INSIGHT: AFPM '21: COVID-19 recovery, policies, tighten oil and gas markets - AFPM CEO

Author: Al Greenwood


HOUSTON (ICIS)--The economic recovery from the pandemic, declines in investment in crude output and US policies have combined to cause a mismatch in the supply and demand for oil and natural gas, the head of the American Fuel & Petrochemical Manufacturers (AFPM) said in an interview with ICIS.

At the start of the year, WTI oil prices were $47.62 and Henry Hub natural gas futures were $2.581/MMBtu.

On Friday, WTI closed at $82.28/bbl and natural gas at $5.410/MMBtu.

"It's a perfect storm of things that have come together," said Chet Thompson, the CEO of the AFPM. He made his comments on the eve of the International Petrochemical Conference (IPC), hosted by the AFPM.

The coronavirus destroyed demand for oil and gas on a massive scale, leading companies to reduce production, Thompson said.

The response was a historic reduction in oil production by OPEC and its allies, known as OPEC+.

Since then, demand for oil and gas have rebounded with the economic recovery. However, production has lagged.

In the US, oil companies are complying with investor demands to limit capital expenditures and focus on free cash flow. So far, US oil and gas companies have maintained this restraint and have limited new production despite the rally in prices.

The rig count figures released by the oil services company Baker Hughes illustrates the restraint of the nation's producers.

On 15 October, the US had 445 oil rigs and 98 natural gas rigs in operation. Prices for WTI were $82.28/bbl.

On 17 October 2014, when WTI prices were $83.08/bbl, the US had 1,590 oil rigs and 328 gas rigs.

If producer restraint eases and players try to raise production, they will run into the same shortages of labour and material that are holding back other parts of the economy, which could limit the speed of any increase in output.

A growing challenge involves financing projects.

Banks and investors are increasingly considering environment, social and governance (ESG) factors as part of their investment strategies.

The result is raising the cost of capital for fossil-fuel projects.

Amid this gap in energy supply and demand, US law makers and administrators are adopting policies and making proposals that could further restrict companies' ability to increase oil and gas production, Thompson said.

He raised concerns that US policy makers are artificially accelerating the transition away from fossil fuels and towards renewable energy.

Many of these policies are creating uncertainty about whether long-term investments in fossil fuels would pay off.

"We were coming out of an energy-first regime into one that made it very clear that they want to transition away from fossil fuels," Thompson said. "Certainly, there is a different tone, and that creates uncertainty."

He noted that US President Joe Biden revoked the permit for the Keystone XL oil pipeline on his first day in office.

Days later, Biden issued a moratorium on new federal oil and natural gas leases.

Policy makers are proposing increases in corporate taxes, methane taxes and other mechanisms that would increase taxes for oil and gas producers.

A $3.5tr spending package is proposing a plastic tax of up to 20 cents/lb ($421/tonne) to help fund the measure.

A $1tr infrastructure bill would reinstate the nation's superfund taxes on 42 chemicals at double their original rates.

On the state level, policy makers are using provisions in the nation's Clean Water Act to delay or cancel the construction of new pipelines, said Rob Benedict, AFPM vice president, petrochemicals and midstream.

Some states are considering emissions and other criteria outside of water quality that would make it more difficult to build new pipelines, Benedict said. There are even signs of growing opposition against existing pipelines.

Michigan, fearing oil spills, is seeking to end a 1953 easement for  Enbridge's Line 5 oil pipeline.

In other cases, regulators are imposing more onerous terms on permitting midstream projects, Benedict said. "We are all for a thorough review of the environmental impacts of a project, but we are getting to a point where we are creating a scenario where it is pretty much impossible to invest in a project."

Thompson raised other areas of concern involving possible reforms to the National Environmental Policy Act (NEPA) and environmental justice.

"We are not fearful in any way about having to go through that type of analysis," he said. However, companies need clarity.

"No one knows the rules right now," Thompson said. "We need to get certainty around these issues in order for these projects to have any chance."

The AFPM has acknowledged that human activities are contributing to climate change, and it voiced support for policies that would reduce emissions of carbon dioxide (CO2).

"We recognise that we have to play a role in helping to find solutions to both climate change and plastic waste," Thompson said.

The challenge is achieving these sustainability goals while meeting growing world demand for plastic and energy.

The UN expects the world's population to reach 9.7bn in 2050 from 7.7bn in 2019.

Wealth is also increasing, with some forecasting that half of the world could join the middle class, Thompson said.

The world will need to find a way to meet rising demand for energy and products without further contributing to climate change and plastic waste.

The AFPM has been promoting higher octane ratings for gasoline. Higher octane gasoline is used by automobiles with smaller internal combustion engines. Such vehicles consume less fuel because they weigh fewer kilograms.

Thompson also pointed to the AFPM's support for renewable diesel, a fuel made by treating vegetable oils and animal fats with hydrogen. The result is a fuel almost identical to petroleum diesel. Moreover, refiners can often use existing units to produce renewable diesel.

Thompson stressed its support for carbon capture and sequestration (CCS) and the group's role in lowering plastic waste in oceans. Many AFPM members also belong to the Alliance to End Plastic Waste (AEPW).

The AFPM and its members support polices that would encourage chemical recycling. Thompson said it would be difficult to meet many plastic recycling goals if policy makers rely solely on mechanical recycling.

Benedict stressed the need for a national framework to address recycling. This would prevent the proliferation of local rules governing which plastics can and cannot be recycled.

The AFPM expressed support for some policies introduced this year. It highlighted the $1tr infrastructure bill, which should improve ports and help alleviate the nation's supply-chain bottlenecks.

"The pure infrastructure - the bridges, the roads, the ports - we absolutely support," Thompson said.

Benedict pointed to Biden's executive order on 9 July on competition. That order included sections about railroad competition and improving access to shippers.

The AFPM estimates that 70% of its members are beholden to a single railroad company.

Another policy that could relieve supply chains is the adoption of 24-hour operations at the ports of Los Angeles and Long Beach for seven days a week.

The IPC ends on Tuesday.

Additional reporting by Stefan Baumgarten and Joseph Chang

By Al Greenwood

(recast paragraph 25 with different title for Rob Benedict
(removed "Earlier this year" from paragraph 32)