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Oil Prices Gain 2% on Tightening Supply

Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Trump Needs Higher Oil Prices For His Infrastructure Plan

Trump

President Trump is asking the Congress to approve $1 trillion worth of investments in U.S. infrastructure, financed through both public and private capital. Although no specific sources of such an investment have been identified, the White House ‘An America First Energy Plan’ – a follow-up to the President’s campaign pledges – states that America “must take advantage of the estimated $50 trillion in untapped shale, oil, and natural gas reserves, especially those on federal lands that the American people own. We will use the revenues from energy production to rebuild our roads, schools, bridges and public infrastructure”.

While the Trump Administration may have plans to use the revenues generated from more drilling on federal land, opening up more federal land to drilling to finance infrastructure won’t happen overnight. The startup of that drilling and royalties paid to the federal government will most likely start pouring in only after a couple of years—likely after President Trump’s current term in office expires.

While regulation and permits are largely expected to be greatly facilitated by the Administration, federal government revenues and the companies’ eagerness to drill in new areas will be mostly driven by one key global market and economic factor of supply and demand—the price of oil. Related: Trump To Undo Fuel Efficiency Standards

Over the past two years, low oil prices have resulted in reduced federal government income from energy production. In fiscal year 2016, the U.S. government received nearly $6 billion revenues from royalties, rental costs, and other fees from activities related to energy production on federal and American Indian lands, the EIA said in January, citing figures by the Department of Interior’s Office of Natural Resource Revenue.

Between 2010 and 2013, high oil prices combined with a growth in offshore and onshore production led to an increase in federal revenues, with revenues in 2013 exceeding $14 billion. Since then, revenues have dropped each successive year, with 2016 revenues the lowest since at least FY2004. Royalties – which made up 86 percent of FY2016 revenues – are based on how much a resource was produced and its value, so low oil prices naturally led to lower revenues.

In addition, since the peak of the shale revolution, crude oil production from federal land has been dropping. According to a Congressional Research Service report from June 2016, nonfederal crude oil production has rapidly increased over the past few years, partially thanks to better extraction technology, favorable geology, and the ease of leasing. On the other hand, the federal share of U.S. crude oil output dropped from its peak of nearly 36 percent in FY2010 to 21 percent in FY2015.

But even if the Administration were to roll back regulations and open up as much federal land to drilling as possible, the price of oil, the balance sheets, and the spending plans will likely be the primary considerations of oil and gas companies tasked with drilling in new lands. And that’s not even counting the almost certain challenges in court that these pro-oil regulations would face. California is already bracing for legal disputes, with Democratic Senators pushing for bills to keep the state’s current environmental legislation from potential Trump Administration overhauls.

The opening up of more federal land to drilling is not in itself the key factor for generating revenues high enough to help finance a trillion-dollar infrastructure program. Related: Oil Majors To Boost Production As IEA Warns Of Supply Deficit

According to energy consultancy Wood Mackenzie, the most important factor for companies deciding where and when to drill is the price of oil. With current oil prices sitting just above $50, operators want certainties—they want to drill in proven areas with existing infrastructure, they want to eliminate all possible uncertainties, including how new wells perform and how much return on investment they would make. Most of the ‘certainty’ areas currently in the U.S. are situated on private property, and none of the major shale plays sit in significant portions of federal land, except for some Permian areas in eastern New Mexico, WoodMac says.

In addition, in a low-price environment, operators—no matter how nimble and resilient they have proven to be—are less likely to spend on exploration and infrastructure builds to appraise the economics of oil and gas extraction in new areas, when they could produce more cheaply in areas with more attractive—and proven—economics.

So Trump’s multi-billion-dollar revenue plan from drilling on federal land will likely depend, above all, on the price of oil, which – ironically – is currently capped by the resurgence in U.S. shale drilling.

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By Tsvetana Paraskova for Oilprice.com

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  • Lee James on March 07 2017 said:
    Not sure our U.S.A. is looking realistically at unconventional petroleum. We see it as "the answer." That's because there aren't too many good crude-supply answers left in North America. Sometimes, we look good relative to the politics of other parts of the world ....

    Challenges with tight oil, deep water, and tar sands are: extent of economic reserves, high-cost of production, and caution over where financing rates are headed. oh -- and we used to worry about regulation and cost of pollution.

    I hope our nation has a back-up plan for how we're going to pay for infrastructure. But when it comes to electric grid modernization, wind and solar generators can contribute to that. It's the cleaner direction that our country needs to be going in -- for our health, clean air and water, and for jobs with a good future.

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