Industry, political narratives clash on oil growth

A US energy policy debate under way in Washington involves Republicans saying that President Joe Biden's policies have made producers reluctant to invest more capital, while Democrats say the industry has a duty to consumers to allocate recent "windfall" profits into more output rather than shareholder returns. The answer from the oil industry can be summed up as "it's complicated".

US shale producers have repeatedly resisted calls to ramp up supply faster following a spike in crude prices caused by Russia's invasion of Ukraine, saying it would take the blessing of shareholders to redirect capital. But executives testifying before US Congress last week also cautioned that a faster pace of production growth would be harder to accomplish in any case, citing severe cost pressures, supply chain issues and labour shortages that continue to pose significant challenges. US crude production in February was estimated at 11.8mn b/d, 1.8mn b/d more than when Biden took office but still short of the record 13.1mn b/d before the pandemic hit in early 2020.

The sector's focus on prioritising investor returns has drawn criticism from the White House and congressional Democrats. The House of Representatives Energy and Commerce Committee on 6 April pressed oil executives from ExxonMobil, Chevron, Pioneer Natural Resources and Devon Energy, as well as BP and Shell, to consider a dip in shareholder returns to provide some relief to consumers at the pump. The top executives testifying at the hearing said that they plan to raise production this year. But they declined to commit to redirect dividends and stock buybacks estimated at a collective $95bn in 2021 and 2022 into more drilling or clean energy.

For Pioneer chief executive Scott Sheffield, "the answer is no on dividends", a sentiment echoed by his shale peer at Devon, Rick Muncrief. The hearing comes as the industry gears up to report first-quarter results that will show the benefits from surging energy prices. ExxonMobil, the biggest US producer, has already said that the rally will lift its upstream earnings by as much as $2.7bn over the final quarter of 2021.

Who's to blame?

The industry view provides an alternative to the competing political narratives in Washington over whether oil companies share responsibility for US gasoline prices hitting a record high last month. "We are here to get answers from the big oil companies about why they are ripping off the American people — at a time of record profits, Big Oil is refusing to increase production," committee chairman Frank Pallone says. Republicans are seeking to pin responsibility on the run-up in gasoline and diesel prices on Biden, who in his first year in office blocked the 830,000 b/d Keystone XL pipeline and slow-walked energy leasing on federal land.

Devon is now running 19 rigs, up from 14 last year, and plans to bring on 300 new wells in 2022. Additional ramping up is "challenging" given the inflationary climate, Muncrief says. The company has spent 110pc of operating cash flow in the past decade, and now is the time to reward shareholders that had stuck with the company during the bad times, he says. Besides capital discipline and sparse funding from private equity and banks, "the reasons why we can't grow faster are we're lacking rigs, we're lacking frac [hydraulic fracturing] fleets", Sheffield says.

The decommissioning of rigs and frac fleets that took place in 2020 when prices were low, as well as the unwillingness of workers laid off during recent downturns to return to the shale patch, are additional obstacles, he says — "when you go through three downturns, we can't bring people back to the Permian basin. Who wants to come back and work in the oil and gas industry?"

Weather-related disruptions, particularly in the Permian early in the year, may weigh on the results of shale explorers. "We may see the numbers on the lower end of guidance, at least on the production side, but to some extent, also on the capital side," consultancy Rystad Energy's head of shale research Artem Abramov says. Analysts at US firm Bernstein Research also flag evidence of strong capital discipline and a lack of prime acreage inventory, as well as the possibility of greater supply-related constraints than anticipated.

Private-sector drillers led the charge back to drilling last year, but they face the same headwinds from higher prices and labour shortages as their public-sector peers. The upshot is that any production response to higher prices may take longer to filter through. But some public-sector producers may end up increasing rig activity in the second half of the year beyond what they originally set out, Rystad says, paving the way for higher growth next year.

Make up your mind

Chevron intends to spend 60pc more capital than last year but can still return value to shareholders, chief executive Mike Wirth says. Some of the executives testifying before Congress said they felt irony in criticism about their drilling plans — just six months ago, a climate-focused congressional hearing featured Democrats urging the industry to cut production. "Less than six months ago, I was asked to pledge to reduce production," Wirth says. "I resisted that request and pledged to increase production. I reiterate that pledge today, we will increase our production."

Some Democratic lawmakers pushed back against industry complaints of over-regulation by referencing a recent survey by the Dallas Fed — nearly 60pc of oil executives surveyed said investor pressure for capital discipline was the top reason for restrained growth, with only 10pc blaming government regulations. "They are very much opposed to large-scale production increases, because who knows what the price might do in a couple of years," Dallas Fed senior economic policy advisor Lutz Kilian says. "That means oil companies in turn cannot afford to go against the wishes of their investors."

Democrats say that as private businesses, oil companies have a right to focus on shareholder returns but do so at the risk of losing preferential tax treatment worth more than $4bn/yr. Democrats are also proposing windfall profit taxes against the industry, the repeal of tax benefits, penalties for not using drilling permits and providing regulators with more power to investigate energy prices.

On the Senate side, the Democrats are calling on federal regulators to investigate "volatile and elevated" gasoline, diesel and other petroleum product prices on the west coast. Senate Commerce Committee chair Maria Cantwell is crafting new legislation to grant federal anti-trust regulator the FTC greater authority to oversee oil and gasoline spot markets. Pointing to the expanded powers that federal energy regulator Ferc received from Congress in 2005 over the gas and power markets, Cantwell says: "We now need to do the same thing on opaque petroleum markets."

In the absence of a clear response from the industry to political nudges and price incentives over faster production growth, the Biden White House is continuing to tap the country's Strategic Petroleum Reserve and encouraging allies to do the same. The IEA member countries plan to release 60mn bl of crude over a six-month period, complementing Biden's ordered drawdown of 120mn bl from the US' emergency stocks. It is the fifth time that the IEA has co-ordinated a stocks release and has come about "in response to the significant strains in oil markets resulting from Russia's invasion of Ukraine", the agency says — the previous release, of over 60mn bl, was announced just over a month ago.

By Stephen Cunningham and Chris Knight

US average retail gasoline prices

US crude output and forecast