Two Big Changes for the U.S. Oil Patch: Gas and Biden

It’s been a year for the unexpected, the unpredictable and the improbable, and as 2020 winds to a close, the U.S. energy industry finds itself confronting two factors that would have seemed unimaginable in January: gas is the new oil and Joe Biden is the new president.

As the COVID-19 pandemic rages on, with cases hitting records across the U.S. and deaths topping a quarter of a million people by November, the hopes for a late-year resurgence of oil demand evaporated. Natural gas, however, is a different story. Gas producers are seeing signs of a recovery that has continued even amid the pandemic’s second wave.

Benchmark U.S. natural gas prices rose 33% in October, hitting a two-year high, while oil prices fell 11% to their lowest point since June.

Natural gas is less affected by the lockdowns that are once again being instituted in several states. Lockdowns hurts transportation demand, and therefore oil, but in the U.S., natural gas primarily is used for heating and electricity generation, both of which have remained steady heading into winter.

As a result, the market value the six largest publicly listed Appalachian gas companies rose about 18% this year, while the value of the 25 largest oi producers fell 53%.

Gas producers are also benefitting from a decline in oil production. Fracking activity in North America may have peaked in October, according to Rystad Energy. Many oil companies produce natural gas as a byproduct, which created excess supply and kept natural gas prices low. As oil production declines, and excess gas along with it, gas producers may enjoy higher and more stable prices heading into 2021.

Meanwhile, the industry is greeting the advent of Joe Biden’s presidency with trepidation. While Biden hasn’t embraced the extreme anti-fracking measures that some Democrats favour, he has advocated an aggressive agenda to combat climate change and has suggested he may suspend leases for new drilling on federal lands and waters.

In mid-November, the Trump administration held is final offshore lease auction for the Gulf of Mexico, and companies rushed to secure areas amid concern that it may be their last opportunity for a while. The government leased about 518,000 acres, bringing in about $121 million in bids, more than the $100 million it expected.

During the campaign, incumbent president Donald Trump tried to cast his opponent as an enemy of the oil business, saying Biden would “destroy” it. But it’s hard to imagine how much more damage the new president could do after the devastation the industry has endured this year.

Oil companies have cut some 118,000 jobs—and counting—since the pandemic began. In the past five years, almost 250 producers have filed for bankruptcy—almost half of them in Texas. In the third quarter alone, filings jumped by 21% from a year earlier, according to the Dallas law firm Haynes and Boone.

Oil prices, which started the year above $60 a barrel have fallen by about a third since then, and that’s only after recovering from a plunge in late April that briefly took West Texas Intermediate futures into negative territory for the first time ever.

Investors have fled the industry as well. Energy is now the poorest performing sector among the 11 components of the Standard & Poor’s 500 Index. By late November, the broad market was up more than 12% since January while the energy sector had fallen more than 37%.

After years of relying on the industry’s steady performance, investors increasingly are looking elsewhere for returns. Blackstone, the world’s biggest fund manager, in late September pledged to cut carbon emissions in its new investments by 15% within the first three years of buying a company or asset. According to a recent survey, 33% of institutional investors who don’t already do so are considering environmental, social and governance criteria for investment decisions, up from 12% last year. The value of assets governed by so-called ESG mandates has almost doubled during the past four years to $40.5 trillion.

In recent years, as low interest rates kept capital flowing into the Oil Patch, producers spent more drilling wells than they made selling the oil and gas they pumped. Investors grew weary of the overspending, and last year, the easy money started drying up.

A Biden presidency, in other words, may be the least of the industry’s worries, especially since presidents typically have little more than a marginal impact on oil and gas production.

After all, Trump’s predecessor, Barack Obama, restricted drilling on federal lands, delayed projects such as the Keystone pipeline and imposed a moratorium on drilling activity in the Gulf of Mexico after the Deepwater Horizon disaster, yet domestic oil production surged 90% during his first seven years in office—the fastest production growth in American history.

That surge came from hydraulic fracturing, which was developed with minimal government support through both Republican and Democratic administrations.

Biden may, at some point, suspend or scale back leasing programs on federal lands, which could crimp the industry’s long-term growth because fracked wells typically play out more quickly than conventional ones, requiring producers to drill more to maintain production levels. At the same time, curtailing production can only help an industry awash in too much of it.

And Biden might also try to limit drilling in the Gulf of Mexico. But such restrictions are unlikely to happen quickly. The government collects billions of dollars in royalties—some $30 billion from the Gulf alone. A time of record deficits isn’t the time to start cutting revenue. Nor is it a time to cause more job losses in an industry already awash in them. Perhaps that’s why President-elect Biden has remained mum on energy since winning the election.

But there’s one thing that Biden could do—and hopefully will do quickly: get the coronavirus under control. That might help restore demand and return some stability to the oil and gas industry.

Of course, Biden also faces mounting pressure from his party’s left wing to make bold moves in combatting climate change. His responsive could pose a threat to the energy industry, but it also could present an opportunity. If Biden is serious about alleviating the partisan divisiveness hamstringing our political process, this may be a good place to start.

The industry recognises that policy, public sentiment and investor interest is driving the market toward low-carbon solutions and away from fossil fuels.

America will still need fossil fuels, of course, but in increasingly smaller quantities. This change isn’t being driven by the government, but by economics. In the past decade, the cost of wind and solar has fallen from the most expensive to the cheapest form of energy — cheaper than oil and gas even without federal subsidises, according to an analysis by the investment firm Lazard.

Natural gas is already fuelling the transition from coal-fired electricity to gas generation. Gas plants produce far less carbon, and they’ve encouraged the spread of renewables. Gas plants can start and stop quickly, allowing them to work in tandem with renewables to keep the lights stay on when the sun isn’t shining or the wind isn’t blowing.

Gas produced from fracking is an essential step toward a cleaner energy future. As 2020 comes to a close, a new landscape is emerging in the U.S., one in which gas plays a more prominent role, and environmental policy increasingly sets the agenda.

Read the latest issue of the OGV Energy magazine HERE.