The end of the shale revolution? Biden’s policy and the cost of oil

Should The U.S. Ban Fracking?

Is the ban on oil and gas production on state lands and the sea shelf dangerous for producers??

Can exercise "green" Joe Biden’s programs lead to higher oil prices? Is the ban on oil and gas production on state lands and the sea shelf dangerous for producers? Can the Kremlin count on rising oil revenues during the Biden presidency? "Nord Stream – 2" not needed, but we will not stop?

We are discussing the possible consequences of the first decrees of US President Joe Biden aimed at the transition to renewable energy sources with economist, former adviser to the governments of several countries, Johns Hopkins University professor Stephen Hanke, energy specialist, professor at Columbia University Natasha Udintseva and partner of a consulting company "Rusenergy" Mikhail Krutikhin.

New US President Joe Biden, without wasting a day, began to fulfill his campaign promises. During his first working week at the White House, he signed 42 presidential decrees – an unprecedented number. At least two decrees contain measures aimed at reducing carbon dioxide emissions into the atmosphere and achieving, according to the text of the documents, "environmental justice". Joe Biden withdrew permission to build the Keystone XL pipeline, banned licenses to drill new wells on government land and offshore, and asked government agencies to review the use of the licenses. Although the federal states make up a very small percentage of the territories in which shale deposits are being developed, skeptics saw the president’s move as a symbolic leap towards curtailing the shale revolution. They believe he can push matters to the cessation of US oil and gas exports and higher energy prices. The future, however, is not so obvious and predictable. It is possible that a side effect of President Biden’s environmentally sound initiative will be to give a second wind to the American shale industry, which requires higher oil prices for its prosperity. And Steve Hanke believes that the rise in oil prices is inevitable in the foreseeable future:

– In the near future "green" Joe Biden’s initiatives have the potential to have a dramatic negative impact on oil and natural gas production in the United States, especially shale production, – says Steve Hanke. – First, if the Biden administration stops issuing new licenses to develop deposits on state land and intends to revise existing licenses, then you will lose a significant percentage of the oil fields in the future. Second, if the Keystone LX pipeline is banned to transport Canadian oil to US refineries, you reduce oil market access. That is, the federal government is imposing bans that will no doubt hinder production. On the other hand, the artificial limitation of supply causes the price of the product to rise and stimulates its production, which means that shale deposits will become more attractive to large companies with funds. Now this industry is in a relatively precarious position due to the high indebtedness of many producers who took out loans to develop unprofitable fields with low oil prices. For them to survive, the price of oil, as far as I understand, must be significantly higher than $ 50 per barrel. If the policy of the Biden administration leads to a rise in prices in the medium term, this will increase interest in investments in shale production, in the exploration and development of shale oil and gas fields..

– Predict how much oil prices might rise?

– I really think that prices will go up primarily due to artificial restrictions on production. After all, it was American shale oil that became the main factor that radically changed the situation in the world oil market, turning the United States into the world’s main producer of energy resources. In terms of the level of price increases, this is impossible to predict. As long as government policy in the United States and, by the way, in many other countries remains, I would say, hostile towards oil and gas producers, the prices of their products will remain overpriced..

– Are you completely discounting renewables as a competitor to oil and gas, professor? After all, Europe produces almost half of its electricity thanks to them. They even write that the cost of energy generated from the sun and wind is lower than the cost of energy produced from hydrocarbons.?

– I – per "green" energy sources, if their development is approached rationally. While much of what is proposed, in my opinion, is irrational. Consider the idea of ​​achieving so-called carbon neutrality by 2050. The people proposing such plans have no real idea of ​​the price that will have to be paid to implement these ideas. Government-run infrastructure projects cost, on average, fifty percent more than initial estimates. They never finish on time. Lots of "green" companies that received government loans under "green" the Obama administration’s programs failed, they went bankrupt. The data on the low cost of solar and wind energy is hard to believe. Both of these sources are unreliable. You cannot rely on them in the absence of sun or wind. There are no powerful batteries that would serve as reservoirs of such energy. Sooner or later the necessary technologies will appear, and then it will be possible to speak of this energy source as a serious competitor, say, to natural gas. But so far, for example, Germany’s renewable energy has reached only 15 percent of its design capacity. It is very ineffective.

– Could the Biden administration’s plans affect the fate of the pipeline? "Nord Stream – 2"?

– Forget about sanctions and various difficulties! I think the gas pipeline will be started up. The fact is that the United States is currently viewed in Germany as an unreliable supplier of liquefied gas. And the main consideration – Germans are uncertain about the viability of the American shale industry and the ability of the United States to export gas. At the same time, their relationship with Russia, as a supplier of natural gas, has been tested for decades, they know that Russia needs their money, and the largest German companies, including BASF, are supporting the launch of the gas pipeline. In other words, Germany wants an additional source of natural gas, and they intend to get it. They understand that if economic decisions are made by politicians, and not dictated by market demands, then this promises surprises in the future. And that’s bad, – says Stephen Hanke.

