Where the oil industry is headed in 2022

Go to Source January 11, 2022

After recovering from a near-death experience in 2021, the U.S. oil and gas industry could be in for a bumpy ride in 2022 that will influence how much the industry drills, cuts emissions and invests in clean energy.

While oil prices have begun to stabilize after crashing during the pandemic, the recovery creates a paradox for oil companies. It will repair their bottom lines, according to a recent report from Moody’s Investors Service, but also increases calls for the industry to lower its emissions of climate-warming pollution and transition away from fossil fuels.

“The corresponding increase in carbon emissions from greater oil consumption will likely lead to added investor pressure on oil companies to transition their businesses, and to inspire more policy initiatives aimed at reducing demand for oil and natural gas,” the Thursday report said.

Interior Department plans and pending rules from EPA on methane emissions could further change the trajectory for the sector across the country. Other changes in the industry, including technology and a drive for efficiency, also could shift the outlook this year for the workers and communities that rely on the industry for jobs.

And while prices are higher than they were during the pandemic lows, they could whipsaw for the first half of the year, with repercussions for emissions and drilling levels, analysts say.

Here are four industry trends to watch this year:

Don’t bet on low oil prices

High oil prices have been a recent thorn in the side of the Biden administration, which recently released crude from the Strategic Petroleum Reserve. Along with injecting uncertainty into politics, a relatively high price could entice domestic drillers to push up their output by about 900,000 barrels a day to as much as 11.85 million barrels a day, energy consultant Dan Yergin, the vice chairman at IHS Markit, said late last month on CNBC. In comparison, 900,000 barrels a day equals almost what is produced by all of North Dakota daily.

“U.S. production is coming back already, and it’s going to come back more in 2022,” Yergin said.

The expected rebound comes after the pandemic caused the largest-ever drop in oil prices in the first few months of 2020. Travel and industrial activity ground to a near halt around the world as governments imposed lockdowns and quarantines, but it took months for oil companies to slash their production.

By the beginning of 2021, the opposite was happening. The world’s economy began to heat back up, but oil producers were hesitant to bring production back up. That mismatch pushed the price of crude higher than it was before the pandemic, to more than $76 a barrel this week.

The gap between demand and supply is expected to close this year, but prices could still be volatile.

Saudi Arabia and its allies in the Organization of the Petroleum Exporting Countries agreed this week to continue gradually ramping up their production.

At the same time, a lot of publicly traded companies are under pressure from their shareholders to control their spending. They will be cautious about putting money into new drilling, which could put a damper on American output, said David Meats, an analyst at Morningstar.

And a variety of other factors could swing the price of oil over the next few months — a new outbreak of the pandemic or a change in course by OPEC and its allies.

“I wouldn’t bet on stability,” he said in an interview.

Emissions pressure is real

Oil companies will continue looking for ways to cut their emissions this year, under pressure from both regulators and their own investors.

The trend began in 2020 and 2021 as European companies like BP PLC and Royal Dutch Shell PLC announced plans to invest in renewable power generation and cut the emissions from their operations.

In November, EPA rolled out a plan to reduce the amount of methane, a potent climate-warming gas, that’s released from oil and gas production (Energywire, Nov. 3, 2021).

U.S. companies, including Chevron Corp. and Exxon Mobil Corp., haven’t gone as far as their European counterparts, but they announced plans to invest in projects to capture carbon dioxide and reduce their emissions in other ways. Exxon said in December it will reduce the emissions in one of its largest operations in the Permian Basin oil field to the equivalent of zero by the end of this decade.

That will likely continue in 2022, Moody’s Investors Service said in a December research note.

The “majors remain committed to carbon-emissions reductions,” Moody’s said. “European firms in particular will further increase investment into lower-carbon businesses.”

U.S. oil majors are expected to feel more pressure this year from activist investors, who notched a couple of wins during the annual shareholder meetings last year.

