IndustryIssue 01 - 2023MAGAZINE
GBO_ Energy

Growth dilemma of US energy sector

The US energy sector is not really in the most comfortable position to boost growth as fast as the White House wants it to

While 2022 was marked by higher oil prices, it seems that the US companies did not cash into it to maximise their growth throughout the year. The latest Dallas Fed energy survey suggests that the growth pace in the industry has slowed down in the fourth quarter of 2022 despite the energy sector facing not many steep challenges.

How the sector will pan out in 2023?

As per an ING report, energy prices may be off those highs witnessed in 2022, with immediate supply worries easing recently. Demand concerns, however, are weighing on sentiment for oil. So the sector may remain on the tightening trajectory.

“The key supply uncertainty for the oil market this year has been how well Russian supply would hold up following a number of countries banning Russian exports, along with an increased amount of self-sanctioning. Russian supply has held up better than many were expecting, with India, China and a handful of other smaller buyers increasing their purchases of Russian crude oil, given the steep discounts available. As a result, exports in October were 7.7 million barrels a day (MMbbls/d), down just one hundred thousand barrels per day (Mbbls/d) Year-on-Year (YoY),” it said.

“However, the impact of the EU ban on Russian crude oil is still playing out, and we will have to wait until early February for the ban on Russian refined products. The ability of India and China to absorb a still more significant amount of Russian oil is likely limited. As a result, we expect Russian supply to fall in the region of 1.6-1.8MMbbls/d Year-on-Year in the first quarter of 2023. As for the G-7 price cap, we expect it to have a little direct impact on Russian oil supply for now, given that at US$60/bbl, it is above where the Russian Urals are trading,” the study elaborated further.

While a de-escalation of the Ukraine crisis may not ensure pre-war oil trade flows, it will remove supply risks from the market.

“The decision by OPEC+ might appear to be the right one, at least in the near term, as it offers stability to the market. Given that most of its members are producing well below their production targets, OPEC+ supply cuts work out to an effective cut of around 1.1MMbbls/d. In aggregate, OPEC+ production was 3.22MMbbls/d below target levels in October,” the report said.

However, the cuts may prove to be more destabilising in the medium term, given the expectation of a tighter market throughout 2023.

“High energy prices, a gloomier macro outlook and China’s zero-COVID policy have all weighed on oil demand this year. At the beginning of 2022, global oil demand was expected to grow by more than 3MMbbls/d YoY and hit pre-COVID levels. However, demand is estimated to grow at a more modest 2MMbbls/d this year, leaving it below pre-COVID levels. While for 2023, demand is expected to grow in the region of 1.7MMbbls/d. Almost 50% of this growth is expected to come from China with the expectation of an economic recovery,” it said.

What the report has to say on US’ energy market

The response from US producers to the higher oil price environment has been unimpressive.

“This appears to have also given OPEC+ confidence to cut supply without the risk of losing market share. US crude oil supply is forecast to grow by less than 600Mbbls/d to average around 11.8MMbbls/d in 2022. While for 2023 supply is forecast to grow by less than 500Mbbls/d to around 12.3MMbbls/d. This growth is much more modest than the supply growth seen in previous upcycles,” the report said.

The study also noted the shift in the mentality of US producers from producing as much as possible to focusing on shareholder returns, thus showing discipline in terms of capital spending. Supply chain issues, labour shortages and rising costs have also played a role in the more modest supply growth expected in 2023.

US Energy Information Administration to shares similar emotions. In December 2022, it said that even though oil output would reach a record 5.6 million bpd by January 2023, it would constitute a third of the growth rate in Permian Basin output for last September.

The country saw a dip in the number of active drilling rigs by seven in the first week of January 2023, as per the energy firm Baker Hughes.

The total rig count fell to 772—184 rigs higher than the rig count in January 2022, and 303 rigs lower than the rig count at the 2019 beginning.

Oil rigs in the United States fell by three to 618. Gas rigs fell by four to 152. Miscellaneous rigs stayed the same at two.

The rig count in the Permian Basin and Eagle Ford stayed the same.

Crude oil production, within the country, however, increased to 12.1 million bpd level by December 30, 2022. U.S. production levels also went up just 300,000 bpd versus the 2021 tally.

