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PaperclipPerfector  9mo ago (text post)   31421 thread views

Culture War Roundup for the week of July 10, 2023

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Updates on Oil and Gas

In the old place I started a conversation about rising oil and gas prices. Several people responded at the time that it was due to policy, like Biden cancelling the keystone pipeline and pressuring the adoption of green technologies. The theory was that the Biden Administration wanted to keep prices high to effect a transition to green technology. At the time I argued that it seemed very unlikely that Biden wanted gas prices high, and that these regulatory factors were an insufficient explanation for price spikes/production gluts: Obama cancelled offshore drilling and pushed green tech too and yet oil production doubled under him. @Iconochasm, who I think is no longer with us, made a prediction that oil would fall significantly anyway because fossil fuel companies would react to Biden’s opposition.

As a follow up on that prediction, in the year since this conversation oil production in the US has shot up and looks on pace to soon reach its previous heights before the Covid collapse, with prices falling correspondingly. Now I see articles like “U.S. Crude Oil Production Rebounds In January: EIA”, “America is going through an oil boom — and this time it's different”, and “U.S. Crude Oil Output Expected to Hit New Record Highs in 2023”:

U.S. crude oil production is expected to average 12.4 million barrels per day in 2023, surpassing the previous record of 12.3 million barrels per day in 2019. These forecasts, offered by the U.S. Energy Information Administration, include increased production in the Permian region and the Federal Offshore Gulf of Mexico.[1]

The U.S. is on track to recover all the decreases in production that occurred during the Covid-19 pandemic, when demand for oil collapsed along with its price. The low price of oil caused energy companies to slow production and close their least profitable wells, resulting in an 8% drop in oil production for 2020, the highest annual decrease on record. Following the easing of travel restrictions and a rebound of global demand, U.S. oil output is close to surpassing pre-pandemic levels…

The bulk of the growth in U.S. oil production has come from the Permian region, which spans parts of Texas and New Mexico and accounts for about 40% of U.S. oil output and currently produces 5.7 million barrels per day. The other major source of growth is the Federal Offshore Gulf of Mexico, where several large projects have come online in the past few years, producing 1.8 million barrels per day.

In addition to boosting domestic production, the U.S. is expanding its access to new oil resources in Alaska and the Gulf of Mexico. In March 2023, the Biden administration approved a controversial drilling project in the National Petroleum Reserve-Alaska, known as Willow. The project, initiated under former President Trump and faced legal challenges from environmental groups, is expected to produce up to 160,000 barrels per day of oil at its peak and generate $10 billion in revenue for the federal government over 30 years.

A few weeks later, the Biden administration announced plans to hold an auction for a lease sale of more than 73 million acres in the Gulf of Mexico, which could yield up to 1.1 billion barrels of oil and 4 trillion cubic feet of natural gas over the project’s lifetime

It’s gotten so pronounced that environmentalist groups have even started critiquing the Biden Administration (1, 2, 3) for surpassing even Trump in their zeal for fossil fuels:

Federal data show the Biden administration approved 6,430 permits for oil and gas drilling on public lands in its first two years, outpacing the Trump administration’s 6,172 drilling-permit approvals in its first two years…

Nearly 4,000 of the Biden permits are on public lands administered by the U.S. Bureau of Land Management’s New Mexico office, followed by 1,223 drilling permits in Wyoming, and several hundred each in Utah, Colorado, California, Montana and North Dakota.

Will the outlook stay rosy? I have no idea. As I argued in previous posts I think regulatory decisions are probably less impactful than the broader global markets, and investments in new productive capacity remains low for that exact reason. So a lot of the future probably hinges on stuff like the Ukraine War and the decisions made by OPEC. Still, coupled with the fact that Biden tapped the Strategic Petroleum Reserve to depress prices, I think this largely confirms that Biden was certainly not driven by a desire to crush oil production and keep prices high for Americans. Like most Presidents, he wants voters to be happy with him.

The geopolitical significance of the US oil boom combined with the EV surge in Europe and China (and eventually in the US) spell big trouble for the gulf states in the Middle East. Saudi Arabia has terrible human capital. Without oil, they'd just be another Egypt. The transition period will take years - decades probably - but it is ongoing. Russia is another state which will have to seek another model of development though I am more optimistic there given their fairly well-educated workforce. Saudis are just pretty dumb.

My understanding is that it takes a significant amount of time for exploration projects to go from approval, through construction, to production. To what extent are current production levels indicative of investments made 5-10 years ago, and approvals sought 3-4 years ago? (Honest question, I don't know the industry well enough to say off the top of my head or with only cursory googling).

