As the old political saying goes… “Never let a crisis go to waste.”
I’m beginning to think the corollary to that adage is, “Whenever possible, start a new one.”
This week, President Biden, in further retaliation for their aggression in Ukraine, suspended all Russian oil imports. Naturally oil prices spiked on the news.
In truth, Russian crude is only a small percentage of the oil we import — about 4.7%. But oil is a global market and, as such, our markets are susceptible to global uncertainty and volatility.
And over the past week, that uncertainty has had an unbelievable impact on gas prices which rise and fall in anticipation of supply availability. On a national average we’re now paying the highest gas prices in our history.
This is, of course, bad politically. So the administration immediately sought to absolve themselves and lay blame elsewhere.
At his Tuesday press conference President Biden protested, “It’s simply not true that my administration or policies are holding back domestic energy production, that’s simply not true.”
Later in the day, he was asked what can be done about the problem. His response? “Can’t do much right now. Russia is responsible.”
The White House spokesperson rushed to try and back up the president’s plausible deniability…
She (Jen Psaki) noted that the vast majority of U.S. production is on private land, and said even on federal land the industry has 9,000 unused permits to drill.
The White House spokesperson rushed to try and back up the president’s plausible deniability…
She (Jen Psaki) noted that the vast majority of U.S. production is on private land, and said even on federal land the industry has 9,000 unused permits to drill.“
The suggestion that we are not allowing companies to drill is inaccurate,“ she said Monday. ” I would suggest you ask the oil companies why they’re not using those (unused permits) if there’s a desire to drill more.”
(I’m going to come back to that 9,000 permit issue in a minute…)
And the president piled on that too…
Mr. Biden then looked at the camera and issued a stern warning to the oil industry: “Russia’s aggression is costing us all,” the president said, “and it’s no time for profiteering or price gouging.”
So all your gas price woes are the result of Russia and greedy oil companies.
It’s not surprising to hear a presidential administration attempt to blame others when economic conditions are bad. That’s just standard political operating procedure. And it’s despite the fact that everyone in the administration is conveniently neglecting that crude oil was trading at $94 a barrel and gas prices were in the neighborhood of $3.50 a gallon well before Russia ever set foot in Ukraine.
What is surprising, and perhaps more frightening, is that the “blame game” talk coming out of Washington demonstrates a STAGGERING ignorance of the energy industry — the industry they would propose to direct the future of.
Whether it’s actual ignorance, or just willfully ignoring the realities that don’t fit with their plans, I really don’t know.
When it comes to energy, the Biden administration would have you believe that the whole situation has a very simple solution. Oil companies just need to drill more now until we can establish a secure, fully renewable future.
But there are consequences that come from being stupid — from not understanding (or willfully ignoring) how businesses run. Especially in an industry as critical and complex as the energy industry
As a 20-year energy trader I have a little background in how the industry works. I’d like to clear a few of these misconceptions up…
Say Goodbye to the Bad Guys
First let’s acknowledge something about those greedy oil producers our socialist-leaning leaders seem to forget.
They are businesses.
And like all businesses, their goal is to provide a value for profit. That doesn’t make them evil. That makes them businesspeople.
I realize some in Washington operate under the misconception that there is a limit to how much profit a company should make — but characterizing them as “profiteers” doesn’t help anything.
But beyond the insatiable greed the administration keeps calling them out for, there are certain realities about oil as a commodity you (and the Biden administration) need to understand.
Producing energy is much different from producing just about any other commodity on the planet. Here’s a basic overview of how the hydrocarbon energy industry works:
There’s a massive amount of work that goes into energy production before a drill bit ever hits the ground. First there’s the process of finding the oil — what’s known as the exploration phase. Companies must do initial evaluations of potential sources of oil performing geological and geophysical surveys.
This process, on its own, is hugely time consuming… and high risk. Exploration efforts can take up to four or five years and in the event an effort is unsuccessful, it can cost a company anywhere from $5 to $20 million.
Once you find potential well sites, you have to obtain a lease with the owner of the land where you want to drill. This negotiation is another complex step in the process that can run into the millions of dollars. (Do I need to say you won’t find these contracts on LegalZoom.com?)
Then you have to deal with the government. Every state, as well as the federal government, requires a number of permits before drilling can begin. And it’s not just permits that need to be approved. Rights of way (ROWs) need to be obtained to access the leases — and they can potentially take years to acquire as well. Mineral rights also have to be secured.
