05 Aug, 21

OGV Energy’s US Energy Overview – Outlook Improves as Crude Oil Prices Rise


The US oil and gas sector entered the second quarter with a dramatically improved short-term outlook due to the oil price rally in the first quarter.

Drilling activity across the US shale patch has been rising this year from the trough seen in the summer of 2020, as oil prices rise and outlooks on economic growth and oil demand growth improve. Employment in the oilfield services sector has gained back more than 23,000 jobs since last year, when the pandemic-related peak job losses were above 100,000.

The US Energy Information Administration (EIA) forecast in its April Short-Term Energy Outlook (STEO) that this year’s US crude oil production would average 11.04 million barrels per day (bpd). This would be lower than the average 11.31 million bpd for 2020, however, production is set to increase month over month and quarter over quarter for the rest of 2021 to reach 11.35 million bpd by the fourth quarter.

By the fourth quarter of 2022, US crude oil production is expected to average above 12 million bpd, at 12.18 million bpd, as per EIA’s latest estimates.

Outlook Improves as Oil Prices Rise

The primary drivers of higher expected production would be higher expected oil prices and the rebound in the economy and oil demand this year as vaccination rollouts progress and people travel more.

US oil and gas sector activity already expanded strongly in the first quarter of 2021, the Dallas Fed Energy Survey for Q1 2021 showed, although the base for comparison from the fourth quarter of 2020 is quite low.

Nevertheless, some metrics in the survey jumped to the highest since the Dallas Fed started surveying oil and gas executives in the largest oil-producing state in the US, Texas.

For instance, the business activity index—the survey’s broadest measure of conditions of energy firms—soared from 18.5 in the fourth quarter to 53.6 in the first quarter of 2021, reaching its highest reading in the survey’s five-year history. Both exploration and production (E&P) and oilfield services firms experienced a strong expansion in activity. The index for capital expenditures jumped from 12.5 to 31.0, indicating an acceleration in capital spending among E&P firms. Additionally, the index for next year pointed to firms already increasing their capital spending plans for 2022, the survey found. 

“Six-month outlooks improved notably, with the index rising from 21.6 last quarter to 70.6—the highest reading in the survey’s five-year history. Additionally, firms noted less uncertainty around their outlook this quarter than last; the aggregate uncertainty index fell eight points to -22.2. This is the lowest reading for the uncertainty index since its inception in first quarter 2017,” the Dallas Fed said.

Drilling Activity is Picking Up Pace

“The Dallas Fed study confirms what our sector has been seeing on the ground the past few months. Activity is picking up as America rebounds from the COVID economic slump. We appear to be on the cusp of a huge surge in demand for all forms of energy, and oil and gas will be a big part of what satisfying this demand,” said Tim Tarpley, SVP Government Affairs & Counsel at the Energy Workforce & Technology Council. 

In a sign that activity is strongly picking up, a report from Rystad Energy showed in early April that fracking in North America almost recovered to pre-pandemic levels, as the count of started frac jobs had reached a 12-month high in March 2021. The number of completed wells in the Permian basin in Texas and New Mexico during the first quarter of 2021 exceeded the required output maintenance level, so oil production is set to rise in the current quarter – but will likely slow again later in the year, according to Rystad Energy.

“We have already detected 429 started frac operations in March, while February 2021 ended up at 260 wells. Permian oil production maintenance currently requires about 300 unconventional well completions per month, so the basin is set for production growth already in the second quarter,” said Artem Abramov, head of shale research at Rystad Energy.

Moreover, low-interest rates and higher oil prices have increased the capital availability in the US oil and gas sector.

“Since September 2020, debt and equity issuance has increased in all but one month, suggesting that increasing crude oil prices are encouraging U.S. crude oil producers to raise money to refinance debts, resume drilling activities, or purchase acreage,” the EIA said in its April STEO.

“Although primarily a result of higher crude oil prices, high capital availability for U.S. producers also supports EIA’s forecast for U.S. crude oil production to increase from 10.7 million b/d in first-quarter 2021 to 12.2 million b/d by fourth-quarter 2022,” the Administration reckons.

Moreover, the upstream sector in Texas has started adding jobs recently. In February, the oil and gas E&P industry in Texas added 2,300 jobs, according to data from the Texas Workforce Commission cited by the Texas Oil and Gas Association (TXOGA).

The sector has added 7,400 jobs since the low point in September 2020, bringing the total upstream employment in Texas to 164,900 jobs, and those are jobs that pay among the highest wages in Texas.  

“The resilience and reliability of the Texas oil and natural gas industry is remarkable and it is the reason this industry will be essential to the energy mix for decades to come,” said Todd Staples, president of the Texas Oil & Gas Association.

Oil & Gas Industry Concerned about President Biden’s Plans

While activity and employment are rising from the low points of last year, the US oil and gas industry overall expresses concerns about potential changes to the regulations about new oil and gas leases on federal land and in federal waters. The sector is also anxious about proposed provisions in President Joe Biden’s infrastructure and tax plans.

“Regulatory uncertainty creates a clear challenge to continued investment in energy development of our assets,” an E&P executive said in the Dallas Fed survey’s special questions.

“Rash and disruptive decisions do not help an industry that is already very volatile,” another executive noted.

Changes to new oil permitting would likely be a positive for states like Texas, Oklahoma, Kansas, West Virginia, Ohio, and Pennsylvania, as more E&P companies would shift budgets to those states not impacted by the federal moratorium, one executive at an oilfield service firm said.

The oil and gas industry is also concerned about President Biden’s tax and infrastructure plans, which aim to eliminate tax preferences for fossil fuels.

Estimates from the US Treasury Department’s Office of Tax Analysis suggest that eliminating the subsidies for fossil fuel companies would increase government tax receipts by over $35 billion in the coming decade. The main impact would be on oil and gas company profits. 

“The tax plan would end long-entrenched subsidies to fossil fuels, promote nascent green technologies through targeted tax incentives, encourage the adoption of electric vehicles, and support the further deployment of alternative energy sources such as solar and wind power,” the Treasury said in its report on The Made in America Tax Plan.

Commenting on the new infrastructure plan, Ed Longanecker, president of the Texas Independent Producers & Royalty Owners Association (TIPRO), said:

“While ambitious and aimed in the right direction — bolstering America’s infrastructure — President Biden’s American Jobs Plan overlooks the backbone of America’s energy system: pipelines. Pipelines are the most reliable and efficient means to transport the oil and natural gas that powers families across America. Placing a high tax burden on the oil and gas industry, including pipelines, hinders Texas producers’ ability to deliver the energy the country needs.”

The most powerful oil industry organisation, the American Petroleum Institute (API), said President Biden’s infrastructure proposal “misses an opportunity to take an across-the-board approach to address all our infrastructure needs – including on modern pipelines.”

“Targeting specific industries with new taxes would only undermine the nation’s economic recovery and jeopardize good-paying jobs, including union jobs. It’s important to note that our industry receives no special tax treatment, and we will continue to advocate for a tax code that supports a level playing field for all economic sectors along with policies that sustain and grow the billions of dollars in government revenue that we help generate,” said Frank Macchiarola, Senior Vice President for Policy, Economic and Regulatory Affairs at API.

Aug 05, 2021
Original Article: https://www.ogv.energy/news-item/ogv-energy-s-us-energy-overview-outlook-improves-as-crude-oil-prices-rise