Upstream and Midstream U.S. Oil and Gas Execs Remain Bullish on Natural Gas: Pipeline Capacity Remains Biggest Concern. Uncertainty About Government Support for Domestic Energy is Another Significant Concern.

 

     In a recent Bloomberg interview with upstream gas producer EQT CEO Toby Rice, he noted that the Appalachian region alone rivals Russia as a natural gas supplier. He also noted that the current pipeline takeaway capacity out of the region of about 35 BCF per day needs to expand, that production can easily meet new demand if pipelines capacity were available. The Mountain Valley Pipeline, over 92% complete with building cleared to resume, is set to add 2 BCF/day of new capacity, perhaps later this year, although it is already more than five years behind schedule. He also noted that well productivity is so good that EQT can run just 2 rigs to keep its production flat. He said that about a quarter of their production, or 1.25BCF/day is currently being delivered to the Gulf Coast LNG market and that new LNG export terminals and trains in progress should add to that. Rice has advocated for LNG to be a replacement for coal around the world for carbon emissions reduction. He noted that the current low gas prices are a result of the weather, the warmer winter, and that resulted in 500 BCF more gas supply than expected. Expectations are for prices to rise somewhat by the middle of the year. He did acknowledge that some drillers have pulled back the number of wells they will drill this year, especially in more marginal areas. Another factor, that will increase demand is the return of the Freeport LNG export facility that has been offline for several months.  

     Rice is taking a wait-and-see approach on a blue hydrogen project in which EQT is involved. He seems quite bullish on carbon capture, especially in the pure form provided by oxyfuel combustion via the Allam Cycle Gas plants being developed by NET Power, a company which his brother Daniel Rice just became CEO after taking the company public with a SPAC. The company is well-funded and set to create a revolution in carbon capture and sequestration in combination with a new supercritical CO2 based natural gas power plant design that is expected to rival combined cycle gas plants. The high purity of the CO2 captured through the oxyfuel combustion process renders it ideal for enhanced oil recovery use. Pilot projects have proven the technology. Currently, the first 300MW plant being built in Odessa, Texas is in the Front -End Engineering and Design (FEED) phase and is expected to begin actual construction in mid-2024. Utility-scale operation could begin in 2026.  

     In another recent Bloomberg interview with midstream pipeline company Williams CEO Alan Armstrong, he reiterated the sheer size of the Appalachian shale gas resources and the fact that it is consistently the lowest cost gas in the U.S. He also reiterated that inadequate pipeline takeaway capacity is the biggest block in developing those resources. He noted that three major pipelines have been stopped and scrapped after spending $11 billion in attempts to get that gas out of the region to markets. That certainly hurts the American economy. He noted that the 230 coal plants operating in the U.S. are equivalent to about 11-12 BCF/day of gas, that currently 6BCF/day of LNG demand has reached FID or is under construction, and that another 20 BCF/day of potential LNG export demand is being considered. Current LNG export output is around 13 BCF/day. He thinks there is plenty of supply in U.S. basins to meet that demand, mainly from the Marcellus, Utica, Haynesville, and Permian rocks. A big problem for his company and others that build large pipelines has been the states politicizing the Clean Water Act by blocking pipelines at the state level. He thinks states should be subject to FERC and not have their own veto right. Of course, he recognizes that permitting reform is strongly needed and is hopeful that there is more recognition of this. He says there are ongoing projects like adding compression or replacing some pipeline with higher pressure pipeline to add volumes but there is still need for more large pipelines. Asked about blending hydrogen in natural gas pipelines, he noted that age and carbon content of the pipelines are issues. He noted that Europe is doing it successfully so it can be done. Upgrades are manageable such as replacing elastomers in valves that can be dried out by hydrogen. He emphasized that small-scale blending makes the most sense, since blending just 2% hydrogen in U.S. pipelines would involve more hydrogen than is produced in the world currently. Thus, small level blending is the way to go, the most doable, and easiest to manage. This can also integrate hydrogen faster and cheaper, reducing emissions faster. He also noted that cybersecurity is being prioritized, that skilled labor is available, input costs like steel and lube oil have been higher but manageable, and that cost of capital is higher with higher interest rates but still manageable. He agrees that gas storage is going to be critical in the future, especially as renewable power is added to more local markets. He noted that while that may lower overall demand for gas, it actually increases peak load demand for gas. Storage can help that, and they are investing heavily in storage, including by buying storage. More electrification and LNG exports will also increase the need for storage.

     Charif Souki, CEO of Tellurian, and CEOs of Woodside, Shell, and others see LNG demand growing in the coming years including 2023. Europe will continue to need increased amounts of LNG. Asian demand is expected to grow. Chinese demand is expected to keep growing at high rates even with Chinese economic growth rates adjusted downward. Billionaire, or once billionaire, Souki claims he had a bad experience with China, does not trust them to keep to deal terms, and simply won’t deal with them, preferring to deal with other Asian countries instead.

     Government support for the oil and gas industry, however, is in question. The U.S. Dept. of Interior has delayed its five-year oil and gas leasing plan till the end of the year, 18 months after it was expected and 3 months later than requested in a lawsuit filed by industry groups led by the American Petroleum Institute (API) after a previous delay, even though the lease sale is required by law. The leases will only be in the Gulf of Mexico and will apparently consider one option of allowing no leases at all. It seems the Dept. is flirting with punitive measures through considering no leases. These delays and considerations increase uncertainty among those wishing to develop those resources. Such actions are not conducive to a timely and economically favorable development of needed American resources. Some of those investment dollars may well get diverted to non-American regions. I do not think this is good energy policy. Senator Joe Manchin blamed the administration’s “radical climate agenda” for the delay, also noting that all previous administrations, Republican and Democrat, have abided by the mandate required by the Outer Continental Shelf Lands Act in a timely fashion. I agree wholeheartedly with Manchin on this issue.

