The oil and natural gas industry made capital investments of $52 billion in the second quarter of 2022, the latest for which there is complete financial reporting.
That is substantial but remains about one-third less than investments of $77 billion per quarter between 2010 and 2019, prior to the COVID19 pandemic, per API.
In the wake of the pandemic, a litany of workforce, supply chain, financial and energy policy headwinds have slowed the industry’s investment and drilling responsiveness.
Yet, a remarkable dichotomy took hold in September and October. While U.S. oil drilling in October remained down by nearly one-fifth compared to the same month in 2019, and U.S. crude oil production remained 1 mb/d less than its highest levels of late 2019 and early 2020, U.S. natural gas-focused drilling surpassed its pre-COVID-19 levels. In fact, the production of natural gas and natural gas liquids (NGLs) achieved record highs.
As a result, working gas in storage rapidly grew and contributed to cutting natural gas spot prices at Henry Hub by more than 50%, to $4.00 per million Btu on Nov. 8, from $8.70 per million Btu on Sep. 14 per the EIA.
If U.S. drilling has continued to be broadly affected by the litany of headwinds, the question inquiring minds have is this: Why has natural gas been able to outperform oil? There are two main reasons.
First, U.S. natural gas drilling (155 rigs as of Nov. 4) involves only about one-quarter as many rigs as oil drilling (613 rigs as of Nov. 4), so it requires less investment to accelerate.
Second, the leading natural-gas producing regions of Louisiana and Texas have been enabled to ramp-up quickly due to their strong combination of steady regulatory regimes, natural gas processing and pipeline infrastructure and geographic advantages, with drilling programs planned to support the eventual exports of LNG, which in turn require processing and markets to handle NGLs.
By contrast, U.S. oil drilling is geographically diverse, and returning production to its pre-COVID-19 levels could require broader participation among producing states and regions. For example, drilling in Colorado, New Mexico, North Dakota and Wyoming has continued to lag pre-COVID-19 levels, per Baker Hughes.
Consequently, U.S. natural gas drilling is a tangible success story, thanks to a combination of enabling factors. Replicating this success in oil could benefit U.S. economic and energy security, but likely requires broader support for enabling energy policies and infrastructure.
In the absence of a robust policy response, the International Energy Agency (IEA), Kingdom of Saudi Arabia and OPEC have separately highlighted the needs for greater investment and drilling for oil supply to meet demand in 2023. Demand has instead been met recently by continued releases from the Strategic Petroleum Reserve (SPR).
Notably, however, international demand for U.S. petroleum has repeatedly established new record highs of late (a total of 10.4 mb/d of U.S. petroleum was exported in September, including crude oil (3.9 mb/d) and refined products (6.5 mb/d) per API) amid Russia’s war in Ukraine.
The U.S. continued to help allies as the Russian invasion of Ukraine moved into its eighth month in November, underscoring the importance of U.S. energy leadership. While American petroleum exports can help stabilize global markets, they can also spur production, job creation and economic growth here at home.
Consequently, U.S. crude oil inventories in the SPR have fallen to their lowest level since 1984, due to the Biden Administration’s use of SPR drawdowns to address domestic fuel prices.
Additionally, OPEC cut its oil production by 2 mb/d effective in November, and industry analysts anticipate a possible loss of additional Russian crude oil and refined products as the G7 price cap proposal is implemented beginning in December.
Overall, the data tells us that U.S. and global economies are vibrant and require abundant energy, but collectively we must find a way to build on the success we have seen in U.S. natural gas.
For more information, visit api.org or call (202) 682-8114.