Once a company is done with all this, it can finally start drilling.
And drilling is no small task. Before you can even bring in your drilling rig, the site has to be excavated, leveled and access roads have to be built. Weeks or months more. Then, and only then, can you set up your actual rig and start drilling.
A modern drilling project can require contracting upwards of 30 to 40 independent companies working together to complete it. Costs will vary depending on the depth and complexity of the well but they can easily run into the millions just to reach the oil.
Then once you’ve reached the oil you plan to pump, there is a build up period while the well is brought online to a consistent production rate.
And even after you’ve brought your well online, there are still other risks involved — namely the risk that oil prices suddenly become depressed.
There’s no “volume control” where wells are concerned. Once a well is drilled and in production, it basically has two settings: on and off. And shutting off a well until prices bounce back isn’t like flipping a switch.
Oftentimes drilling can be a condition of the lease contract so you’ll need to keep pumping even at substantially lower margins (or even a loss).
And even if it’s not, pausing a well is a risky project in itself. It basically requires capping the well. And if that weren’t enough, restarting a capped well is even trickier. You’ve got to redrill through the cap. And then there’s no guarantee that the oil flow will resume — capped wells can become clogged.
The bottom line is the development of oil permits is no simple task. They need to be developed (or not) based on the economics of the lease and the favorability of the overall economy.
So… Back to Those 9,000 Permits
Now let’s get back to those 9,000 permits Ms. Psaki suggests the greedy robber barons are ignoring.
Here’s exactly what Madam Spokesperson tweeted:
This tweet is a little confusing as she wrote it. What it says is the industry holds 9,000 approved permits to drill on public lands. However 90% of energy is currently produced on private land.
There’s a reason for that. The Institute for Energy Research explains it quite simply [my emphasis]:
The reality is that federal lands vastly underperform on oil and gas production versus state and private lands because the federal government owns the majority of the mineral estate.
Now, having an idea of what actually goes into the oil production process, and knowing that public lands are less than promising economically… What would you do?
All these considerations are just where the drilling portion of the program goes. There are transportation and refining requirements that factor into energy production as well.
But there is one more consideration that likely tops them all.
An Industry Facing Massive Regulatory Uncertainty
Let’s not sugar coat it. Since he started his presidential campaign, Joe Biden has been hostile to the fossil fuel industry.
On day one he canceled the Keystone XL pipeline.
He ordered a 60-day pause in the issuing of drilling leases on federal lands. (He’s also promised to make these permanent.)
He reinstated methane regulations calling for “substantial reductions in U.S. methane emissions.”
He’s recently initiated a study on the impacts of closing another pipeline — the Line 5 pipeline — that supplies about 540,000 barrels of oil and gas to the Midwest every day.
Finally he’s looking to eliminate tax deductions and regulatory advantages to hydrocarbon based producers including intangible drilling cost deductions and “depletion tax breaks.”
None of this is friendly to the oil and gas industry. And that means it’s not friendly when it comes to financing the business.
Would any smart investor (and I’m talking about big investors like pension funds who literally influence the decisions of a company) vote to risk substantial capital in a market where the government has overtly threatened to pull the rug out from under your efforts?
Are we to believe his claim that his policies aren’t holding back energy production when three days before Russia invaded Ukraine:
Even as Russia amassed forces outside of Ukraine last month and the White House warned of a potential full-scale invasion, its agencies raised new roadblocks for U.S. oil-and-gas companies. The Federal Energy Regulatory Commission approved higher environmental standards for new natural-gas pipeline projects, over the objections of industry.
Energy investors won’t back increased drilling in this kind of regulatory environment. Even if Biden were to lose in 2024 and an oil-friendly republican were elected, there would still be the risk that things could change back after that. Four years of regulatory accommodation just isn’t enough.
You won’t see a significant ramping up of new oil production unless investors can see a clear 10-year runway of regulatory support for any new efforts.
Biden has declared war on the fossil fuel industry. And, like all wars, it’s going to be ugly.
Shareholders will be content for oil companies to continue selling off their reserves at higher prices, paying them increased dividends, and buying back stock to support their prices.
The government will be content that increased energy prices will make their electric version of the future seem affordable by comparison.
You’ll be the only big casualty.
Make the trend your friend,
Bob Byrne
Editor, Streetlight Confidential