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Conservative rates of spending on new oil and natural gas production are expected to put more upward pressure on fuel prices as global demand inches higher alongside war-related supply disruptions.
A number of large U.S. oil and gas companies have been forward with investors about their decisions not to increase production in response to high prices, preferring instead to exert “capital discipline” and drive profits toward paying down debts and shareholder returns.
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That approach is contributing to tightness in the market, some industry players say, warning it could add even more pressure now that Russian oil production is falling and being increasingly shunned by the West and as China’s demand reemerges after COVID-19 lockdowns.
“The problem that we see with [capital discipline] is you’ve got a large producer and access to that production being taken off the table with Russia,” Sean Strawbridge, CEO of the Port of Corpus Christi, told the Washington Examiner.
“We’re going to continue to likely see higher energy prices in the near term until we can kind of balance that out with supply,” Strawbridge said, “and much of that is being constrained right now by both the capital discipline that’s been employed by the producers coupled with we still have some regulatory hurdles to get that production to the coast, where it can be processed and loaded onto vessels.”
While some energy companies have announced plans to increase production this year, others have said outright they have no plans to alter their strategies, even while U.S. natural gas prices hover around 14-year highs and gasoline breaks new records on a near-daily basis.
Independent Texas-based company Diamondback Energy said it is “committed to maintaining our current production levels” in its first-quarter earnings announcement and emphasized volatility in the oil market.
The company also said in the May announcement that leadership does consider now to be the time “to begin spending dollars that would not equate to additional barrels until multiple quarters from today given the uncertainty.”
Other independents, including Devon Energy and Occidental Petroleum, have similarly stressed capital discipline. Devon said in its first-quarter earnings assessment that it is “committed to a disciplined maintenance capital program” and that it has not amended its plan to sustain production of between 570,000 to 600,000 barrels per day.
Strawbridge, who as head of the port oversees the passage of around 60% of all U.S. crude exports, said a mix of factors have driven many in the industry to take this capital approach: demand destruction caused by the pandemic, a flight of capital from the sector due to many investors’ preferences for greener options, and a regulatory environment that he said “has not been very friendly” to energy producers who need more pipelines to transport product.
At the same time, fuel demand has rebounded, and oil has been trading near or well above $100 per barrel for most of the year, with Brent crude futures opening again near $123 per barrel Friday. Treasury Secretary Janet Yellen told the Senate Finance Committee on Tuesday that these factors have given the industry incentives to increase production.
Production has been rising in response, albeit slowly, noted Ben Cahill, senior fellow at the Center for Strategic and International Studies.
“The supply response has been really slow. It’s coming — it’ll be backloaded towards the end of this year and into 2023,” said Cahill, who focuses on commodities markets for CSIS’s Energy Security and Climate Change Program.
“It’s not at the rate of growth that you would expect with prices at this level,” he added. “Producers are still sticking to the capital discipline mantra, even at $120 [per barrel].”
Another driver of slower growth is that writ large, producers are relying more on exploiting “drilled but uncompleted wells” rather than ramping up rigs to drill new ones, which have higher initial yields.
“Rig counts are still below pre-pandemic levels, so there will be likely a plateauing [of output] as we continue to see this capital discipline from the sector,” Strawbridge said.
Oil and gas executives have rejected accusations, coming mostly from the Biden administration and congressional Democrats, that they are unduly profiting off of the war in Ukraine and milking high prices.
“They’re not drilling. Why aren’t they drilling? Because they make more money not producing more oil,” President Joe Biden said Friday.
Producers and trade associations have pointed to supply chain constraints, including difficulties acquiring steel and rigs and hiring workers. The industry lost some 20% of its workforce in recent years because of COVID-19’s effect on demand and associated layoffs, according to analytics firm Rystad Energy.
All the while, oil and gas companies have done especially well over the past few quarters thanks to these conservative growth strategies and higher prices.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
Cahill said he expects the holdouts to change course, especially if crude remains at current levels.
“If we have a few quarters of $120 oil and companies don’t change their tune on capital discipline, something’s wrong,” Cahill said. “They should be able to raise output incrementally and still deliver high returns. If not, they’re leaving money on the table.”
