[Editor's note: A version of this story appears in the August 2018 edition of Oil and Gas Investor. Subscribe to the magazine here.]

The Washington Hilton’s location is easily triangulated by Ivanka Trump’s house to the east, Washington, D.C.’s DuPont Circle to the south and multiple displays of graffiti for the then “missing” First Lady.

Along streets, Melania Trump was depicted as a Where’s Waldo character with a cartoon bubble reading “Where’s Melania?”

Inside the safe bubble of the Energy Information Administration’s (EIA) conference, however, politics and policies once lauded by oil and gas companies were showing signs of souring. President Donald Trump’s steel and aluminum taxes on allies and adversaries alike have injected trade war fears into a recovering oil and gas industry with a growing stain of uncertainty.

More recently, the tit-for-tat trade war with China resulted in retaliatory tariffs on several U.S. goods, including crude oil exports. Since 2017, China has increased its imports of U.S. oil and is now only rivaled by Canada in consumption.

The spillover of some trade policies, which are already hurting a variety of U.S. companies, may fall on the hottest shale play in the Lower 48, the Permian Basin.

In a June 28 letter to Trump, Texas Gov. Greg Abbott asked the president to reconsider the tariffs, arguing that they “could jeopardize the livelihoods of hundreds of thousands of Texans and other Americans employed in the oil and gas industry.”

In 2017, Texas imported $8.3 billion in steel and aluminum that were “crucial for the construction and maintenance of drilling wells, pipelines and other infrastructure,” Abbott said. The Permian may also squander its potential in the face of tariffs that continue to drive up oil and gas production costs, he said.

Deborah Byers, U.S. energy leader for EY, said China’s decision to impose tariffs on oil should be mitigated by alternative outlets for U.S. crude.

The more pressing challenge is the indirect impact on the steel supply chain, which “will likely be the main issue for companies.”

“Steel tariffs could potentially affect the cost and timing of several new pipelines, proposed to alleviate current constraints in U.S. oil and gas production,” she told Oil and Gas Investor. “The project promoters have filed applications for waivers for these projects, and a clearer picture of the actual impact will only emerge when the U.S. administration comes to a decision on these waivers.”

On June 5, Mark W. Menezes, the Department of Energy’s undersecretary, credited the removal of oil and gas regulations and the development of clean coal technologies for putting America “on the verge of energy independence.”

The U.S., he told the conference, is on track to become the net exporter of multiple energy sources and the technologies and know-how that produce these fuels.

“Moving toward energy independence, America is untying the hands of their leaders enabling them to conduct foreign policy in a way that advances this nation and its allies without fear of energy blackmail or retaliation from countries we have previously been dependent on,” he said.

The U.S. is also supporting its allies by exporting energy and “liberating our friends from the dependence on countries that have wielded their energy [resources] as a political weapon.”

Menezes’ message, however, was undercut by events already in motion as well as an unforeseen confrontation with U.S. allies.

‘Unjust’

Greg L. Armstrong, chair of the National Petroleum Council and CEO of Plains All American Pipeline LP (NYSE: PAA), opened the conference by lauding the EIA’s quality of data and the innovation of upstream companies. The EIA had been under fire by prominent oil and gas executives for what they saw as exaggerated production figures.

Addressing tariffs, Armstrong, whose company has asked for an exemption from the tariffs, said paying additional taxes on the steel is “in our view, unjust.”

“A lot of the steel pipe we’re buying right now is not made in the U.S.—the size and specifications,” he said. “We don’t think we should have to pay a tariff on something we can’t buy in the U.S.”

He noted that petroleum exports have also helped balance trade, with each 1-million-barrel reduction in petroleum imports reducing the U.S. trade deficit by $24 billion per year.

The Permian promises to continue driving oil production growth, if it can escape the basin. As a standalone country, the Permian would rank seventh among the world’s top liquids producers, he said.

While midstream companies are working to alleviate pipeline bottlenecks, crude oil differentials have ballooned from $1 per barrel (bbl) of oil to $12 to $13/bbl.

“Basically everybody is trying to get on a ship and there’s no space available, and the price for the tickets go up,” Armstrong said.

The drop in realized prices forced Halcón Resources Corp. (NYSE: HK) on June 19 to reduce its operated rig count in July from four to three.

Nevertheless, the steel tariffs are preferable to quotas, which would have effectively put a halt to some projects.

“We had steel headed our way and we weren’t sure if we would actually be able to unload the steel because of the quotas,” Armstrong said, adding that “80% of a pipeline doesn’t do us any good.”

“It’s kind of like building half a bridge. You have to finish it out to move production,” he said.

In a request to the U.S. Commerce Department, Kinder Morgan Inc. (NYSE: KMI) noted that its 514-mile Gulf Coast Express Pipeline project would be a major conduit for natural gas and oil production out of the Permian. The $1.75-billion pipeline will be constructed with about $500 million worth of U.S. manufactured steel.

However, domestic pipe mills were unable to provide specialized steel that Kinder Morgan and its partners need to begin operations by October 2019. The company secured 47% of its steel from a Turkish supplier.

Plains All American similarly wrote to the Commerce Department, saying that no domestic supplier was technically able to manufacture a specialized 26-in. pipeline it needed.

“Delays in new Permian Basin infrastructure would perpetuate capacity constraints, thereby diminishing the ability to bring additional barrels to market, which help support the overall U.S. economy,” the company said in an April letter.

Liquefied

China has indicated that it may impose further duties on U.S. crude imports, but it hasn’t levied tariffs on LNG imports. (Editor's note: China included LNG for the first time in its list of proposed tariffs on Aug. 3.)

The U.S. has become a formidable oil exporter to China during the past 18 months, a period in which Saudi Arabia, Russia and others curtailed production, said Michael Tran, an analyst at RBC Capital Markets.

“Given escalating tariff talks between Washington and Beijing, the Chinese could ease imports from the U.S. in favor of long-standing relationships like Russia, Saudi” and other Gulf Cooperation Council countries for incremental barrels.

“U.S. crude exports could be the first to be muscled out, leaving barrels searching for placement over the coming months,” Tran said. “This has clear read-throughs for the near-term WTI-Brent spread.”

Christine Cho, an analyst for Barclays, considers the China tariffs a toss-up. While U.S. oil exports to China are up 10% in first-quarter 2018 compared with 2017, the impact on U.S. production and West Texas Intermediate prices should be limited in the near term “given the fungible and liquid nature of global crude oil markets,” she said.

China’s 25% tariff on propane exports may also have minimal effect since China is unlikely to “find a cheaper propane source overnight,” she said.

LNG is likely safe for now.

“China has indicated that it may impose further duties on U.S. crude imports, although LNG remains unaffected,” Byers said. “Companies now need certainty so they can move beyond this period of unease.”

China’s coal-to-gas initiative drove a 12-million-ton-per-annum (mtpa) increase in LNG demand in 2017, Cho said. Chinese LNG is expected to increase by 10 mtpa in 2018 and another 9 mtpa in 2019.

As a key player in the LNG trade, its exports are expected to account for 30% of global LNG supply growth in 2018 and another 45% in 2019.

A tariff on LNG could “pose a challenge for Chinese buyers and a hurdle to achieve its coal-to-gas initiative targets,” Cho said.

Darren Barbee can be reached at dbarbee@hartenergy.com.

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