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US Energy Review – July 2022

US Energy Review – July 2022

 

While US consumers and the Biden Administration are reeling from record-high petrol prices, the US oil and gas industry activity is accelerating, but cost increases and worsening supply chain issues are not leaving much room for further increases in output, at least not in the short term.

US petrol prices hit a record of over $5 per gallon early in June, putting pressure on the Administration to lower prices in a mid-term election year and putting upward pressure on inflation which hit in May its highest annual growth since December 1981.  

US Administration Struggles with Record Petrol Prices

As a result of the Russian invasion of Ukraine and the subsequent Western sanctions on Russian oil, international crude oil prices have largely stayed around and above $110 per barrel for most of the second quarter. This has led to a rise in petrol prices globally and in the US, where inventories of fuels including petrol, diesel, and jet fuel are at their lowest in years and well below the five-year average for this time of the year. Since crude oil prices make up more than 50% of the price of petrol in the US, the price has jumped to a record in nominal terms of over $5 a gallon national average. Inflation-adjusted petrol prices are not as high as in the early summer of 2008, but they are causing hardship for drivers as the driving season ramps up, and for the Biden Administration ahead of the mid-term elections in November. President Joe Biden and the White House have repeatedly said they would use every reasonable policy tool available to try to lower prices. Those efforts, including a large release from the Strategic Petroleum Reserve (SPR), haven’t led to much relief at the pump.

President Biden upped the rhetoric toward oil companies in June, asking them to boost supply of petrol and not pass on record refining margins to consumers.

“I understand that many factors contributed to the business decisions to reduce refinery capacity, which occurred before I took office. But at a time of war, refinery profit margins well above normal being passed directly onto American families are not acceptable,” President Biden said in a letter to oil companies on 14 June.

“So, we know where to put the blame: on the war. But oil companies, they have — oil refineries, they have a responsibility too. What they have been doing is taking advantage of the war,” White House Press Secretary Karine Jean-Pierre said on the following day, commenting on the letter.

“By putting out the letter, we’re saying, “Hey, we need you to act. It is time to act,” Jean-Pierre added.

US Oil Industry Wants Long-Term Policy Encouraging Investment

The US oil industry responded to the letter, saying that the government should change its current policy and work for a business and regulatory environment encouraging investment in supply.

“To protect and foster U.S. energy security and refining capacity, we urge to you to take steps to encourage more domestic energy production, including promoting infrastructure development, addressing escalating regulatory compliance costs, allowing all technologies to compete to reduce emissions, modernising fuels policies, and ensuring capital markets are functioning for all participants,” the American Petroleum Institute (API) and the American Fuel & Petrochemical Manufacturers (AFPM) said.

Texas Oil & Gas Association President Todd Staples said in a statement in response to President Biden’s letter that “The best solution to price relief is more production as the price of oil is determined on a global basis, driven by supply and demand. Unfortunately, this Administration’s policies have actively discouraged the increased production Americans need and now consumers are hurting as a result. Let’s hope this current outreach recognises that for long term investment to be made there must be long term support.”

The two US oil supermajors, ExxonMobil and Chevron, both called for consistent long-term policy that supports investment in US oil and gas resource development.

Despite Chevron’s efforts to boost supply over the past year, “Notwithstanding these efforts, your Administration has largely sought to criticise, and at times vilify, our industry. These actions are not beneficial to meeting the challenges we face and are not what the American people deserve,” CEO Michael Wirth wrote in a letter to President Biden.

Federal Tax Suspension?

President Biden also called on Congress to suspend the federal gas tax for the next 90 days, through the busy summer travel season. He also called on states to either suspend the state gas tax, too, or find other ways to deliver some relief to consumers.

However, the President’s call for a federal gas tax holiday faced opposition in Congress, including from Democrats.  

Cost Escalation, Supply Chain Impede Faster US Oil & Gas Production 

Business activity of firms operating in Texas, northern Louisiana, and southern New Mexico jumped in the second quarter to its highest reading in the Dallas Fed Energy Survey’s six-year history, but cost increases accelerated for a six consecutive quarter and supply chain issues further worsened, the survey showed on 23 June.

Oil and natural gas production increased, though the pace eased slightly, according to executives at exploration and production (E&P) firms polled in the survey. 

Costs jumped for yet another quarter, the sixth in a row, while delivery times for materials and equipment rose as supply chain issues continue to hamper an even more robust activity, the Dallas Fed Energy Survey found.

None of the 52 responding oilfield services firms reported lower input costs for the second quarter. It is taking longer for firms to receive materials and equipment. The supplier delivery index edged up from 30.6 to 31.9—a record high. Among oilfield service firms, the measure of lag time for deliveries jumped from 25.5 to 36.0—also a record high and suggestive of delays acquiring products and/or services. Most executives – 66% – expect it will take more than a year to resolve supply-chain issues, while only 4% of executives said that their firms were experiencing no supply-chain issues.

In comments to the survey, one E&P executive said: “The highest uncertainties are no longer below ground (ultimate recoveries, initial production rates, gas–oil ratios, operating expenses), as we’ve gotten very good at forecasting, estimating and predicting those. No, the highest uncertainties now are all above ground (politics, windfall profits tax, surtaxes, leasing bans, product prices, inflation, supply times, material availabilities, contractor availabilities and capital availability).”

Another one noted that “It is getting increasingly hard to find rigs, steel pipe and fuel to run the rigs.”

An executive at an oilfield services firm said “The industry is in the position to expand; however, supply-chain issues and employee-hiring issues will dampen the overall ability to expand.”

Another one noted that “The supply chain seems stretched to the max in the Permian Basin. There really is not much ability to increase drilling activity.” 

Executives in the survey also expressed concern that a recession or a significant slowdown in the economy could be around the corner to crash oil and gas prices again.  

Freeport LNG Outage Further Tightens Global Gas Market

A fire at the Freeport LNG export facility in early June led to a decline in US natural gas prices, but the prolonged outage at the terminal, which is estimated to have supplied 2.5% of Europe’s gas demand in May 2022, is set to tighten global gas markets. 

“At this time, completion of all necessary repairs and a return to full plant operations is not expected until late 2022,” Freeport LNG Development said on 14 June. Partial operations could resume within three months, once the safety and security of doing so can be assured, and all regulatory clearances are obtained.

With Freeport LNG offline, US feedgas volumes have fallen to 10.2 Bcfd in the week after the fire, alongside a 30% decline in US LNG export terminal utilisation rates, Rystad Energy said in a report on US gas balances for June.

“Freeport LNG was able to be flexible with diverting volumes to Europe since on average around 76% of its exported volumes in 2022 are uncontracted. As a result, we expect Europe will be the region most impacted by this incident,” the independent energy research and business intelligence company said.

“The global gas market was already tight heading into the northern hemisphere’s summer demand period, but Freeport LNG’s outage is expected to further tighten the market,” Rystad Energy reckons.

Read the latest issue of the OGV Energy magazine HERE

Published: 08-07-2022

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