The U.S.-China trade tensions—which continue to escalate despite last week’s talks—risk backfiring on the American oil and gas sector, slowing down investments in long-term projects, a Texas energy group says in yet another warning that escalation of the trade war would ultimately hurt the U.S. energy industry and related services and goods.
The Texas Independent Producers & Royalty Owners Association (TIPRO)—a trade association representing the interests of nearly 3,000 independent oil and natural gas producers and royalty owners throughout Texas—issued last week a new warning about the potential fallout of additional tariffs, if the tit-for-tat continues and China were to slap tariffs on imports of U.S. liquefied natural gas (LNG), although crude oil appears safe from tariffs for now. China slapped tariffs last week on imports of U.S. oil products and coal.
While U.S. oil and gas production rises and continues to rise, with the Permian in West Texas contributing the most to this increase, production in Texas continues to face takeaway capacity constraints, and pipeline construction could be jeopardized by the steel and aluminum tariffs the U.S. Administration imposed earlier this year, TIPRO president Ed Longanecker said in an op-ed last week.
“The escalating trade disputes between the United States and China are putting the success of the American oil and gas sector at risk, and stand to deter investments of longterm energy projects, amongst other negative implications, if tensions continue,” Longanecker wrote.
TIPRO sees Texas crude oil production rising to nearly 1.5 billion barrels of oil by the end of 2018, up by almost 200 million barrels compared to the total Texas production in 2017.
EIA estimates show that the Permian is expected to account for more than half of the growth in U.S. crude oil production through 2019. Permian production is seen averaging 3.3 million bpd this year and 3.9 million bpd next year. Yet, recent pipeline capacity constraints have dampened wellhead prices for the oil producers. “Lower wellhead prices in the region are contributing to slower growth in Permian crude oil production in 2019 compared with 2018,” the EIA said last week.
According to TIPRO, “as the West Texas region continues to face output capacity challenges, the ability to move product will be dependent on having additional infrastructure in place, something that is threatened by the Trump Administration’s current tariffs on steel and aluminum.”
Prices for Oil Country Tubular Goods (OCTG) jumped by almost 30 percent in some cases after the steel and aluminum tariffs were put in place in March 2018, while Line Pipe (LP) expenditures increased by 10-20 percent, the Texas association has estimated.
“These tariffs on imported steel and aluminum have been described by many as effectively a tax against U.S.- based producers, large and small, adding significant cost on a per-well basis and a punitive tax of tens of millions of dollars to some critical infrastructure projects,” Longanecker writes.
“While President Trump’s commitment to fulfill all campaign promises is admirable, tariffs and trade disputes conflict with his energy dominance agenda, which could have a lasting impact on the U.S. oil and gas industry,” TIPRO’s president concluded.
This was not the first time that TIPRO has warned that tariffs threaten to slow down the rising Texas oil and gas production and employment. Last month, Longanecker said in a press release that steel and aluminum tariffs would have a significant impact on the Texas oil and gas industry and the U.S. economy as a whole if left in place.
“While well-intended, ultimately the tariffs will result in a slowdown in exploration and production activity and infrastructure projects, job loss and decreased tax revenue, which will reverberate throughout the state and national economy. The Texas oil and gas sector once again joins Governor Abbott in calling for the removal of tariffs on steel and aluminum for the benefit of our state and industry,” Longanecker said.
API also warned last week about the potentially damaging impact of additional tariffs on the U.S. oil and gas industry, and on U.S. LNG exports.
“Additional tariffs by the Chinese on U.S. LNG will hurt the US more than it hurts China and naturally incentivize other LNG suppliers to fill this market,” API Director for Tax Policy Stephen Comstock said.
While it’s far from certain that China will follow through its threat to slap tariffs on U.S. LNG, energy groups in America continue to warn that more tariffs on top of the steel and aluminum tariffs could slow down oil and gas production growth and cloud the outlook on which the industry bases its longer-term investment decisions.