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American Oil & Natural Gas Producers Want to Increase Production – But Hurdles Remain
- Apr 6, 2022 4:05 pm GMT
The Biden administration has recently begun calling on the industry to increase domestic oil and natural gas production and attempting to name and shame independent producers who have not committed to their shareholders to do so.
This unfair and unfounded criticism that oil and gas producers are purposefully not meeting rising production demands ignores deeply impactful market factors.
At the top of the list is the conflicting stances on oil and gas from President Biden’s administration seeding uncertainty in the market. While President Biden may have called for more domestic energy production in the past few weeks, in the very recent past, the Biden administration has called for decreased financing for oil and gas. In fact, in December 2021, the Biden administration committed to stop financing new fossil fuel projects abroad.
Members of the Biden administration have also made their position against fossil fuels well known. President Biden’s former nominee for the Federal Reserve, Sarah Bloom Raskin, openly discouraged lending to fossil fuel companies, calling oil and gas a “dying” industry. And President Biden’s former nominee for Comptroller, Saule Omarova, said she wanted oil and gas companies to go bankrupt in the name of climate change.
Current Biden administration policies like the federal leasing ban, changes to National Environmental Policy Act (NEPA) reviews and Waters of the United States (WOTUS) send market signals that the regulatory environment is uncertain. What’s more, the constant litigation over these policies further adds to the uncertainty. Not knowing what regulations and policy changes, the impacts of them or when they might occur is making investors hesitant to increase cash flow and increasing the cost and time to drill.
Beyond Biden’s policies, the lingering effects of the COVID-19 pandemic continue to be felt throughout the oil and gas industry.
The rollercoaster of 2020 devastated the oil markets. In April of 2020, the WTI crude dropped dramatically to $16.55 per barrel. That was a more than 70 percent drop from January 2020 – oil prices hadn’t been that low since 1999. Oil and gas producers faced extreme depressed demand from global lockdown, as transportation and everyday life came to a screeching halt. Like many other industries, the shock of COVID-19 meant many firms re-evaluated their drilling plans, halted investment in new sites and instead focused on keeping their employee base and most essential operations underway.
As demand finally began to rise in 2021 following record low oil prices in 2020, investors signaled for producers to pay back debts and increase dividends to shareholders. In an about face from historic investment strategy, increased drilling became less of a priority as investors waited to see how demand would fluctuate from new measures and outbreaks.
In other words: demand fluctuations from COVID-19 are still impacting the cash flow available to independent producers.
Today’s oil markets continue to be unstable. Russia’s invasion of Ukraine and unexpected changes in oil and gas demand following new Covid outbreaks plague an already shaky market. Anxious investors are hesitant to increase cash flow without knowing if demand will stabilize anytime in the near future, or if it will drop significantly again by the time rigs and crews can be brought onto sites.
It’s not just cash-flow that independent producers most overcome to drill more, but the herculean task of securing the necessary materials to drill.
Supply chain issues are impacting everyone – from grocery stores to construction crews to independent producers. In Texas, home to the country’s energy capital, nearly two-thirds of business executives polled by the Dallas Federal Reserve Bank recently disclosed difficulties getting needed supplies. The same supply chain problems impacting other sectors are also creating challenges for the oil and gas industry. Producers are facing shortages in raw materials like stainless steel and titanium, and are having difficulties securing electronics, trucks and skilled workers. And the current chaos of the supply chain has culminated in creating sometimes months-long delays for increased drilling.
We need more domestic production – and most Americans agree. A recent study from Convention of States Action along with The Trafalgar Group found that more than three quarters of American voters said that, “in the wake of Russia’s invasion of Ukraine, President Biden should make increasing American energy production a priority.”
American oil and gas producers are working tirelessly to meet the challenge – but President Biden can and should do more to help producers get there. Ensuring American energy security in a world beleaguered by once-in-a-lifetime market events will require the continued collaboration of producers and policymakers alike. By laying out a consistent and supportive policy path for oil and gas operators, the Biden administration can assure investors and calm the markets, and in turn, allow oil and gas producers to more fully meet production needs.
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