     Meanwhile, the UK and Europe imposed temporary windfall taxes on record profits of Big Oil companies and Biden wants to tax stock buybacks by Big Oil companies in the U.S. Does he have a point? I don't know but I do know that with the current lower oil and gas prices those levels of profits will drop considerably, and near-term future stock buybacks will likely be much smaller than last year. Even so, several CEOs have indicated that they will continue to focus on shareholder returns including stock buybacks. Oxy's Vicki Hollub and Chevron's Mike Worth both indicated that stock buybacks will continue. Chevron is implimenting a massive $75billion buyback. On one hand these may help out the ailing stock market. On the other hand, they will take away from needed investment in new supply. oil is likely to remain close to current pricing. Personally, I would like to see lower gasoline prices, but I understand that is not likely. I just hope they don's spike up high again. U.S. oil production is likely to rise modestly, by about 500,000 barrels per day, led by the Permian Basin. Hollub also expects the administration to wait until oil prices come down, which could be a few years from now, to buy more oil to refill the SPR, or just add small amounts through time. The situation is perhaps not what the government (or we consumers for that matter) would consider ideal, but the oil producers are in good financial shape to buy back stock and increase dividends, so shareholders are benefitting. while some of those shareholders are those with 401Ks, many are those that are already wealthy investors so one can argue that the oil companies' approach is most beneficial to those who are already wealthy and most detrimental to those consumers who are poor. However, gasoline prices are also dictated by things like refinery capacity that is influenced by other issues like ability to upgrade for sulfur regulations. Pioneer Natural Resources CEO Scott Sheffield went so far as to say that the U.S. won't 'ever again' reach a record in new oil production. He, like Hollub, believes that prices will remain close to what they are now, or slightly higher, and that one control is simply that we are maxed out on our refining capacity. he also thinks if we drill more, then service company prices will rise accordingly, and he also noted that the inventory is not there. That is perhaps a bit concerning and segways to the next paragraph which addresses some issues about possible other sources of new U.S. oil supply.  

     Another upcoming decision by the Biden administration that pits the environmental groups that hold significant sway with him against U.S. energy development is whether the Willow Project in Alaska will be approved. Senator Dan Sullivan of Alaska argued, I think decisively, that the project’s environmental impact statement has deemed it one of the most environmentally responsible and lowest carbon emissions projects of its kind in the world. He also noted that it has very strong support among the indigenous Alaskan population and among unions workers. He pointed out the obvious hypocrisy of restarting imports of Venezuelan oil which has a very poor environmental record and profits a corrupt regime with a poor human rights record and one that befriends our adversaries. He noted that the Willow Project and others like it aid U.S. energy security. He also said that those environmental groups are not considering the rights and opinions of Alaskans. Conoco’s CEO said he is hoping for approval but expecting denial. The administration may opt to limit the size of the project which could affect economic viability to the point where the project could be abandoned. This is another “no-brainer” decision that is being hijacked by radical groups where the outcome they desire will likely result in more overall world pollution and carbon emissions. There are numerous examples of outcomes such as this. Hopefully, common sense will prevail.

     Energy Secretary Jennifer Granholm just made some remarks at CERAWeek: “we know that oil and gas is going to remain a part of our energy mix for years to come.” “Even the boldest projections for clean energy deployment suggest that in the middle of the century we are going to be using abated fossil fuels.” “It should not take over a decade to get permitting for a transmission project on federal lands.”

These statements are sensible and do not support the logic of denying emissions-conscious American energy projects in favor of emissions-indifferent projects from adversarial countries.

 

 

References

 

EQT CEO Sees US Natural Gas Market Balancing Later This Year. Bloomberg. March 7, 2023. Watch EQT CEO Sees US Natural Gas Market Balancing Later This Year - Bloomberg

 

Williams CEO Armstrong on Natural Gas Pipelines, Storage. Bloomberg. March 7, 2023. Watch Williams CEO Armstrong on Natural Gas Pipelines, Storage - Bloomberg

 

Developer Of Revolutionary Carbon-Capturing Power Plant To Go Public Via SPAC With Gas-Fracking Rice Bros. Christopher Helman. Forbes. December 14, 2022. Developer Of Revolutionary Carbon-Capturing Power Plant To Go Public Via SPAC With Gas-Fracking Rice Bros (forbes.com)

 

NET Power’s First Allam Cycle 300-MW Gas-Fired Project Will Be Built in Texas. Sonal Patel. Power Magazine. November 10, 2022. NET Power’s First Allam Cycle 300-MW Gas-Fired Project Will Be Built in Texas (powermag.com)

 

Biden admin quietly delays major oil, gas leasing decision. Thomas Catenacci. Fox News. March 8, 2023. Biden admin quietly delays major oil, gas leasing decision | Fox News   

 

Biden admin facing calls to approve major Alaska oil project. Fox News. March 8, 2023.Biden admin facing calls to approve major Alaska oil project | Fox News Video

Charif Souki on Outlook for Energy. Bloomberg. Charif Souki on Outlook for Energy | Watch (msn.com)

Oil CEOs are doubling down on buybacks as Biden budget seeks to quadruple tax. Eric Rosenbaum. CNBC. March 8, 2023. 

U.S. won’t reach a new record in oil production ‘ever again,’ says Pioneer Natural Resources CEO. Ian Thomas. CNBC. March 9, 2023. U.S. won't reach new record oil production 'ever again': Pioneer CEO (cnbc.com)