The last barrel
Over the past two years, the fallacy of relying on renewable resources has become increasingly apparent. President Biden and environmental groups have vehemently stressed the imperative of reducing the use of fossil fuels to slow GHG emissions. Biden enacted legislation that created an unprecedented reduction of investment in hydrocarbon-based energy, in favor of developing green resources. The hard push to convert has left the U.S. undersupplied, underpowered and vulnerable to weather-related events.
Adding to the undersupply problem, the war in Ukraine created sanctions on Russian oil and gas supplies and caused uncertainty about European energy security. If the Biden administration had worked with energy companies instead of waging war on hydrocarbon producers, our country might have had surplus production capacity available to meet demand when the unexpected supply disruption occurred. However, a recent pivot by the Biden administration suggests 2023 should be better.
Biden quietly changes course (finally). In late November, the Biden administration approved plans to build the nation’s largest oil export terminal off the Texas Gulf Coast, which would add 2 MMbpd to U.S. oil export capacity, according to the Texas Tribune and Earthworks. The approval by the U.S Department of Transportation’s Maritime Administration was filed in the federal register without public announcement. Earthworks, an environmental nonprofit, spotted the filing and publicized approval of the Sea Port Oil Terminal.
In a 94-page decision, the Maritime Administration wrote, “The construction and operation of the port is in the national interest because the project will benefit employment, economic growth and U.S. energy infrastructure resilience and security. The port will provide a reliable source of crude oil to U.S. allies in the event of market disruption.” The administration’s move marked a major step forward for the export sector, which has grown rapidly since the U.S. began to allow crude sales abroad in 2015. The offshore oil export terminal, the first to be approved of four proposed along Texas’ Gulf Coast, will enable continued growth in U.S. shale oil production and in global consumption.
Approval of the Sea Port Oil Terminal, 35 mi off the coast of Freeport, about 50 mi southwest of Galveston, gave Enterprise and Endbridge a clear lead in the race to build the first new offshore export terminal in the Gulf of Mexico. It was the agency’s first endorsement and followed a three-year review process. According to James Coleman, who teaches energy law at Southern Methodist University in Dallas, the export terminal’s approval represents the first “hands-off” approach the Biden administration has adopted recently toward oil infrastructure projects since winning the White House on promises to block pipeline expansions. “They keep asking the oil industry to expand its production and build more refineries, yet they keep saying we need to phase out fossil fuels. What they’ve said seems contradictory.”
CCUS pivot. The Biden administration also reversed course on carbon capture funding to allow oil production following an intervention by Senators Joe Manchin (D-W.Va.) and Kyrsten Sinema (Ind.-Ariz.), handing a win to the fossil fuel industry. The DOE announced $3.7 billion of funding to back projects that remove CO2 from the atmosphere, which have long been considered key technologies needed to reach net-zero goals. The policy pivot opens the door to the use of taxpayer dollars to fund carbon capture projects that produce fossil fuels through enhanced oil recovery (EOR).
It’s a significant shift, and one likely to be championed by the oil and gas industry, because it promises more funding options for crude production. The move is also another example of how the Biden administration has been caught between competing interests, as it pushes a climate agenda while trying to increase energy supplies to tame gasoline prices.
The carbon capture projects will be required to complete an environmental pollution impact assessment prior to construction and, in addition to an assessment of net-climate benefits, will be required during the operation phase, the DOE announced in its funding opportunity announcement. Applicants will be required to detail plans for maximizing the amount of CO2 storage relative to associated hydrocarbon extraction over the life of the project.
Earlier this year, the DOE notified the industry of its intent to provide funding for DAC projects, but said that projects producing oil and gas would not be accepted. The department decided to change that stance after a July meeting, when Senators Manchin, Sinema and other lawmakers from both sides of the aisle said they were concerned it wouldn’t be implemented as Congress intended.
Project developers “should not be subject to requirements that would limit the revenue” derived from pumping CO2 underground, 10 senators wrote in the letter. Widening the revenue streams would “provide the flexibility that private developers need to gain value from investment in DAC, including to deploy first-of-its-kind technology at scale.”
Granholm extends olive branch. In mid-December, U.S. Energy Secretary Jennifer Granholm told energy executives that she recognizes fossil fuels will be around for a long time, even as the Biden administration works to transition away from them to cleaner alternatives. “We are eager to work with you,” she told the National Petroleum Council, an advisory group that includes executives from ExxonMobil and Royal Dutch Shell. “Moving too fast could have unintended consequences that hurt people and cause backlash.” Granholm concluded, saying, “production will need to increase soon to meet growing demand, including a shortage of diesel in the Northeast U.S.”
Chevron responds. Chevron announced it will allocate an extra $2 billion to capital expenditures in 2023, as it weighs demands for higher investor returns amid calls from the Biden administration for U.S. energy producers to reinvest more profits in production. The company announced it will spend $17 billion in 2023, 13% more than its spend in 2022.
The Permian will account for $4 billion, as Chevron wants to accelerate low-risk U.S. shale production, which offers quick financial returns, compared with the multi-year megaprojects that dominated much of the last decade. According to Chevron, spending in the basin assumes low double-digit cost inflation, while global expenses are likely to rise in the mid-single digit percentages. Its low-carbon business will receive $2 billion, double the 2022 spend.
Increased shale production. The EIA raised its forecast for oil production in 2023, reversing course after five straight months of cuts that stoked concern about a slowdown in output from shale fields. Production is forecast to average 12.34 MMbopd next year, topping the record 12.32 MMbopd set in 2019. The forecast is an about-face after the agency published a sharp downward revision in November. The estimate for 2022’s output also got a boost. The forecast should help quell fears that oil production from American shale fields, one of just a few sources of output growth globally, is decelerating, even as crude prices remain well above drillers’ costs to break even. The U.S. estimate was raised partially as a response to increased drilling activity, which has climbed 30% this year.
Energy industry emerging from the crisis. Spiraling energy costs and the impact of Russia’s war with Ukraine damaged the global economy, but may have hastened the changes required to transform the way we power the planet, according to a report from Wood Mackenzie. The report outlines several key developments that, despite the setbacks of the past year, are laying the foundations for the delivery of more reliable, affordable and sustainable energy. Policymakers are finally acknowledging that a diverse range of low-carbon technologies beyond variable renewables is required to achieve deep decarbonization while maintaining a secure energy supply.
“We estimate that the low-carbon hydrogen and CCUS project pipeline has grown around 25% over the past year,” said Prakash Sharma, Wood Mackenzie V.P. “About 30 projects have taken final investment decisions, and another 170 are aiming to reach FID by the end of 2023. Also, the war in Ukraine has left a massive supply gap in European markets. We now expect two-thirds of all U.S. LNG cargoes to land in Europe this year. Regasification capacity is the major impediment to even more U.S. LNG exports to Europe.”
Balanced energy strategy. The energy crisis has prompted investors to rethink finance for fossil fuels. What has emerged is a more measured approach that reflects the real-world constraints on financial institutions and corporations in making long-term financing and capital allocation decisions.
“The shift in approach reflects both complexity and the necessity of securing an orderly energy transition,” said Kavita Jadhav, research director, Wood Mackenzie. “The past year has made abundantly clear that energy supply and demand need to move in sync for economic stability and minimal price volatility.” WO