A small investment fund, Engine No. 1, organized a drive that led to the election of three people with climate change and alternative fuels experience to Exxon’s board of directors. Other groups, including pension funds and investment managers, won a nonbinding vote at Chevron to cut its so-called Scope 3 emissions, which are caused by customers burning oil and gas products (Energywire, May 27, 2021).

Engine No. 1 was reportedly in talks with Chevron in September, according to Reuters. And another group, Amsterdam-based Follow This, is shifting its attention to U.S. oil producers after spending the last few years running shareholder campaigns in Europe.

Follow This is asking for shareholder votes on climate issues at six U.S. oil companies this spring, up from three last year. Investors are increasingly aware that climate change is a threat to oil companies’ viability, Roos Wijker, a spokesperson for the group, said in an email.

“Climate change ultimately is hurting the bottom line of their portfolios, and they are becoming more determined to reach the goal of the Paris Accord,” Wijker wrote. “Long-term investors thus want change and are really losing their patience with Big Oil.”

Biden administration next steps

From EPA to the White House, the Biden administration also could play a significant role in the oil industry in the year ahead, including by shaping development on public lands and off the country’s coasts.

The administration has backed away from the more aggressive reform agenda of stalling new federal leasing or — as promised on Biden’s campaign trail — blocking new drilling, following aggressive pushback last year from oil state politicians. But the White House does have reforms on the schedule for 2022 that could substantially alter federal land drilling.

At the center of administration efforts is the Interior Department, which is planning to adjust federal royalties for onshore drilling. Those royalties are currently at 12.5 percent, a floor set in the Mineral Leasing Act of 1920. Other modernization efforts include updating bonding requirements to keep pace with the expensive cost of plugging wells and ensuring that the cost doesn’t fall to taxpayers if companies go bankrupt. The administration may also adjust fees in the federal oil and gas patch.

Observers have speculated that a carbon or methane fee may also be attached to federal oil and gas development, whether independently or through royalty adjustments, to counter the greenhouse gas damages that come from the downstream use of federal crude oil and natural gas.

Additionally, the administration will pen new regulations on methane emissions on federal leases, aimed at reducing waste by stemming leaks and releases of the potent greenhouse gas.

This will be the second time an administration tries to regulate production’s methane footprint through the Interior Department’s Bureau of Land Management. Obama-era BLM methane regulations were dismantled via a lawsuit brought by industry.

Meanwhile, offshore, the Bureau of Safety and Environmental Enforcement, an agency of Interior, will release regulations on high-pressure and high-temperature drilling practices, and it will update its decommissioning standards for offshore infrastructure like pipelines.

BSEE will also begin revision of the well control and blowout preventer regulations. First written in response to the Deepwater Horizon explosion that killed 11 men in 2010, the rules were pared back by the Trump administration to be more flexible for industry. It is not clear what this third revision will entail.

The big job decline

The industry is increasingly relying on technology and automation to make its operations more efficient.

In October, Schlumberger Ltd. said it had worked with Exxon to drill a section of a well off the coast of Canada using a completely automated system.

Oil field service providers like Schlumberger employ the bulk of the oil and gas workforce, and they were forced to lay off tens of thousands of people at the beginning of the pandemic. Some economists believe that the industry will never see the same number of jobs, as automation replaces more and more blue-collar workers.

Employment in the oil field services sector reached about 597,000 positions in September, the last month for which data is available, according to the Energy Workforce & Technology Council, a trade group.

That’s about 62,000 jobs fewer than before the pandemic.

At the same time, some service companies are transitioning to building and maintaining renewable power projects like offshore wind turbines (Energywire, March 12, 2021). And the push to reduce emissions is creating jobs at dozens of startup companies that building high-tech sensors, drones and other equipment (Energywire, Oct. 25, 2021).

“It is certainly possible that the industry total labor numbers will never return to pre-pandemic levels,” Leslie Beyer, chief executive officer of the workforce and technology council, said in an email.

“However, this innovation in the industry is driving opportunities for new, highly technical, and digitally driven jobs in decreasing emissions of energy production.”