry, leading us toward more reliance on foreign energy from countries with lower environmental standards. The agenda also risks hundreds of thousands of jobs and billions in governmental revenue. A U.S. President takes an oath of allegiance to the American people, correct? It appears I am wrong. In the new U.S. economy, blue is now faithful to Saudi Arabia and Russia.

About the Authors
Craig Fleming
World Oil
Craig Fleming
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