America’s shale story has a new chapter in the offing

Joe Biden’s election to the highest office in the US is likely to hold implications on the country’s shale gas and oil exports

Will the two senate run-offs in Georgia, both of which went to the Democrats, make it easier for the Biden administration to steer a more progressive climate agenda?

The question is as consequential as it is hard to answer. Since 2014, riding on fracking, the United States has upturned global energy markets. Till September 2013, it was the world’s biggest importer of oil. By the autumn of 2018, however, the country had pushed aside Russia and Saudi Arabia to become the world’s largest oil producer. By the end of 2019, it had become the world’s third largest exporter of liquefied natural gas (LNG) – and counted amongst the top ten oil exporters.

The fallouts have been extraordinary. Shale, costlier to extract than oil wells like the ones in the middle-east, becomes viable whenever the price of oil rises beyond $50 a barrel. And so, after years of pushing oil prices as high as $100/barrel, OPEC found a fresh ceiling – whenever oil prices rose above $50/barrel, US production began kicking in, forcing prices down.

As the US tasted energy independence, its interest in keeping the middle east ‘stable’ reduced. As oil prices fell, smaller producers like Nigeria saw their oil revenues shrink. As US exports rose, countries like India saw intensifying competition between Russia, Saudi Arabia and the USA.

For all these reasons, since November last year, when Biden/Harris defeated Trump/Pence, energy sector executives and observers have been wondering if Biden, given his statements on climate change, would push shale – and energy exports – as enthusiastically as Trump did.

A hard question to answer

Uncertainty surrounds that question. Till the November elections, while the Democrats’ manifesto was explicit about fighting climate change – rejoining the Paris climate agreement; pushing clean energy; boosting energy efficiency; and instituting curbs on both fossil fuel exploration and emissions – it maintained a careful silence on fracking.

One reason was politics. Speaking out against fracking, as Quartz wrote, would have been political suicide in “swing states like Pennsylvania and Ohio where fossil fuels still rule.” And yet, silence over fracking ran deeper than a pre-poll tactic. The Democratic party is split over fossil fuels. While Biden has ruled out any ban on fracking, the left-wing of the party, leaders like Bernie Sanders and Alexandra Ocasio-Cortez, want fracking banned and oppose any expansion of natural gas in the power sector.

Even after the November elections, uncertainty remained. One reason were the two Senate run-offs in Georgia. “Without control of the Senate, the White House will be seriously constrained when it comes to policy ambition,” Charles K Ebinger, a former director of Brookings’ Energy Security and Climate Initiative, had told Carbon Copy last November.

Then came January

That uncertainty ended on the January 7, with Jon Ossoff and Raphael Warnock winning both run-offs for the Democrats. Now, with Democrats and Republicans controlling fifty seats each in the Senate – with vice-president elect Kamala Harris having the tie-breaking vote — the Democrats have a slim majority.

To pass, however, legislations need to muster sixty votes – which necessitates cooperation by some Republicans. “I would not expect very progressive climate and energy policies to receive a majority,” says a US-based natural gas researcher on the condition of anonymity. What this slim majority does, however, is ensure the Senate approves President-elect Biden’s staff picks – like Deb Haaland, expected to be in charge of the Dept of Interior.

This is critical. Legislation is not the only way to push progressive climate policies. Fracking can be reined in through tightened administrative regulations as well that increase the cost of capital for the sector – like requiring banks and investors working with energy companies to account for investing in risky assets; and tighter methane emission norms. Haaland, for instance, is expected to limit oil and gas drilling on public lands.

And yet, given this (limited) scope of action, expect a slowdown in fracking and energy exports – not an outright ban.

Given the slim majority in the Senate, said the energy researcher quoted above, “So far most announced envisioned appointees are centrists and I think that, together with the slim majority, is a pretty decent indication of what to expect going forward.”

The outlook for fracking

A bigger challenge to the sector comes from its own worsening economics.

At the start of 2020, frackers were on a high. Output had crossed 13 million barrels/day in February. Then came Coronavirus. By the end of the year, collapses in demand had pushed production down by almost 1 million barrels/day. This decline is expected to continue, with production dropping to 11 million barrels/day in the second quarter of 2021. With oil prices between $35-$40, firms are closing down. Other firms are consolidating, turning to mergers and acquisitions as they try to survive.

