A year ago, as we looked toward 2021, the oil and gas sector was emerging from one of its darkest periods ever, with prices plummeting due to falling demand from COVID-19. There was optimism about increasing energy demand but there was also concern over the transition to the Biden administration, which made no secret about its desire to move the U.S. and the world away from fossil fuels.
One year later, the world is facing high oil and natural gas prices, inflation, an energy crisis in Europe, and a surge in global LNG exports. All in spite of the fact that COVID-19 is again surging with the onslaught of the omicron variant.
As we move into 2022, there are some interesting signals that indicate commodity prices will remain high and could grow higher. Domestic oil and gas production should continue to increase, but not respond as quickly to price signals as it has in the past due to lack of investment capital in the sector. Production will also be more expensive, due to inflationary factors and labor, equipment, and supply shortages.
There are some interesting signals from Europe that could portend rough times ahead for consumers and the global economy. Western Europe has been moving away from coal and nuclear power, relying more on renewables. Much of its baseload generation comes from natural gas, which it must import from Russia or through LNG from other parts of the world. Germany’s delay in permitting the Nord Stream 2 Pipeline and frictions between the NATO and Russia over Ukraine have led to a slowdown and even reversal in gas flows designed to run from Russia to Europe.
Energy Crisis in Europe
Combined with the early onset of winter in Europe and a lack of natural gas storage capacity, an energy crisis continues to unfold in Europe. As a result of high gas and electricity prices that are hurting consumers and the overall economy, manufacturers are now shutting down production because their facilities are not globally competitive.
The root causes of the crisis in Europe can be traced back to the changing nature of the source of its power generation capacity. Europe has made a big shift away from coal and nuclear and now relies on natural gas, which is also out of favor, and renewables, which have reliability challenges. The EU has reacted by putting forth a plan to label natural gas and nuclear power projects as “green” under the “EU sustainable finance taxonomy.” Unsurprisingly, this proposal has drawn opposition from greener members of the European Parliament and nations like France that are moving away from nuclear energy.
US Gas Exports to Europe
Events in Europe are important in the U.S. for a number of reasons. First, U.S. natural gas, in the form of LNG exports, are playing a critical role in keeping the lights on in Europe. An armada of LNG tankers has been delivering greater volumes of U.S. natural gas to Europe, which has helped to make up the shortfall of what is being delivered from Russia. Many of these volumes have been diverted from Asia.
It is important to note that at the end of December 2021, for the first time ever, the U.S. became the largest exporter of LNG in the world. Given the number of LNG liquefaction projects either under construction or on the books, the U.S. is now on a trajectory to be a world leader in LNG exports for years to come. Importantly, overseas demand helps encourage domestic production, which benefits U.S. consumers and the American economy alike.
The issue for the U.S. natural gas and oil industry isn’t the availability of global markets, but, rather, our own government’s position on the commodity, the eroding regulatory landscape, and the disfavor that fossil energy is receiving in the capital markets.
From its early days, the Biden administration has made known its disdain for fossil energy, and so far, policies have made future exploration and production more difficult on federal lands and waters. All federal decisions regarding energy projects are being viewed through a climate lens, which is likely to eventually slow down permitting decisions and environmental reviews.
Shale Energy Production
At the same time, it doesn’t appear the federal government is aiming to end shale energy production, as demonstrated by recent Biden administration requests for the U.S. oil and gas industry to increase production activity. However, the government’s position on U.S. oil and gas production as a solution to current high commodity prices has been lukewarm as best. For example, President Biden has asked OPEC to boost production, largely discounting the ability of U.S. producers to make up the shortfall, and then blamed U.S. producers for not producing enough.
While U.S. natural gas has come to the rescue of Europe in its energy crisis, it has hardly been mentioned in our diplomatic dialogue. At the COP26 climate summit in Glasgow, the U.S. also should have been touting its natural gas as a solution in Asia, where energy demand is high and coal-fired generation is increasing through the foreseeable future.
The U.S. oil and gas industry has made great strides in recent years to decarbonize, reduce emissions, and improve environmental, social and governance (ESG) performance. This is a trend that is accelerating.
US as Leader on Clean Oil & Gas
Our ability to be the world’s leader in oil and gas production and do it in the cleanest, most ESG-friendly manner should be something we market to the world and use to boost our economy, our geopolitical standing, and our ability to help the international community reduce its greenhouse gas emissions. If our government and our financial institutions and investment communities would recognize these facts, we could make enormous strides on all fronts.
Let’s not make the same mistakes that have been made in Europe. Let’s use our resources to better the lives of both U.S. citizens and the rest of the planet.
Jack Belcher is a principal of Cornerstone Government Affairs' Advisory Services and advises energy, transportation and financial services clients on government relations, regulatory affairs, risk management, ESG management, coalition building and stakeholder relations. He is also managing director of the National Ocean Policy Coalition.
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