Similarly, should we expect the number of permits granted by the Biden administration to have an immediate impact on production numbers?

And are all permits created equal - e.g. if current production increases are centered in shale fields, are those permits more or less impactful than the permits being granted now?

Time to production varies based on the type of project. In the Permian you can go from a drawing on a napkin and some capital to physical production in less than a year. In the gulf of mexico, it's more like 4-5 years (and the capital costs are insane).

To be clear, this is a change from the way things were prior to say 2010. Time from spud to completion in Permian is down to ~6 months. Used to be more than a year.

Thank you for the insight!

Similarly, should we expect the number of permits granted by the Biden administration to have an immediate impact on production numbers?

Probably not, though it might change investment. But this squares with my point from the way-back OP that the regulatory decisions probably have less of an impact that broader market forces. My point here is really just that Biden is behaving in a way that shows willingness to increase production and decrease prices, in contrast to the theory that he was actively trying to hurt the fossil fuel industry as part of a climate mission.

And are all permits created equal - e.g. if current production increases are centered in shale fields, are those permits more or less impactful than the permits being granted now?

I'm far from an expert here but my guess is that it would matter less in shale fields because the problem there doesn't seem to be as simple as permitting permissions, given all the Drilled but Uncompleted wells we have (DUCs are in decline in large part due to the Permian Region, which is a positive sign).

My understanding was that it takes at least 10 years to get a fully functioning mine up for instance. And that’s after discovery and vetting. I can’t imagine it’s any easier for oil expeditions.

I've heard from Peter Zeihan that fracking wells are easier and quicker to get up and running than other types of operations, but I can't remember whether it's on the order of months or years.

If this is Permian basin, it’s probably relevant that one of the key legitimacy building activities for Texas political figures is to sue the federal government into changing their minds. And they did in fact do this over Permian basin policy.

Interesting. You have any more details on how that went down?

Abbott sent a vague threatening letter to the EPA over proposed permian basin reclassification, and claimed victory when the reclassification didn’t happen, as perhaps the most high-profile example. Paxton has also won a few lawsuits against the EPA which relate specifically to oil and gas production.

Got it, thanks

Obama cancelled offshore drilling and pushed green tech too and yet oil production doubled under him.

Mostly in spite of his policies. 2010-2014 was the technologically-driven shale boom period, followed by the crash in 2014-15. The leases that facilitated this expansion were created under Bush who was a wee bit more energy industry friendly than Obama/Biden.

US oil production continued to expand under Trump, though more slowly than it did during the Shale boom and peaked in late 2019-2020 before COVID nearly bankrupted 1/3 of the US regional producers by briefly making oil prices go negative. It has taken three years for US production to get back to 95% of the peak production because it isn't just like turning on a spigot again.

Prices are slowly normalizing, but are still historically high, even adjusting for inflation. This makes very little sense to me because U.S. demand has fallen almost 10% from 2019 and almost 20% from 2005 despite returning to high production rates. I'll have to look into what is going on with global production in that time period, but that data is harder to track down and less reliable.

I have no idea. As I argued in previous posts I think regulatory decisions are probably less impactful than the broader global markets, and investments in new productive capacity remains low for that exact reason. So a lot of the future probably hinges on stuff like the Ukraine War and the decisions made by OPEC. Still, coupled with the fact that Biden tapped the Strategic Petroleum Reserve to depress prices, I think this largely confirms that Biden was certainly not driven by a desire to crush oil production and keep prices high for Americans. Like most Presidents, he wants voters to be happy with him.

This analysis seems apt to me, with the exception of the Strategic Petroleum Reserve publicity stunts. Tapping the reserves to increase supply temporarily to help lower prices was nothing more than a headline generator, and was a poor decision strategically. It's selling cheap gas now to buy expensive gas in the future.

I do appreciate that the messaging from the Biden administration has moved away from "Evil Oil Companies™" to focusing pretty much exclusively on culture warring in the runup to the election. I don't think campaigning against big oil is a winning strategy when prices are still 50% higher than they were under the last Republican administration.

This analysis seems apt to me, with the exception of the Strategic Petroleum Reserve publicity stunts. Tapping the reserves to increase supply temporarily to help lower prices was nothing more than a headline generator, and was a poor decision strategically. It's selling cheap gas now to buy expensive gas in the future.

No it's the exact opposite, they sold when prices were high in order drive them down then bought when prices are low again. They made a cool $4 Billion on the deal.