In this landscape of distress, it’s unclear if Biden will step in with a bailout. While campaigning, he spoke about the need to cut fossil fuel subsidies. At the same time, interest from people willing to finance the sector is weakening as well. As books like Bethany McLean’s Saudi America show, subsidies – and investors – have played a large role in keeping shale afloat. Even before Covid-19, the industry was buckling under high debts and shareholder discontent. “Lenders and PE firms have lost their patience with a sector that has not proved able to generate stable returns, and will instead look for other places to lend/invest,” agrees the energy researcher.

It remains to be seen, he added, if states step forward with incentives to push shale. “Their interest in doing so given the number of associated jobs and (tax) revenues is fairly straightforward in the current economic environment.” Even then, between cooling investor interest and overcapacity in gas infrastructure, he doesn’t expect more than “one or two new LNG liquefaction facilities” to reach FID (final investment decision) — or none given the oversupply.

Existing projects, however, will be around. That is partly because most shale production occurs on state and privately held land. The Biden administration cannot curb this production — it can only curb granting of leases on federal land and enforce environmental laws more strictly. “Given its abundant shale reservoirs and the infrastructure already in place, the U.S. will continue to be the global leader in natural gas production,” says a report by US’ Institute For Energy Research.

However, with Biden promising 100% clean renewable energy by 2035 in electricity generation, buildings, and transportation, shale oil and gas will face rising competition within the USA from renewables – while facing a parallel rise as compliance costs become more stringent.

This creates a new question.

Will the USA go the China way?

China, even as it pivots to renewables, continues to set up thermal power plants elsewhere.

Could the US end up doing something similar — pivoting to clean energy domestically while continuing to export shale oil and gas? Consider shale’s economic dividends. By 2019, as Daniel Yergin writes in The New Map, the sector supported over 2.8 million jobs; reduced US trade deficit by $309 billion; and incremental economic activity alone around the sector was projected to generate as much as $1.6 trillion between 2012 and 2025 in federal and state revenues.

There are two issues at play here. First, state financing of new fossil fuel projects around the world. “The Biden/Harris climate plan was very critical of China for annually financing billions of dollars of dirty fossil fuel energy projects across Asia and beyond,” says Han Chen, an energy researcher with NRDC. She adds that far from financing fossil fuels, the plan promises to make the Export-Import Bank and the new U.S. International Development Finance Corporation (formerly the Overseas Private Investment Corporation (OPIC) — institutions through which the US has financed fossil fuel projects like the controversial Mozambique LNG project in recent years — significantly reduce the carbon footprints of their portfolios. “If it sticks to this commitment, the Biden Administration won’t be promoting gas overseas with financial support,” says Chen.

A second question has to do with energy exports by American firms – like Dominion, Cheniere and Tellurian. Under Trump, such exports were a major focus. “The US is moving ruthlessly,” a Delhi-based energy consultant had told Carbon Copy after Trump’s visit to India. “India needs deals in areas like defence and global negotiations and they won’t sign unless we buy energy from them.”

Will that continue? Carbon Copy‘s questionnaire to USISPF (United States and India Strategic Partnership Forum) asking if governmental support to shale firms would change did not get a response. “Since LNG exports have now been allowed since around 2016,” said Chen, “it is indeed still a question whether Biden or Congress would ban exports again across the board.” At the same time, she said, “even a subdued push for exports – through bilateral visits and closed door meetings – would be quite controversial, not to mention counterproductive for the efforts of the US on climate, i.e. the job of someone like John Kerry, Special Presidential Envoy for Climate, who is trying to ask other nations to take more ambitious climate action.” (A growing body of research shows emissions from US LNG export are much higher than what US EPA assumes, which means LNG exports are a significant climate threat.)

Indeed, according to a Delhi-based energy sector watcher who attended a Chatham House discussion in November where industry executives like Charles Souki of Tellurian spoke, the prevailing consensus was that the new administration would not push deals as aggressively. Companies will have to scout for their own deals.

Price is the big variable here. Not only are Biden’s curbs on shale expected to push US oil and gas prices higher, he is also expected to take a more conciliatory approach towards countries like Iran and Venezuela, which may bring another 3 million barrels/day of oil into the global market – keeping global spot prices down.

That will further stack the deck against shale.

Wait and watch, essentially.