Some Reasons for Optimism at the End of a Troubling Year

Some Reasons for Optimism at the End of a Troubling Year
oil field, the oil workers are working

One would have to dig deep to find a year that has been more difficult for the U.S. oil and gas industry than 2020, an effort likely to end up being futile. As dark as this year has been, however, a quick look back at recent history shows that it is way too soon to sound the death knell for the sector.

In the early 2000s, the U.S. appeared to be on track to become even more reliant on petroleum imports, with the situation worsening as the U.S. began running short of needed domestic natural gas supplies as coal-fired plants were retired. Conventional wisdom was that new resources in areas like the Rockies and the Arctic would be insufficient to meet demand and that significant LNG imports would be needed to make up the difference.

During this period in the mid-2000s, I became part of a private study of North America’s offshore, onshore, conventional and unconventional oil and gas resource potential. The results were staggering; North America could be energy self-sufficient and also a net exporter if the right technologies were deployed under the right regulatory climate, fiscal terms and economic conditions. To most at the time, the study findings seemed widely aspirational, and to some, almost naïve. I can still hear a chorus of members of Congress, in both parties, shouting in unison, “We can’t drill our way out of this.”

Then, quietly, in the late 2000s, unconventional resources killed conventional wisdom. The shale boom occurred, driven by a revolution in technology and innovation and George Mitchell’s willingness to put resources behind his belief that techniques could be developed to cost-effectively develop shale oil and gas resources. It changed the world.

Fast forward to 2020 and everything is again turned on its head. As the year began, the U.S. achieved energy sufficiency and was breaking records for production and exports alike. Then, a global pandemic and a price war devastated the industry, impacting prices and supply. The result is a round of bankruptcies, layoffs, restructurings, mergers and acquisitions, falling rig counts and shelving of new exploration projects. An acceleration in divestitures by investment institutions in oil and gas companies and activities exacerbated the downturn, which was capped off with a new layer of uncertainty in the form of a new administration in Washington that is seen to be less supportive of, or even hostile to, the domestic oil and gas industry.

As easy as it may be to be pessimistic about the future of the U.S. oil and gas industry, there are some reasons for guarded optimism in 2021 and beyond. First, as 2020 closes, the industry continues to add drilling rigs, with its biggest rig count gain of the year occurring the week ending Dec. 11. As vaccinations begin worldwide, prospects for global economic recovery and a return to more typical levels of energy demand have improved, with light at the end of the tunnel finally seeming within reach. In short, while further corporate rationalization, consolidation, and belt-tightening should be expected, the worst is likely to soon be behind us, with the industry’s competitiveness as a lower cost, more efficient producer primed to fuel its return to strength and profitability during the coming recovery.

As the industry seeks opportunities to capitalize on its newfound efficiencies, it must also continue to work to significantly improve its greenhouse gas emissions (GHG) and environmental, social, governance (ESG) performance. In that regard, U.S. producers are increasingly announcing programs to address methane emissions and flaring, with many improvements stemming from the implementation of ESG programs. In December, ExxonMobil announced that it would significantly reduce its greenhouse gas emissions, by as much as 20%, by 2025. This is a significant development that will serve to help lead the industry to increase its performance on the sustainability front, which cannot come soon enough, as underscored by French gas distribution entity Engie’s recent decision to not buy U.S. gas from LNG producer NextDecade over concerns about the release of methane. In sum, while the bars continue to tighten, we can expect the U.S. industry to rise to the occasion, with technological advances leading the way.

Without a doubt, 2020 was a tough year for the industry, maybe the toughest ever. However, the year is ending with some positive indications for the future. U.S. LNG exports reached a new record in November. The U.S. Department of Energy extended seven U.S. LNG export authorizations to 2040. Bank of America announced that it believes that Asian LNG demand will remain strong enough in 2021 to prevent major U.S. cargo cancellations. Wood Mackenzie has predicted that global LNG demand will grow through 2030 at a rate of 4% per year, with a potential shortfall of 12.8 billion cubic feet per day (Bcf/d) of gas by the end of the decade. Finally, many FIDs for LNG export projects and expansions that were postponed in 2020 are likely to occur in 2021. In fact, eight projects with a combined volume of 17.3 Bcf/d are expected to have FIDs announced in the coming year. Crude oil exports, which fell drastically in 2020 and have been slow to recover, are recovering as well.

To be sure, many wildcards will impact the U.S. oil and gas industry. Continued uncertainty over OPEC+ quotas and its ability to hold down production will continue to keep us guessing. U.S. foreign policy is expected to move away from its recent pro-Saudi Arabia and anti-Iran posture, with implications for future production in the Gulf region. Global investment will likely continue to view oil and gas investments unfavorably, making capital harder to raise. Regulation of U.S. oil and gas is going to become more difficult. All that being said, there are real reasons to be optimistic about the future and hopeful that the same kind of innovation that opened up the shale plays will help meet these challenging times. With history as our guide, it would be a fool’s errand to bet against this industry.

About the author: Jack Belcher joins Cornerstone in 2019 with over 25 years of experience in energy and energy policy. As senior vice president of Cornerstone Energy Solutions, he provides strategic and tactical advice to energy and transportation companies and financial institutions, focusing on government relations, regulatory affairs, public policy, strategical communications, situational risk management, and Environmental, Social, and Governance (ESG) performance. Jack also serves as managing director of the National Ocean Policy Coalition.


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