Jack Belcher, Cornerstone Government Affairs

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Oil and Gas Investor

Geopolitics continues to be the dominant force in the outlook for global energy markets. The escalation of tensions between the U.S. and China and between the West and Russia is impacting the flow of oil, gas and refined products and ultimately markets and prices.

There are signs that demand for oil and natural gas is rising. Although there are still fears of a looming recession, other economic indicators suggest that a recession is far from certain, especially as China emerges from its COVID-19 lockdown. Yet, global tensions threaten to stifle economic expansion.

The Chinese spy balloon incident in February highlighted tensions that have been growing over China’s threats to invade Taiwan and its territorial ambitions in the South China Sea and Southeast Asia. Underscoring the energy policy nexus associated with these growing tensions, in one of the first actions taken by the Republican-controlled House of Representatives, legislation was passed to limit the Department of Energy’s ability to sell future barrels from the Strategic Petroleum Reserve (SPR) without assurances that SPR crude would not end up being sold to China, Iran, North Korea or Russia. The measure, which the Biden administration has threatened to veto, would also require that federal lands and waters be leased in exchange for future SPR releases.

LNG investments need long-term contracts

Across the Atlantic, the EU continues its efforts to use energy policy as a means to punish Russia for its actions in Ukraine. The 27 EU states recently agreed to place a price cap on shipments of Russian refined products, setting the limit at $100 per barrel for diesel and $45 per barrel for low-end products like fuel oil. Notably, recent reports suggest sanctions are beginning to hurt the Russian economy. With Russian natural gas supplies now mostly cut off, Europe is seeking to develop a future that is devoid of Russian gas. Despite the fact that Europe was able to make it through this winter, the future is much less certain.

U.S. and Qatar LNG producers need the commitment of long-term contracts in order to guarantee firm, long-term LNG supplies to Europe, but EU reluctance based on the pursuit of fossil-free energy objectives will make that more difficult. As a result, Europe could face a more difficult situation next winter as well as long-term uncertainty, as Asia (particularly China, South Korea and India) shows its willingness to enter into long-term contracts.

In the meantime, U.S. oil and gas producers are seeing long-term opportunities in LNG and investing in related infrastructure. Examples include Devon Energy’s agreement with Delfin Midstream on a floating LNG facility, ConocoPhillips’ partnership with Sempra’s Port Arthur LNG and Chesapeake Energy’s commitment to supply Golden Pass LNG with certified clean natural gas. However, U.S. producers have their own challenges as they continue to deal with inflation, labor shortages and shareholder pressure for capital discipline, not to mention the impacts of ongoing regulatory uncertainty.

U.S. “going to need oil and gas for a while”

The question is clear: Can the U.S. oil and gas industry meet growing demand amid the ongoing challenges created by geopolitical realities? Domestic energy policies should ensure that it can. Last month, U.S. House Energy and Commerce Committee Chair Cathy McMorris Rodgers (R-WA) released the Oversight and Authorization Plan for the 118th Congress. It vows to “examine the impact of government policies and programs on the efficient exploration, production, storage, supply, marketing, pricing and regulation of domestic energy resources, including issues relating to the nation’s energy infrastructure,” while investigating the impact of the administration’s energy policies on supply chains, U.S. dependence on China and domestic energy production.

During his State of the Union address in February, President Biden accused the U.S. oil and gas industry of keeping retail fuel prices artificially high while profiting from Russia’s invasion of Ukraine. “It’s outrageous,” Biden said. “They invested too little of that profit to increase domestic production and keep gas prices down. Instead, they used those record profits to buy back their own stock, rewarding their CEOs and shareholders.” At the same time, the president acknowledged that “we’re going to need oil and gas for a while,” adding that oil will be needed for “at least another decade … and beyond that.”

To be sure, the U.S. and the world will be using oil and gas for many decades to come, alongside renewables, nuclear and other energy sources. The more that our nation’s leaders recognize that reality in developing and carrying out policy, the better-equipped the U.S. will be to meet domestic and global energy needs as geopolitical challenges inevitably continue to unfold.