Natasha Udintseva doubts that the measures taken by President Biden will react sharply negatively on the American oil industry, because the so-called "green" the economy is already establishing itself naturally in the United States.

– Biden’s decrees only apply to federal states, – speaks Natasha Udintseva. – This is 10 percent of the entire industry in the United States, which is engaged in the exploration and development of oil. Therefore, these are, in principle, not such large numbers. Plus, in August, September, October, our entire industry here as a whole was ready for this, so everyone bought mining permits with terrible force. And those permissions that have already been sold, they are not canceled. The only thing that Biden made real, – suspended licenses for federal lands in Alaska. Again, he set a temporary moratorium on this, a temporary ban. So it seems to me that this is a lot of ado about nothing, at least for now.

– Do you think President Biden’s actions threaten shale oil and gas companies??

– I would say the opposite – it will help them. Because this decision will really lead to a rise in oil prices. American companies, just like Russians, want higher prices, because the main problem for American companies was precisely that prices are not very high and demand is not very high. This was a problem for American oil shale investors who were not getting good returns. Therefore, money began to leave this industry a little. As soon as prices go up, the money will come again. So, the question is: will prices go up if the entrance of American companies to federal lands is limited? Most likely, we can assume that prices will go up a little. Here you can guess on the coffee grounds, because we do not know how, in principle, the energy itself will develop. We are emerging from the crisis caused by the pandemic very slowly, like a turtle. The entire global economy will probably begin to gain momentum in a year, and then, of course, oil will still be needed. We are not yet at the level where oil is not needed. If oil is needed, and the supply is insufficient, then, of course, all this will take off and again investors will carry their money into the industry..

– You are talking about the level when oil is not needed. Now it is impossible to imagine that this will ever happen. But is it possible to imagine the times when these renewable sources will become a real competitor to oil and gas??

– "Green" the industry, whether we resist it or not, is already part of the energy portfolio, in principle, in any country. Do you know which state in America produces the most electricity? Texas, the state with the most developed oil industry. But they understand very well, they have a lot of space, a lot of wind, they have installed wind towers, the highest percentage of electricity from wind energy is generated in Texas. No, the country is already moving towards this, I don’t think there is any kind of turning back. I think it will be an extension of this phenomenon. Now coal, oil, gas – the main natural sources of energy, then solar energy is added, wind energy is added, and this will all expand and expand.

– American critics "green" ideas say that the problem is that society is trying to impose costly, yet ineffective "green" technology, which will lead to an increase in the cost of living, while America, for example, has sharply reduced carbon dioxide emissions into the atmosphere, simply by switching many power plants to natural gas.

– Yes, it’s true, it reduced emissions thanks to natural gas, because natural gas just turned out to be cheaper. You know, all this will happen when there are economic incentives. When we say that our country has reduced greenhouse gas emissions, it has reduced it precisely because there was a lot of natural gas, it became cheaper to use it. In those regions where it was cheaper, they began to use natural gas, and in those regions where coal remained cheaper, coal remained there., – speaks Natasha Udintseva.

On the possible trajectory of oil prices and whether "green" Joe Biden’s strategy to bring dividends to the Kremlin, we speak with Mikhail Krutikhin.

– Trump did everything to ensure that prices developed in two directions, – says Mikhail Krutikhin. – Within the United States, for oil prices to go down, gasoline and diesel fuel prices at gas stations would be lower, there would be more incentives for oil refining and the development of petrochemicals inside the country, and prices on the external market, global oil prices, would rise. He opened the licensing of sites in federal territories. It opened access to a part of the continental shelf, where access to miners was previously closed. He lifted a lot of restrictions on obtaining permits for organizing the export of liquefied natural gas, for example, he gave permission for the construction of trunk pipelines, in particular an oil pipeline such as Keystone, which could deliver Canadian heavy oil, which the United States needs, since in the United The states produce very light, low-sulfur oil, but enterprises also need heavy oil. If oil production from Canada is slowed down by the cancellation of the Keystone project, then the United States will have to increase its oil production from sources such as Venezuela, as it did before, and the Persian Gulf. That is, to increase the United States’ dependence on imported oil, including from those places where American policy is not always viewed favorably. I do not exclude that these steps by Biden, the renewal of the ban on the construction of an oil pipeline from Canada, he is going to cancel licensing in the federal territories, all this may negatively affect the potential for production and the potential for export of energy resources from the United States..

