‘Sticker shock’ in the oil patch

One thing to start:

• I highly recommend checking out this interactive break down of Europe’s efforts to wean itself off of Russian gas.

Welcome back to Energy Source after the short break!

A world desperate for more oil is going to be paying a lot more to get it out of the ground, I report in our first item in today’s newsletter. Myles looks at a big hole in the Biden administration’s efforts to crack down on methane, the powerful greenhouse gas, in our second item. And in Data Drill, Amanda has numbers on which American cities are putting up the most solar panels.

Thanks for reading.

Justin

Join us May 7 at our inaugural US edition of the FTWeekend Festival, where Henry Kissinger, Chimamanda Ngozi Adichie, William J Burns, Tina Brown, Jennifer Egan and more will be in attendance. Claim 50 per cent off your pass using our exclusive newsletter discount FTNewslettersxFTWF22. We look forward to welcoming you, in Washington, DC or virtually.

Oil drillers see ‘very busy years ahead’ on high crude prices

The oil drilling boom is on.

That’s the message this week from Halliburton and Baker Hughes, two of the world’s top oilfield services groups, which carry out the frontline work for oil and gas producers such as drilling and fracking new wells.

“At $100 a barrel, everything is busy,” Jeff Miller, chief executive of Halliburton, told analysts in a call this week. “Current oil supply tightness and commodity price levels strengthen my confidence in the accelerating multiyear upcycle and very busy years ahead.”

Oil prices have surged to more than $100 a barrel after Russia’s invasion of Ukraine compounded concerns over global crude supplies, which were already tight as the global economy emerged from the pandemic.

The high prices have helped fuel a rise in oil drilling activity, especially in the US.

The number of rigs drilling for oil in the US has risen to 548, up about 60 per cent over the past year. And as Myles reported in ES last week, drillers in the Permian, America’s largest oilfield, secured more new well permits in March than any month ever, another sign of the big pick up in oilfield activity.

Investor demands that the price windfall go to higher dividends and share buybacks has tempered growth at some bigger publicly listed producers, but privately held drillers that are trying to maximise cash flow by adding new wells at high prices are accelerating drilling.

“Over 60 per cent of the US land rig count sits with private companies and they keep growing, while public [exploration and production firms] remain committed to their activity plans,” said Miller, referring to exploration and production firms.

However, the expansion is running up against a wall of inflation and tight supplies for everything from rigs to steel, sand, speciality chemicals and fluids used in the oil patch.

Baker Hughes’ chief executive Lorenzo Simonelli called it the “most challenging supply chain and inflationary environment we have seen in several decades”.

Miller said Halliburton’s “hydraulic fracturing fleet remains sold out and the overall market appears all but sold out for the second half of the year”. He also warned tight supplies of labour and equipment would be a “constraint” on US growth in the coming years.

The tightness is fuelling inflation, which will ultimately push up the cost to produce oil and support higher prices. Break-even prices in big American oilfields, currently in the range of $40 to $60 a barrel, could quickly rise if inflation is sustained, increasing the price needed to support US output.

Halliburton’s Miller said he expected US oil companies to spend 35 per cent more this year than they did last year, up from an expectation earlier this year of a 25 per cent increase, largely because of inflation.

There is a sense of “sticker shock” in the oil patch, Miller said. (Justin Jacobs)

Biden methane clampdown faces mounting scrutiny

Concerns over flaws in Joe Biden’s methane crackdown have shot back into the spotlight after a new study suggested that a blind spot in the administration’s proposals could be significantly worse than realised.

A paper published in the journal Nature Communications this week found that smaller wells not subject to regular inspections under new regulations account for about 50 per cent of all methane emissions from oil and gas production.

“It’s much worse than perhaps EPA previously thought,” said Jon Goldstein, the Environmental Defense Fund’s (EDF) senior director for regulatory and legislative affairs.

“Showing that half of the problem comes from these smaller wells I think underlines the importance of getting them included in frequent inspections,” Goldstein told ES.

The study comes at an inopportune time for the administration. Just this week it went on the offensive to promote its climate achievements after criticism that the president had failed to deliver on key promises and reports that key officials were on the brink of quitting.

Biden has touted efforts to target methane emissions as an example of tangible progress on climate, even as a congressional logjam leaves much of his green plans in limbo. After reinstating Obama-era regulations of the potent greenhouse gas, the administration has directed the Environmental Protection Agency to formulate a new rule that would tighten requirements for oil and gas producers to find and plug leaks.

But the proposal has come under fire for excluding smaller wells — those deemed to produce less than three tonnes of methane a year — from regular inspections. Environmental groups argue that the rules are too lenient because, on aggregate, these wells are responsible for a significant chunk of emissions. A host of asset managers have taken a similar position.

This latest study investigated wells that produce less than 15 barrels of oil equivalent per day — which the authors said broadly correlated with those wells emitting 3 tonnes per annum of methane — and found that they made up just 6 per cent of oil and gas production but emit methane at between six and 12 times the national average. The finding that these so-called “marginal” sites contribute as much as half of wellhead methane emissions is higher than the 43 per cent previously estimated — which had already prompted concerns.

According to the EPA, the new rule would cut methane emissions by 41mn tonnes from 2023 to 2035, the equivalent of 920mn tonnes of carbon dioxide — and more than total emissions from all US passenger cars and commercial aircraft in 2019. The agency is weighing up comments on the proposal as it formulates a final version, and said it would take the study into account.

“EPA received the information contained in the Nature article during the public comment period on the November proposal,” a spokesperson said. “We are considering that, along with all other comments we received, as we develop a supplemental proposal, which the agency expects to issue later this year.”

Still, environmentalists say that if the administration is to live up to its pledge to cut methane emissions by 30 per cent by 2030 — the centrepiece of its platform at last year’s COP26 climate talks — the current proposal is not enough.

“The EPA proposal is an important step forward by the agency,” said Rosalie Winn, senior attorney at EDF. “But based on this study, we’re leaving a big chunk of potential emissions reductions on the table if EPA doesn’t comprehensively require inspections and fixing of leaks at smaller sites.” (Myles McCormick)

Data Drill

Honolulu, Las Vegas, and San Diego lead the country with the most solar capacity installed per resident, says a new report by the Environment California Research and Policy Center. The report tracks US urban solar development and found 15 cities increased their solar capacity tenfold in the past eight years.

“As Earth Day approaches, I’m struck by how far we’ve come toward tapping the sun’s immense power since this environmental holiday first began in 1970,” said Laura Deehan, state director at Environment California.

Los Angeles remains the city with the greatest total installed solar capacity. Other leading cities are scattered across the country, with San Antonio, Washington and Indianapolis among the cities with the most installed capacity per capita in their respective regions. (Amanda Chu)

Power Points

• Do you know what to do to save the planet? Play the FT’s climate game and see if you can slash emissions before it’s too late. 

• Mexico nationalises lithium as part of the president’s agenda to reassert state control over natural resources.

• France’s president Emmanuel Macron touts climate plans in an effort to win over left-leaning voters.

• Explainer: The reasons behind Germany’s resistance to nuclear power.

• Congress will face a nationwide mobilisation on Saturday to pass a climate package before Memorial day. (WaPo)