OGV Energy's US Energy Review – May 2022

While the US Administration is releasing a record amount of crude oil from its Strategic Petroleum Reserve (SPR) to combat the highest petrol prices in America in eight years, the US oil and gas industry is calling for long-term solutions to the economic pain at the pump and long-term energy security in which oil, gas, and petrol prices will be less dependent on the likes of Vladimir Putin and his war in Ukraine. 

The US oil industry also rebuffed accusations from Democrats that oil companies are engaged in price gouging and are ripping off Americans at the pump while lining their pockets amid the high energy prices.

Drilling permits in the biggest US shale play, the Permian, soared to a record, pointing to a surge in production ahead. Yet, the industry still faces significant cost inflation and supply chain bottlenecks in labor, frac sand, equipment, steel, and other materials, which could slow shale production growth, together with continued capital discipline at many public shale operators.

Historic SPR Release

In a bid to tame high petrol prices in response to what it described as “Putin’s Price Hike at the Pump,” the US Administration announced on 31 March it would authorise the release of 180 million barrels from the SPR over six months “as a bridge through the crisis.”

“After consultation with allies and partners, the President will announce the largest release of oil reserves in history, putting one million additional barrels on the market per day on average – every day – for the next six months,” the White House said.

The Biden Administration, however, angered US oil and gas firms by calling on Congress to make companies pay fees on wells from their leases that they haven’t used in years and on acres of public lands that they are hoarding without producing.

“Companies that continue to sit on non-producing acres will have to choose whether to start producing or pay a fee for each idled well and unused acre,” the White House said.

Commenting on the Administration’s announcement, API President and CEO Mike Sommers said:

“The SPR was put in place to reduce the impact of significant supply chain disruptions, and while today’s release may provide some short-term relief, it is far from a long-term solution to the economic pain Americans are feeling at the pump.”

“The best thing the White House can do right now is to remove barriers to investment in American energy production and infrastructure,” Sommers said. “Unfortunately, today we heard more mixed signals about developing affordable, reliable and secure American natural gas and oil.”

“In fact, companies already begin paying rent on leases to the federal government as soon as leases are granted,” the biggest US oil lobby said, with Sommers noting “The administration once again has a fundamental misunderstanding of how leases work.”

The massive SPR release is a short-term solution and fundamentally, it doesn’t change the supply-demand balance for later this year and in 2023, according to analysts. 

The release will provide a temporary relief to crude and pump prices, Rystad Energy said in research in early April.

“This has delivered an expected change in the Brent futures curve, by shifting prices down in the short term while pushing them upwards again by comparable amounts for contracts expiring later in the year. A pivot around September 2022 can be expected, when the SPR release is likely to end,” Rystad Energy noted.

“This historically large SPR release is the right decision in the current crisis and consumers should feel the benefit soon, but it only solves half the problem,” said Claudio Galimberti, Senior Vice President, Analysis at Rystad Energy.

Considering that the SPR has to be replenished most likely in 2023, “the “big bang” SPR release makes very little change to the 2022-2023 global liquids balance,” according to the independent energy research firm.

US Oil Firms Reject Accusations of Price Gouging  

During a hearing at the US House Committee on Energy and Commerce, executives at the biggest US oil firms dismissed claims that the industry was to blame for the high petrol prices for American households.

The top executives of Exxon, Chevron, BP America, Shell USA, Pioneer Natural Resources, and Devon Energy said they are not setting the price of crude or fuels and explained the economics and how crude oil production and fuel distribution work in a free market.      

“I have seen statements in the press suggesting that Chevron and other oil and gas companies are responsible for the increase in fuel prices. I want to be absolutely clear: we do not control the market price of crude oil or natural gas, nor of refined products like gasoline and diesel fuel, and we have no tolerance for price gouging,” Chevron’s CEO Michael Wirth told the hearing on 6 April.

Gretchen Watkins, president of Shell USA, noted that “Because oil is a global commodity, Shell does not set or control the price of crude oil. Similarly, Shell does not set or control the price that consumers pay. Indeed, it would be illegal for Shell to do so because nearly all Shell-branded retail stations in the United States are owned by independent operators who set their own prices in the marketplace.”  

According to NACS, the Association for Convenience & Fuel Retailing, only about 0.1% of the fuelling outlets in the US are owned by a major oil company.

The US oil and gas industry continues to call for long-term policy that would encourage more domestic supply, instead of short-term solutions and pleas for more production only when the current Administration is desperately looking to lower petrol prices for Americans.

“We can’t treat oil and natural gas as a kind of switch that is turned on or off to suit the moment,” API’s Sommers said in an address to The Economic Club of Florida on 14 April.

“Energy policy does not have to be an endless series of crisis-management decisions. Our aim should be to avoid crises – by shaping events instead of reacting to them,” Sommers added.

Record Permian Drilling Permits, But Output Surge May Have To Wait

Meanwhile, horizontal drilling permits for new wells in the Permian reached a record high in March, with 904 total permit awards, driven by high oil prices and production demand, Rystad Energy research showed in April.

“This is a clear signal that operators in the basin are kicking into high gear on their development plans, positioning for a significant ramp-up of activity level and an acceleration in the speed of output expansion over the next few months once supply chain bottlenecks ease,” says Artem Abramov, Rystad Energy’s head of shale research.

That said, the record-high number of permits shouldn’t be taken at face value and as a concrete indicator of future drilling plans, as many permits never get drilled, and operators follow diverse permitting strategies.

“In other words, the time from permit approval to the start of drilling varies substantially across producers in the same basin,” Rystad Energy noted.

Moreover, investors continue to press listed shale producers to keep capital discipline, which suggests that oil firms are not rushing to raise oil and gas production, a report by the Institute for Energy Economics and Financial Analysis (IEEFA) showed in mid-April.

“This trend shows that the top issue for oil and gas operators in the U.S. is not increasing production but rather paying down debt and rewarding shareholders,” said Trey Cowan, an IEEFA energy finance analyst and author of the report. “High oil and gas prices no longer seem to spur increases in production.”

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