As we begin a new year, it is clear that the experiences of 2020 have had major implications for human behavior, global politics and the global economy. It is nearly impossible to chronicle them all, and like most major global events, their full impacts will not really be understood for years into the future. For energy, 2020 and the global pandemic have been both destructive and transformational.
Looking back at the year, we experienced a complete meltdown of global energy commodity prices as demand collapsed due to the pandemic and Russia and Saudi Arabia engaged in a game of brinksmanship, ultimately bringing oil prices below zero. Since that time, OPEC+ has asserted the discipline needed to more or less stabilize prices. The year ended with OPEC+ resisting calls by Russia to increase production by 2 million barrels per day (bpd) and instead moving toward a 500,000 bpd increase.
However, Russia's goal to take out U.S. shale production and permanently damage the U.S. industry has been partially successful. The price war has devastated the industry, impacting prices and supply. The result has been bankruptcies, layoffs, restructurings, mergers and acquisitions, falling rig counts, and shelving of new exploration projects. We have also seen a rise in divestitures by investment institutions of oil and gas companies and activities, further exacerbating the downturn.
Now, the industry faces a new layer of uncertainty with a new administration in Washington that is certainly less supportive of, and potentially hostile to, the domestic oil and gas industry.
Looking ahead, 2021 begins with some reasons for optimism. First, industry is adding rigs, with the increase that occurred in December 2020. As more of the world gets vaccinated for COVID-19, it is likely that the global economy will begin a recovery, thus increasing demand for oil, gas, refined products, and chemicals. Bloomberg noted a global jump in demand in December, and Goldman Sachs has become bullish on oil for the coming year, predicting an average Brent price of $65 per barrel in 2021.
For natural gas, there are some positive year-end indicators as well. U.S. LNG exports reached a new record in November, contrary to what doomsayers had predicted. The U.S. Department of Energy extended export authorizations to 2040 for seven U.S. LNG producers. Bank of America announced that it sees Asian LNG demand remaining strong enough in 2021 to prevent major U.S. cargo cancellations.
Global LNG demand will grow through 2030 at a rate of 4% per year, with a potential shortfall of 12.8 billion cubic feet per day (Bcf/d) of gas by the end of the decade, according to Wood Mackenzie. Also, while 2020 saw many postponed Final Investment Decision (FID) for LNG projects, eight projects with a combined volume of 17.3 Bcf/d are expected to announce FID in 2021.
Living in 2020 sometimes felt like being in slow-motion, but what was truly remarkable was the rapid pace of change we experienced, including an acceleration of mergers and acquisitions in the energy sector that forced right-sizing, down-sizing, and a culture of greater discipline and efficiency that has kept the U.S. shale industry competitive.
Trends in industry performance for greenhouse gas (GHG) emissions improvements and environmental, social, governance (ESG) similarly accelerated. To that end, U.S. energy producers are increasingly announcing programs to address methane emissions and flaring. Drivers include increased awareness of methane-related issues that have resulted from NGO campaigns and pressure from investors.
However, environmental commitments are increasingly the result of companies implementing ESG programs, as so many began to do in 2020, perhaps in no small part due to the pandemic.
As one energy company executive told me, not being able to travel forced corporate heads to take part in virtual panel discussions, many of which were focused on ESG and climate change, which in turn accelerated action in those areas.
As one example of ESG action in 2020, ExxonMobil announced in December that it would reduce its carbon emissions by as much as 20 percent by 2025. At the same time, Europe continues to raise the bar, with the European Commission focusing on stricter GHG standards and French Gas Distributor Engie deciding not to buy gas from U.S. LNG producer NextDecade, citing concerns over methane emissions in the U.S. value chain.
Despite developments such as the Engie decision, U.S. industry is increasingly demonstrating that it can rise to meet tightening standards, and innovation will no doubt lead it to prominence in an increasingly carbon constrained world.
Of course, government and regulatory policy will be critical to the future success of the U.S. oil and gas industry, and they will pose considerable challenges under a Biden administration. For starters, we can expect a flurry of administrative actions that will likely make oil and gas exploration, production, transportation processing, and usage more difficult, time-consuming, and expensive. Threats will also come in the form of new regulations, taxes, and legal challenges.
While it will be enormously difficult, America's oil and gas sector should be expected meet the challenges — whether rooted in public policy or natural disasters — because as the last year showed it is the world's most resilient industry with a legal and regulatory system second to none.
Jack Belcher is a principal of Cornerstone Government Affairs' Advisory Services and advises energy, transportation and financial services clients on government relations, regulatory affairs, risk management, ESG management, coalition building and stakeholder relations. He is also managing director of the National Ocean Policy Coalition.
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