– You described a fragment of what is called the US shale revolution, which has transformed the US into the world‘s leading energy producer. President Biden intends to severely restrict, if not ban in the future, drilling in federal lands. The ban will affect mainly companies involved in the development of shale deposits. There are reports that these companies are already having problems with lending and refinancing their debts. Can the new administration end this revolution by creating problems for the oil shale industry??

– Yes, some small producers file for bankruptcy under Article 11. Production does not cease, firms go to new owners, they restructure their debts, and so on. I wouldn’t panic here. Apparently, if in 2021 in the United States, oil production from shale rocks may stabilize somewhat, but not fall at current prices, then next year the smooth growth of oil production in the United States is expected to continue..

– How can prices behave in this situation? They have risen perceptibly in recent months?

– There is no shortage of oil on the market. There will be a need for oil somewhere on the globe – instantly, oil producers will fill this gap. There is no deficit, and absolutely not expected in the coming years. Therefore, from the point of view of the balance of supply and demand as a factor in oil prices, this balance has ceased to play a significant role. The rise in prices, which is now happening, Brent crude rose to 55–56 dollars per barrel, it is explained by the expectation of an injection of money into the economy. Based on these expectations, prices went up, despite the fact that the industry seemed to be dormant due to covid, for many reasons. At the same time, the prices for what this industry should produce suddenly went up – from copper and steel to oil. That is, on the expectation that there will be a lot of money, it is necessary to invest there, to play on it, in the speculation market prices went up. And speculation now, as I said, is the leading factor in determining the oil price.

– Speculation, in general, normal market behavior in anticipation of an increase in demand.

– I believe this is abnormal market behavior. Because, nevertheless, with regard to the production of raw materials, one would expect that the balance of supply and demand would affect prices, and not without speculation with all sorts of futures and papers. The financial market plays the leading role in our country, not the physical market, I believe that this situation is completely wrong. This will continue as the financial market will determine everything. Now they say that two tankers were delayed in delivery, and this had an impact on the price of oil. All this is nonsense, of course.

The end of the shale revolution? Biden's policy and the cost of oil

– Does it follow that you will not undertake to predict what will happen to oil prices??

You need to look at the main thing – on the behavior of the financial market. Index S&The P 500 rises on the New York Stock Exchange, the price of oil trails behind it, as soon as it sinks, oil instantly drops somewhere in the derivatives market. When we see that the expiration of first the options is approaching, and then the monthly futures contracts themselves for the right to buy oil, then again we see a game in the market, comrades are fighting for a certain price, about 25 cents up, 25 cents down, there is a struggle, here it determines the movement of prices.

– Michael, unlike you, Stephen Hanke believes that the uncertainty surrounding the future of the US shale industry during the Biden presidency promises an increase in oil prices in the foreseeable future and profits for the Kremlin. But a more interesting question – what can the Kremlin expect in the more distant future? If a "green" will the strategy work? It has just been announced that General Motors intends to move entirely to electric cars. If about half of Europe’s electricity is already generated from renewable energy, how long will Europe need Russian oil and gas??

– Europe has not yet reached half of it, there is a very large spread in different countries. But in principle, the production of electricity from renewable alternative sources is approaching somewhere around 40 percent. The cost of solar and wind energy actually beat coal long ago, naturally, oil and gas are next.

– What does this mean for Russia, for the Kremlin? After all, Putin continues to speak, if I am not mistaken, about the great prospects for the export of oil and gas.?

– They even woke up, even if the president started talking about it. Literally a year and a half ago, he signed the doctrine of Russia’s energy security, which stated that all these focuses with renewable sources, with energy efficiency, with energy saving – these are all the challenges and risks for Russia, and Russia must fight them and continue to follow the path of relying on fossil raw materials. Most recently, he said: yes, we need to prepare for the fact that the demand for oil will fall as a result of such transit, the transition to more "green" types of energy, we are already preparing for this. Although the preparation of Russia is proceeding more with bureaucratic statements than real, but the realization of this has already come somewhere, has reached the very top.

­– But while even the current oil prices seem to be enough for the Kremlin to survive the pandemic relatively calmly, Biden’s energy program can apparently promise him new profits.?

– Russian state revenues jumped over the past year for two reasons – this is a drop in demand for oil, and, by the way, there was a very strong change in demand for gas, revenues fell very much. But when oil prices went up, we still see that Russia is safely using the extra trickle of incoming money. Since according to the Russian budget, if oil costs $ 42 per barrel, then this is a cut-off price, everything that Russia gets on top of this price, – this goes into accumulation in the National Welfare Fund, in the sovereign fund. And it is replenished every month, it becomes more and more, Russia’s gold and foreign exchange reserves are growing as a result of oil exceeding this specified level. So here, in spite of the fact that both production fell and revenues fell last year, the economy is doing quite well and has some chances to last further. In order for it to be dealt a serious blow, it is necessary that the demand for Russian oil should be reduced or even further, I am not talking about gas, there are not such large amounts and shares, and for prices to be below $ 40 per barrel, then the period will really come rather critical, when it is necessary to draw money from a box, from a sovereign fund to support the budget.

