By any stretch of anyone’s imagination, it is fair to say the lead up to, as well as the first few days of the Donald Trump administration have been nothing short of spectacular for U.S. Oil and Gas Inc. Barely hours after Trump had taken office as the 45th President of the USA, an overhauled White House website proudly declared its new found pro energy industry credentials. Guidance on climate change – a key feature of the Obama administration’s policy framework – was swiftly erased from the site.
Then three days into his presidency, Trump gave his explicit backing two controversial pipeline projects – Keystone XL and Dakota Access – provided US steel is used in their construction giving his “America First Energy Plan” a novel dimension. How could you possibly trump the wider appeal of US projects boosting the country’s energy industry, providing jobs and utilizing domestic steel to boot.
On the campaign trail, Trump always maintained that he wants to see America’s “hurting” coal industry firing on all cylinders and expressed views that supporting the U.S. shale revolution would boost tax receipts and create jobs. There is no reason to doubt he won’t follow through on his words with actions. In case you had forgotten, former ExxonMobil Chief Executive Rex Tillerson is his Secretary of State, and former Texas Governor Rick Perry is in the Energy Secretary’s chair.
Away from the Trump Train, it is an added bonus that 24 leading oil producers, including members of oil cartel OPEC and non-OPEC Russia, have delivered 80% of the oil production cuts they promised back in December. The 1.5 million barrels per day (bpd) taken out of the global daily supply pool by the 24 has at the very least ensured that both Brent and West Texas Intermediate futures are a respectable distance above $50 per barrel and hold the promise of stabilizing around $55.
Bjarne Schieldrop, chief commodities analyst at Nordic bank SEB, says in 2016 there were huge doubts about the extent to which US shale players were hurt and weakened by the downturn. “Would they be able to respond to higher prices or would they just slowly limp along with little response despite higher prices? Few placed faith in any OPEC action as production from that side was rising strongly. Now however, the uncertainty around both of these factors has cleared to a large degree. American shale oil producers are alive and kicking.”
Rig data, gathered in the wake of the recent oil price stability, had already been indicating that the US industry’s mojo was back. But Trump’s soundbites and actions have put the industry on steroids as it attempts to shake off a two-year long downturn in an era of ‘lower for longer’ oil prices and discovers a new normal.
Issuing an executive order backing Keystone XL and Dakota Access pipeline might have infuriated environmentalists, but was widely cheered by the industry and not to mention Trump’s core supporters.
The move also highlighted the necessity of energy infrastructure during trying times for the industry, says Deborah Byers, Oil & Gas Leader and Managing Partner of EY’s Houston, US practice. “President Trump’s executive orders on the Keystone XL and Dakota Access pipelines as well as the Senate Democrats infrastructure plan (which includes $100 billion for energy infrastructure) points to an emerging consensus that the US, as a country, needs to invest more in energy infrastructure.
“However, on both fronts, there are obviously many details that need to be ironed out. Hopefully President Trump and Congress will work together to find a consensus for moving energy forward.”
The decision is likely to have a much broader impact extending beyond a few pipelines, and the message matters too. “The executive order demonstrates the current administration’s strong intention to smooth out Federal regulatory hurdles for energy infrastructure projects and to promote domestic energy production,” notes Kathleen Connelly, Director of US Midstream Energy Corporates at Fitch Ratings.
Consensus on Wall Street also suggests Trump’s tactics should help move larger scale energy infrastructure projects forward and assist in alleviating industry concerns around the potential cost impact from regulatory delays at the very least.
Away from downstream and midstream, ratings agencies, while acknowledging the challenges faced by upstream players, also note that US exploration and production transactions are picking up.
According to Fitch data, the Permian shale basin continues to exhibit considerable activity and has seen valuations rise on an acreage and drilling location basis. “Average acreage values are up about 50% from the first half of 2016 to over $35,500 per acre, while average drilling location values are up 57% to $2.2 million, with some approaching $3 million per location,” the ratings agency wrote in a recent client note, although it did add a caveat that “evidence of acreage flipping suggests valuations could be getting overdone, introducing the potential for lower full-cycle returns.”
Nonetheless, whichever way you look at it, the US oil and gas industry in general, and shale players in particular, would rather be where they are in January 2017, than January 2016 when the oil price slid below $30.
To quote the US Energy Information Administration (EIA): “Current crude oil prices near $50 have led to increased investment by some production companies, particularly those operating in the Permian Basin in Texas and New Mexico. A price recovery above $50 could contribute to supply growth in US tight oil regions.”
And the EIA’s latest modeled projections of what may happen in the market in the future, point to the US becoming a net energy exporter by 2050. Trump’s presidency would have been long consigned into the history books by then, but the ‘crude’ decisions the man in the White House takes during his time in office could well shape what might follow.