By Alex Kimani
The battle lines are already drawn in a high-stakes political contest that will ostensibly determine the fate of the American shale industry. On the blue corner is former VP Joe Biden, who has not only pledged to steer the U.S. to a net-zero carbon emissions status by 2050 but is also hell-bent on stopping key oil and gas projects on federal lands and waters including the controversial Keystone XL. In the red corner is President Trump, who has taken credit for the spectacular surge in U.S. shale oil production, rolled back a raft of regulations on the fossil fuel sector, and sworn to continue doing so if re-elected.
The dynamics in the oil and gas sector have, in the past, determined the outcomes of U.S. presidential elections, which in this case appear to favor Trump courtesy of prevailing low gas prices.
The outcome of the elections might, however, ultimately prove to be a moot point in the shale industry’s grand scheme of things.
That’s according to a recent report by the Rapidan Energy Group, which has concluded that whereas the shale industry is likely to bounce back faster under Trump than Biden, even Trump will be powerless to help the industry in a weak macro environment.
Rapidan says that U.S. onshore oil production is likely to clock in 1 million barrels per day lower by 2023 if Joe Biden trounces Donald Trump in the November elections. However, the advantage would be almost negligible if the oil markets are only able to put up a weak recovery.
Rapidan has a base case of Brent crude prices rebounding to the low $50s/b in 2023 while oil demand rises to around 10 million b/d over the timeframe. On the global stage, Rapidan’s base case has oil production rising courtesy of returning OPEC+ production, a rebound by Canadian sands, as well as a startup of seven floating production units in Brazil.
Rapidan, however, sees Brent plateauing in the mid-$40s/b by 2023 with global crude demand climbing only 7.3 million b/d over the timeframe. Meanwhile, U.S. shale production would come in a good 1 million b/d below the base case in 2021.
Nor surprisingly, Rapidan says the tables are likely to turn for Iran if Biden wins with the Middle East nation expected to export 1.8 million b/d just a year after Biden ascends to the Oval Office but might not be allowed to pump that much until the second half of 2022 under Trump.
The Silver Lining
The Rapidan report is very bearish for U.S. shale, either way.
The base case–which is the bullish scenario– has predicted that the U.S. shale industry will not be able to fully recover pre-crisis production levels over the next three years, even under Trump. The projected Brent crude of low $50s/b by 2023 suggests that the majority of shale firms are doomed to remain in the red.
The U.S. shale industry is already in dire straits, with hundreds of operators staring at bankruptcy. WTI prices have been range-bound at $32-34/barrel over the past few weeks, with the current WTI price of $33.75 a long way off the ~$50/barrel that many shale producers require to turn a profit.
But it’s not all doom and gloom though, and Trump might actually be able to do the industry some good.
In a recent statement, the International Energy Agency (IEA) head predicted that oil demand is set to rebound and even surpass pre-crisis levels, in lieu of unfavorable government policies:
“In the absence of strong government policies, a sustained economic recovery and low oil prices are likely to take global oil demand back to where it was, and beyond,” Fatih Birol, Executive Director of the IEA, told Bloomberg earlier this week.
Even the industry’s biggest bogeyman–renewable energy–is lately facing a backlash even amongst European supermajors that have traditionally been at the frontline of the green energy drive. Total S.A. shareholders have overwhelmingly voted down a resolution to force the company to do more about climate change, while Exxon’s shareholders have rejected proposals for a report on lobbying and a report on the risks of petrochemical investments.
Low oil prices have led to more than 2.2 million b/d of U.S. oil production being shut down. But ultimately, the cure for low oil prices is low oil prices, and the markets are bound to eventually correct, especially once a supply squeeze begins to threaten.