– In other words, figuratively speaking, these high oil prices will be enough for Putin’s age, if there is a surplus of profits even during the crisis season.?

– So far, yes, but we must look ahead. And if you look ahead, very interesting factors will work there, many factors at once. Factor number one – this is an objective deterioration in the quality of Russian oil reserves. The reserves are becoming more and more expensive to extract, according to official figures, 30 percent of oil reserves remain that can be extracted at current prices, 70 percent require prices somewhere around 70–$ 80 a barrel to be profitable to mine. Oil companies are very intensively exploiting the remaining cheap oil in order to make some profit, and ignore access to new sources of oil, to new fields, where they will have to endure a negative cash flow for a very long time. Second factor – it is that Russian companies had to cut production under the pressure of the government, which promised to do it OPEC +, the Saudis and others. Production cuts in Russia very often follow the path when it will be impossible to restore the previous level in the future. The point is that most of the oil wells in Russia produce very little oil, they are low-rate. That is, it is good if they give 7–8 tons of oil per day, for comparison: Saudi wells – one to two thousand tons per day. If they are to be closed now, then there is no commercial sense in restoring them again. Oil companies do not want to engage in new projects, new fields, for the reason that they do not have stability. First of all, they do not know what will happen to taxes in a month, let alone a few years, and any new project – this is a negative cash flow of 7 to 15 years, and oil companies currently do not have such a planning horizon. It’s good if they calculate in three years where they will be next in the market. When they say in Russia: look, we are starting a new grandiose project on a new territory "East Oil". First: all the official data on how much and what kind of oil will be produced there., – this is complete bullshit, as the experts say. Second, this oil, which will be produced there, will be so expensive that it will be completely impossible to sell it at current prices and even at future prices. This project is conceived "Rosneft" with only one purpose – in order to maximize costs and put some additional income into the pockets of officials at these gigantic costs. This is not a commercial project at all. Therefore, Russia is very much wrong with the prospects for oil production. You can recall the forecast of the Ministry of Energy, which promises that by 2035 the volume of oil production in Russia will fall by 40 percent. 40 percent – this means Russia will cease to be an oil exporter.

– Fourteen years old – the term is long. And how objectively important is the structure for Russia "Nord Stream – 2", which, by the way, according to Stephen Hanke, will be built? Natural gas export revenues, as you said, are small, while the project has become a symbol of the confrontation between the United States and Russia..

– Let’s go over arithmetic first. There are three gas supply routes from Russia to Germany, one route across the Baltic, "Nord Stream – one", it can pump 55 billion cubic meters a year. Further through Belarus, Poland route. This is, roughly speaking, 30 billion cubic meters, and through Ukraine. It is now possible to pump 120 billion cubic meters a year through Ukraine to Western Europe, but it pumps less, because there is no need for so much. More than enough to satisfy Germany. "Nord Stream – 2" – it was just a gift to Russia, "Gazprom" Germany in order to turn it into a hub, from where it, waving its political banners, would supply Russian gas everywhere, all the way to Italy, throughout Western Europe. It was very beautiful, the Germans really liked it when they get one more such gate for free. And for Russia, a Russian project, like that of "South Stream", like u "Nord Streams", there were only two goals. The number one goal was Putin’s geopolitical one. He decided that it was necessary to punish Ukraine by depriving it of transit, Ukraine would lose two billion dollars in revenue a year. At the same time, for any geopolitical goal of Putin, his friends immediately begin to parasitize, who make the implementation of this goal dependent on huge expenses for it. That is, in order to create "Northern" and "South Stream", they asked Putin for money to build a new gas transmission corridor to Yamal, although the old pipes and the old powerful system were able to deliver this gas to the western borders in Russia quite efficiently, it is still workable and will work for a long time. They have achieved this new corridor. They got and sawed that money of theirs buddies – Rotenberg, Timchenko and so on. This was the second selfish target. The first, geopolitical, completely failed when the US Congress imposed sanctions and "Gazprom" was forced to sign a new transit agreement with the Ukrainians on unfavorable terms, by the way, for five years. That is, it was the merit of the American Congress. And these guys who built unnecessary pipes for anyone, they got money.


The end of the shale revolution? Biden's policy and the cost of oil