Disaster or deliverance? What Biden victory means
For the president-elect and for the industry, crisis creates opportunity.
In early March, I had a book signing at the Petroleum Club of Houston. The room was bathed in sunlight and the mood was jovial. A few jokes were made about how because of this new virus we shouldn’t shake hands, but we all did. Old habits, and all that.
It would be my last in-person speaking event of the year. Just days earlier, the annual CERAWeek conference, one of the industry’s biggest gatherings, had been canceled.
Even so, no one at the Petroleum Club that day — including myself — could imagine how the looming COVID-19 pandemic would ravage the oil and gas industry.
Since then, the industry has been devastated by weak demand, depressed prices and the fallout from a lack of spending discipline during the past five years.
Oil companies have cut as many as 118,000 jobs — and counting — since the pandemic began.
Trouble had been on the horizon and the pandemic brought what had loomed crashing down.
In the past five years, more than 500 producers and service companies have filed for bankruptcy, including more than 120 Texas producers. The Dallas law firm Haynes and Boone, which tracks Oil Patch bankruptcies, predicts more will be coming before year’s end.
Oil prices, which started the year above $60 a barrel, have fallen by about a third since then, and that’s only after recovering from a plunge in late April that briefly took West Texas Intermediate futures into negative territory for the first time ever.
Even as COVID-19-related lockdowns have eased, consumer demand has yet to return to prepandemic levels.
So when President Donald Trump, at the end of the final presidential debate, declared that Joe Biden “is going to destroy the oil industry,” I found myself wondering what more Biden could possibly do to make things worse.
Energy is now the poorest performing sector among the 11 components of the Standard & Poor’s 500 Index.
While the broad market is up more than 10 percent this year, the energy sector has fallen more than 40 percent.
A Biden presidency, in other words, may be the least of the industry’s worries.
While tax policies and leasing programs have some marginal impact, presidents typically have little direct effect on the industry’s success or failure.
After all, Trump’s predecessor, Barack Obama, restricted drilling on federal lands, delayed projects such as the Keystone pipeline and imposed a moratorium on drilling activity in the Gulf of Mexico after the Deepwater Horizon disaster, yet domestic oil production surged 90 percent during his first seven
years in office — the fastest production growth in American history. Conversely, domestic production declined under Obama’s predecessor, Republican George W. Bush, a former oilman.
For all Trump’s bluster about “saving” the oil industry, his policies haven’t helped much. His trade war with China depressed oil prices. When prices fell too low, early this year, he encouraged Russia and Saudi Arabia to reach an agreement on production cuts, strengthening ties between two countries that basically control global prices.
Many of his deregulation efforts remain tied up in court, and his plan to open the Arctic National Wildlife Refuge to new drilling was met with a collective yawn.
Rather than worry about what Biden will do, perhaps the industry can find some solace in what he’s likely not to do. He’s unlikely to ban fracking or offshore drilling, even though some Democrats are calling for it and his pick for Vice President Kamala Harris embraced the idea for a time during her own campaign for president.
The government collects too much in royalties — some $30 billion from Gulf of Mexico leases alone — to shut off the taps amid record deficits. Nor does it make sense to add to job losses amid high unemployment.
My hope is that Biden takes a more forward-looking and economically realistic view. Banning fracking on federal lands won’t persuade Americans to drive less, and its effects on carbon emissions, on a global scale, will be minimal. It’s also counterproductive. The more you ban production, the more prices rise, which only encourages oil companies to drill more. Even a $10 rise in crude prices is likely to open the taps in West Texas.
Constraining supply doesn’t result in lasting change. Influencing demand does.
And the market is telling us that demand is changing. Capital is moving away from fossil fuels. Between 2014 and 2019, low interest rates kept money flowing into the Oil Patch, and producers spent more drilling new wells than they made selling the oil and gas they pumped. Eventually, though, investors grew weary of the overspending, and well before COVID-19, the easy money started drying up.
“The industry over-invested for growth, particularly here in the United States, and hasn’t created strong free cash flow and strong returns,” Chevron CEO Michael Wirth said on CNBC last week. “Investors have been clearly signaling that they expect better performance.”
Increasingly, they are looking elsewhere for that performance. Blackstone, the world’s biggest fund manager, in late September pledged to cut carbon emissions in its new investments by 15 percent within the first three years of buying a company or asset. According to a recent survey, 33 percent of institutional investors who don’t already do so are considering environmental, social and governance criteria for investment decisions, up from 12 percent last year. The value of assets governed by so-called ESG mandates has almost doubled in the past four years to $40.5 trillion.
For the Biden administration and for the oil industry, this market shift creates opportunity.
Rather than a knee-jerk reaction to ban fracking, we need to educate consumers about the importance of it. Simply put, we don’t get to a cleaner, more sustainable energy future without it. Cheap natural gas from fracking has fueled the transition from coal-fired electricity in favor of gas generation. Gas plants produce far less carbon, and they’ve encouraged the spread of renewables. Gas plants can start and stop quickly, allowing them to work in tandem with renewables to keep the lights on when the sun isn’t shining or the wind isn’t blowing. Advances in batteries will free renewables from their dependence on natural gas but the shift will take years.
Fracking, like all forms of energy production, has environmental impact, and the industry can do more to reduce methane leaks, curtail flaring of natural gas, remediate waste pits and other pollution, and improve recycling technology to cut back on wastewater disposal that can cause earthquakes.
Despite these concerns, we will still need fossil fuels, although we will need them in increasingly smaller quantities. This change isn’t being driven by the government, or politics, but by economics. In the past decade, the cost of wind and solar has fallen from the most expensive to the cheapest forms of energy — cheaper than oil and gas, even without federal subsidies, according to an analysis by the investment firm Lazard.
Major oil companies such as BP and Chevron are preparing for this shift by adding renewables to their asset base. “We intend to be a part of a lower carbon energy system in the future,” Chevron’s Wirth said, noting that the company is working to reduce its carbon footprint.
Oil and gas isn’t just about extraction. It’s led by technology, and innovation is ongoing. There’s more resemblance to Silicon Valley along our bayous than most people realize.
Houston’s own George Mitchell poured at least $500 million of his company’s money into the development of modern-day fracking even as his company was struggling financially. The result changed the global oil markets, lowered energy costs for every American household, and put us on a course to a more sustainable energy future.
We need our energy companies to honor Mitchell’s legacy, not by drilling all they can but by developing the next technological steps to making energy cleaner, cheaper and more abundant — from new carbon capture technology to battery storage to more efficient drilling practices to promising alternatives such as hydrogen.
And we need policies from the new administration that are encouraging rather than restrictive. We need to protect the environment, of course, by requiring companies to reduce methane leaks, curtail flaring of natural gas, and remediate waste pits and other pollution. But we also can create incentives that drive investment toward a cleaner energy future without punishing companies for meeting our energy needs of today.
Instead, we should focus on incentives that continue to encourage investment in a cleaner energy future.
We’ve had four years of backward-looking policy that, while cheered by the industry, did little to encourage innovation and drive the change needed to safe guard the energy industry’s future.
In truth, the industry is in far worse shape than it was in 2014. We need the Biden administration to chart a new course forward, to join hands with the industry and environmentalists and break down the tired old debate of fossil fuels versus renewables. The path forward isn’t either/or; it’s both. That’s how we will preserve jobs, generate better returns and provide a cleaner environment for the future.
Steffy, a former Houston Chronicle business columnist, is the author of five nonfiction books including “George P. Mitchell: Fracking, Sustainability and an Unorthodox Quest to
Save the Planet.”