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Drill, baby, drill? Not so fast, say crash-wary energy investors

Republican lawmakers say Biden administration policies hinder production, but market experts point instead to a number of non-regulatory factors

An oil storage facility tank in Houston.
An oil storage facility tank in Houston. (AFP via Getty Images)

High oil prices are hammering American consumers at the pump, but don’t assume they will prompt a boom in U.S. oil production this year.

While Republican lawmakers and some industry advocates have argued that Biden administration policies are hindering production, market experts point instead to a number of nonregulatory factors preventing the industry from rushing into drill-baby-drill mode.

Hunter Kornfeind, an oil analyst for consultant Rapidan Energy Group, said the industry has indicated it expects no more than single-digit percentage growth on average this year.

“Anything above that is going to be very hard to come by just due to the kind of supply chain and inflation constraints that we’re seeing,” Kornfeind said.

[Voters will decide whether Biden or Putin gets blame on gas prices]

Still, some additional production is almost certain. The U.S. Energy Information Administration recently said that while U.S. crude oil production fell below 11.6 million barrels per day in December, output is forecast to hit 12 million barrels per day this year.

And prices could go high enough to convince some producers to take a risk.

Frank Maisano, a senior principal at Bracewell PRG, which represents energy clients, said the administration’s early moves to satisfy environmental groups and uncertainty around the regulatory environment have influenced production decisions, but his prediction is that prices are high enough to drive greater-than-expected boosts in production this year.

“There’s a change in the game in the last week or so with this price run-up,” Maisano said last week.

But the challenges to big boosts in production are not minor.

Kornfeind said there are few rigs available and that input costs have been rising along with the price of everything else. Even if a company boosts its spending 25 percent, that could translate to a relatively small percentage of production growth because equipment, supplies and labor are all getting more expensive — if they can be secured at all.

Also, the industry’s philosophy has shifted in the wake of price crashes, with executives responding to investor sentiment that they should be much more cautious about taking on debt to increase production. Rather, companies are inclined to stretch out the life of the inventory they have at their best, most profitable drilling locations.

“I don’t think we’ll ever see kind of the boom phases we saw pre-2014 and pre-2020,” Kornfeind said. “The idea that another bust could be in the near future is most likely in the back of a lot of executives’ minds.”

If prices go high enough, they could carry with them their own demand destruction by triggering a recession that would send prices straight down again.

Kornfeind also pointed to drilled but uncompleted wells, or “DUCs,” that are a way for producers to more easily and cheaply boost production in the short term than brand-new drilling.

But during the pandemic, companies have run through much of their DUC inventories.

Political debate

More politically inclined voices continue to focus on administration policies.

“Republicans have been demanding the administration take the shackles off American energy producers since President Biden took office,” Sen. John Barrasso, R-Wyo., said in a statement.

As the American Petroleum Institute, the industry’s lobbying arm, endorsed the ban on Russian oil and gas imports last week, it also encouraged the administration to move forward with oil and gas lease sales and ease regulatory approval process for new oil infrastructure projects.

Morgan Bazilian, a professor and director of the Payne Institute at the Colorado School of Mines, said federal policies, or at least the perception of those policies, factors into producers’ decision-making processes. The administration has signaled it wants to quickly move the country away from fossil fuels.

But Bazilian also said even an oil-loving president signing pro-drilling executive orders at the moment wouldn’t necessarily change the current short-term dynamics.

The industry is facing supply chain disruptions, inflation and labor shortages, he said, but the biggest driving factor is the role of investors who are committed to capital spending discipline and don’t want to see companies taking on debt for big new projects.

And while the administration keeps pointing to unused leases on federal land, many of those can’t be tapped quickly for more production.

“There is no magic pump or spigot that can just be turned on in this case,” Bazilian said.

The issue of production growth was ever-present last week at an energy industry conference, CERAWeek,  in Houston.

John Hess, the CEO of Hess Corp., said at the conference that the release of 60 million barrels of oil from the strategic reserves of the U.S. and 30 allies last week was too small and that more is needed, along with more investment by the industry and governments.

He cited familiar difficulties facing the industry — inventory constraints, inflation challenges and investor sentiment — that have companies acting much more cautiously about accelerating production. But he said every producer has to step up.

“The supply chains that we all face, it affects our industry as well, but people are going to have to increase levels, because the world needs the oil,” Hess said.

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