Gas prices spiked to over five dollars per gallon across the country, reaching a high of 120.31 dollars per barrel in March 2022. It then went back down to just under 79 dollars per barrel.

As per a report from MarketScale, the phenomena may have contributed to drop-offs in recent US shale output production growth.

While US’ energy output is set to reach a record 9.32 million barrels per day (bpd) in January 2023, the month-over-month US shale oil production increase is small, sitting at 94,500 barrels per day more than the month before compared to the 207,500-bpd month-over-month increase in August 2022.

Joe Palaia, Vice-President of Business Development at Pioneer Energy, told MarketScale, “I personally think that that has a lot to do with the price of oil right now. So, we’re back down on the USD 75 per barrel range, which is a more modest price per barrel, barrel of oil. And so, you’ve got the producers, you know, that have been burned in the past by you know, the whole drill, baby, drill mentality.”

“You produce as much as possible, quickly as possible. These producers have been burned bad by that in the past. So, their stakeholders in the street are demanding them to exhibit more fiscal responsibility, not get too ahead of themselves, you know, borrow money wantonly, and tend to drill with abandon,” he added.

“In fact, instead what they’re doing is they’re being much more measured on, you know, how much they develop, focused on good financial returns, and satisfying their stakeholders. So, I think if anything is showing there’s maturity happening in the oil field, oil companies are being much more physically responsible. I think there are some other factors, other things which are driving the market, right now. Obviously, we still have ESG concerns and something that’s of great significance and importance to these stakeholders and then therefore to these oil companies. So, they’re out there trying to implement policy to reduce emissions, produce oil in a more responsible manner,” Joe Palaia remarked.

“I think also we’ve got some pressure from the Biden administration on these oil companies. Hey, we need to produce more, we have this whole energy security issue where we need to, mindful of trying to, produce oil domestically, not only for our own needs, so that we don’t have to import oil from others that perhaps we would rather not have to import oil from, but also so that we can provide energy for our allies,” he commented.

“And so, I think that there is push coming from the administration, but you know, how much that’s influencing whether these oil companies are going to drill and produce more? I don’t know. All I know is that it’s definitely a factor. It’s a force acting on the industry right now, and we’ll have to see, you know, in the months ahead how much that really impacts the number of holes that are being put in ground, the amount of oil produced. So that’s pretty much my take on what’s going on right now, and I hope this is useful,” Joe Palaia further said.

We had earlier mentioned about the energy survey from Dallas Fed. The survey respondents informed that the sector witnessed higher costs for the eighth quarter in a row. However, the price hike pace slowed down towards 2022 end.

The supply chain snags persist, thus resulting in longer waiting times for oil and gas producers to access raw materials and equipment. As per, the US energy sector is not really in the most comfortable position to boost growth as fast as the White House wants it to. The prioritization of shareholder returns over output growth appears the best strategic option right now.

Amid this, the optimism expressed in the Dallas Fed survey is an important indication of the state of the industry. However, the optimism is not that strong either, given the increasing uncertainties ahead. So we are not going to see any drastic policy change from stakeholders anytime soon, thus slowing down both production growth and new investments. Moderate spending will be the go-to formula in 2023.

Pioneer Natural Resources’ chief executive Scott Sheffield told Reuters that the production growth in the shale patch in 2023 would be even more modest than 2021. He predicted that this year’s annual increase at just 300,000-400,000 bpd, noting that drillers were running out of their high-quality acreage.

Some 39% of Dallas Fed survey respondents said that their companies’ spending would increase moderately; with a quarter saying they expected significant increases in spending.

The immediate outlook for the US oil industry reads “caution above all”. Uncertainty remains rife, as noted by Sheffield who said, “Because they would charge another 30% to 40% more, and we don’t know what is going to happen in three or four years, by the time we’ve made that investment.”

US oil and gas output will remain close to record highs in 2023, but the figure won’t return to the pre-pandemic level anytime soon.

Related posts

Decoding Vietnam’s LNG ambitions

GBO Correspondent

UK’s senior citizens postpone retirement plans

GBO Correspondent

SAA is solvent and needs to return to the sky

GBO Correspondent