Oil and Gas Investor At Closing: A Taxing Spring

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[Editor's note: A version of this story appears in the May 2021 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

Just over a year ago, when the price of oil went negative, people who care about the oil patch were shocked to their bones. But they have stood back up to prevail once again. The rig count is creeping back up. U.S. oil production is likewise inching up again, lately right around 11 MMbbl/d, although it is still below pre-pandemic levels by about 2 MMbbl/d, or 15%, according to the Energy Information Administration (EIA).

Coincidentally, on April Fools’ Day, OPEC+ announced it will gradually return 2 MMbbl/d to the market over the summer through July.

The balance is delicate between what happens here and how much global demand there will be this year. We’re getting dizzy on the seesaw between extended lockdowns versus more people getting COVID-19 vaccinations, not to mention by how much U.S. shale production increases from here. If oil continues to bounce around $60/bbl, that’s good; most plays have a breakeven price of $45 to $60, analysts said.

U.S. gas production has been aiming higher too. LNG exports are doing the same: send-outs in March were a record. Venture Global LNG’s export facility and a sixth train at Cheniere LNG’s Sabine Pass facility will ship their first cargoes later this year, ahead of their originally proposed schedules. Cheniere’s third train at Corpus Christi came online in March. Total LNG feed gas demand is now about 11 Bcf/d, according to RBN Energy.

Never say die. But at what price?

Jobs are coming back, albeit too slowly for many. That is one heavy price.

Another heavy price: what we are willing to pay for using fossil fuels, both in a monetary sense and environmentally. We’ll debate this in more ways than one.

The Biden administration, Congress, some of the largest oil companies, money center banks and others must try to solve the dilemma of the decade: how to provide enough clean, affordable energy without harming the atmosphere and without tanking an industry that employs millions.

Should tax breaks for oil and gas producers be killed off? Should gasoline be taxed higher to pay for road and bridge infrastructure?

Shouldn’t the free market and American entrepreneurs and inventors be left alone to solve this?

Should governments incentivize energy changes or mandate them?

Should big banks like J.P. Morgan Chase or Citi play a new role by stepping into the debate? Some are refusing to fund any company that drills for oil and gas. Should traditional lenders implement additional criteria, such as tying their loan terms to how much a borrower has reduced its wellhead flaring or otherwise reduced emissions?

The API should be renamed the American Energy Institute for its wise endorsement of energy supply consisting of any and all energy sources that solve the dilemma. The API surprised many when in March it declared it would support some kind of price on carbon, which by any other name is a tax on end users. The fallout was fast and furious.

“The country’s leading oil lobby, the American Petroleum Institute, endorsed a carbon tax or fee for the first time in the organization’s 100-year history, demonstrating the increased risk and salience of climate issues for the oil and gas industry,” said analysts at East Daley Capital Markets.

“A national energy tax is an easy position for big multinational companies to embrace,” said Thomas Pyle, president of the American Energy Alliance, a D.C. lobbying group, “because it gives the federal government what it wants (more tax revenue); attempts to appease the greens (it won’t); and compels consumers to pay more in taxes to the federal government in the false hope of avoiding future regulations … Those who are left out of the conversation are consumers, small businesses, the poor and seniors, and those on fixed incomes—basically everyone.”

He continued, “I have been advocating for years that the House and Senate should debate and vote on a clean bill to create a federal carbon tax so that the American people can clearly see where their elected representatives stand on this issue.”

President Biden’s climate envoy, John Kerry, said it is the private sector that will ultimately lead the fight against climate change. We applaud what he said: Regulators and elected officials work best in a supporting role.

“No government is going to solve this problem,” Kerry said during a virtual conference hosted by the Institute of International Finance. “The solutions are going to come from the private sector.”

Those embroiled in this taxing debate must listen to this advice.