Energy

Oil Boom 2021: OPEC+ Thinks U.S. Shale Has Been Tamed For Awhile


We shouldn’t let this last week pass without noting a couple of key stories related to the domestic U.S. oil and gas sector. First was a decision by a federal judge in Louisiana that will not be as impactful as some would like it to be, and second was the conclusion reached by the participants in the OPEC+ export limitation agreement related to the rate of growth of U.S. shale oil production for the 2nd half of 2021 and through 2022.

The June 15 ruling by Louisiana federal court Judge Terry Doughty that President Joe Biden’s suspension of the federal oil and gas leasing program via executive fiat was an overreach of presidential authority was basically a foregone conclusion under any honest reading of the Federal Administrative Procedures Act and other governing statutes. However, that doesn’t mean it will have any great substantive impact on the current moribund state of federal leasing or permitting for oil and gas operations on federal lands and waters.

When Biden issued his order in January, I noted that that particular public move was made mainly as a pay-back to an environmentalist lobby that played a big role in funding his campaign. The real work of inhibiting energy activities in the federal province would be done behind the scenes through the bureaucracy and its administrative processes, just as was the case during the Obama presidency.

In an interview with Reuters, Kathleen Sgamma, President of the Western Energy Alliance, affirmed the reality the industry faces in the bureaucracy: “We lived through the Obama administration, and they did a lot of things to constrain leasing and other activity on federal lands,” Sgamma said. “And frankly they have the power to do so.”

They do, and they will. Indeed, while Judge Doughty’s order may force Biden’s Interior Secretary, Deb Haaland, to restart the process of auctioning these leases on a set schedule, DOI has full authority to determine which parcels of lands or waters will be offered in such lease sales – this is not something anyone in the industry can control. Meanwhile, as the likely pro-forma lease sales offering paltry and unattractive tracts are taking place, Biden’s bureaucracy will work behind the scenes to slow the process just as it did during the Obama years. Doughty’s ruling is commendable because it is legally correct, but no one should expect it to be hugely impactful in a truly substantive way.

Representatives of the OPEC+ nations, meanwhile, held a technical meeting last week at which the group assessed the current growth rate of U.S. shale oil production, and no doubt came away pleased with what they learned. Reuters reports that the group considered assessments by experts from entities like “International Energy Agency, Argus Media, the U.S. Energy Information Administration, Wood MacKenzie, IHS, Energy Intelligence and Energy Aspects” in order to arrive at a consensus estimate of how much additional oil U.S. shale producers would pour onto the global market over the next 18 months.

Their consensus: Overall U.S. crude production will grow by a very modest 200,000 barrels of oil per day (bopd) during 2021, and by between 500,000 to 1.3 million bopd during 2022. That more robust range for 2022 assumes ongoing strong commodity prices will cause upstream operators to increase their capital budgets and refocus efforts on more drilling next year.

There is little doubt that the current set of facts on the ground favor rising oil prices for the foreseeable future. The only apparent ways to change that dynamic would be the advent of another demand-killing global pandemic or another implosion of the OPEC+ agreement itself, as took place in early March, 2020.

Even given all of that, however, the high end of that projected range for 2022 would seem unlikely to come about. U.S. producers are under tremendous pressure to forego big drilling budgets and focus on increased returns to investors, and that is not going to change anytime soon. Add to that a current presidential administration that is only going to continue ramping up its efforts to inhibit the industry’s growth in the U.S., even in the face of occasional adverse decisions by pesky federal judges, and you have a situation in which even the low end of that projected growth range for 2022 could end up being seen as overly-optimistic.

What it all means is that, at least for the next 18 months, the ability of OPEC+ to set and control the global price for crude oil is likely to be a much easer task than it has been at times in the past. Assuming, of course, the participating countries can hold that deal together.



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