The key phrase in your link is "For now, that translates into an almost $4 billion gain," with emphasis on "for now". The SPR is currently depleted to levels not seen since 1983, around 350M barrels. This is from a peak of about 750M barrels. There are at least another 160M barrels earmarked for sale by congress over the next 5 years. DoE regulations permit (but don't require) replenishment of the reserves when WTI crude is at or below $72/barrel. It has been at that price point multiple times over the last two years, including last month, but no effort has been made to replenish the reserves, at all. Secretary Granholm has said that DoE might start replenishment in Q4, assuming oil prices are consistently below the repurchase price point. That level of commitment does not inspire me with confidence.

At some point, that bill is going to come due, either in the form of expensive oil going into the SPR instead of cheap oil coming out of it, or really wishing we had some expensive oil to get past a supply disruption. It's all short-sighted to the point of absurdity.

My (from eg @IrvingSwisher on twitter) understanding was that the short-sightedness is exclusively on the part of the DoE for not aggressively repurchasing? It would've directly been a 'good trade' without the DoE being slow.

Best financial decision the government has made in a while, huh?

Probably. I don't know if the government should be playing as a commodity trader in general but price smoothing to blunt the pain of embargos seems like a legitimate foreign policy aim. Especially when the low cost producers are foreign and the high cost producers are domestic keeping a ceiling and a floor on oil prices doesn't seem like a bad idea.

I hope that this improves the cost of energy by lowering it. I think that energy is foundational to society and that cheap, plentiful energy helps basically everything.

I worry that this might be too little too late. The Biden administrations attack on oil and gas, and especially their attack on Keystone XL, signals to anybody wanting to make long term investments into infrastructure that an unfriendly regime can and will simply attack and destroy it.

Consider the billions of dollars spent on Keystone XL, which were essentially made worthless with the stroke of a pen when Biden came into office.

If you are a company which may consider building a refinery, or a pipeline, or anything large like that, or if you are a bank/investor providing the money, do you pause a little more knowing the hostility and willingness to attack your infrastructure that Biden has had previously? I for sure would.

I think it’s good land leases are going up. However it’s a rational decision (in my opinion) for the extractors to sit on these leases while there is an administration that is willing and happy to openly attack you, and has publicly stated that they want to destroy you completely.

I worry that this might be too little too late. The Biden administrations attack on oil and gas, and especially their attack on Keystone XL, signals to anybody wanting to make long term investments into infrastructure that an unfriendly regime can and will simply attack and destroy it.

Honestly I would have assumed the same with offshoring drilling, which has similarly flipped back and forth between Administrations approving and shutting down permitting, but right now it seems to be thriving.

My understanding is the keystone pipeline would have just been a more efficient way to move gas that we're moving and using anyway, whereas the productive capacity we're really concerned about right now is drilling. At least from what I gather the reason oil and gas companies are so wary to drill more isn't about Biden but their trauma from having their investments bottom out twice now after the OPEC war against shale and then the Covid glut.

The Dallas Federal Reserve had a survey from a year ago that said only 11% of respondents thought ESG concerns were restraining growth relative to 59% saying their investors were scared of volatility.

I never end up doing myself any favors here discussing energy and the environment.

The pivot is eventually going to turn to nuclear and fusion. It has to eventually. It’s the only long-term economical and sustainable solution.

I think Biden could’ve made energy and environmental policy the key issue of his administration to focus on. In the same way healthcare was the only real priority Obama managed to push through. He’ll blunder it with most things that he does though.

The pivot is eventually going to turn to nuclear and fusion. It has to eventually. It’s the only long-term economical and sustainable solution.

Actually, plunging into a new dark age as the flow of imperial wealth extraction comes to a halt or reverses is also "economically sustainable" long-term.

What, no mention of Black hole farming? Haha

It makes even fusion seem as inefficient as fission, not that I don't think both won't play a role even for far future Kardashev 3 civs. Unless they find a way to make antimatter in bulk, without simply using it as a store of energy.

I admire your optimism in thinking that anyone is prioritizing a ‘long term economical and sustainable solution’ as opposed to unicorn farts or ‘who gives a shit, I’ll be dead’.

“Americans always do the right thing. After they’ve tried everything else.” - Churchill

It has to eventually. It’s the only long-term economical and sustainable solution.

You say that, and I agree with you in the sense that it's the only long-term economical option, but I do fear that, uh, what's the government equivalent of "the market can stay irrational longer than you can stay solvent?"

That’s essentially what I was alluding to. I agree with you.

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