Buying American (Energy), Storage and Recovery

Mark Green
Posted April 23, 2020

While the natural gas and oil industry focuses on challenges from the historic drop in oil demand due to the impacts of COVID-19, keep an eye on proposals that offer the best support for this industry and, in turn, the U.S. economy and American consumers.

One idea among many – including addressing storage issues and ensuring access to capital – is to look to China as a potential buyer of U.S. energy. Makes sense: In an oversupplied global market, China appears to be a buyer. What’s more, in the “Phase 1” trade deal announced in January, China agreed to buy U.S. crude and liquefied natural gas (LNG), among other energy products.

Today, API sent a letter to the U.S. Commerce and Energy departments and the U.S. Trade Representative to suggest that some good might come from following up with China to buy U.S. energy. The letter notes that U.S. energy exports to targeted markets are essential to help with oversupply and storage issues here at home:

… China will need access to energy in the near-term and the United States is well-positioned to provide for this need. In the recently signed Phase 1 Agreement, China agreed to purchase in 2020 an additional $18.5 (billion) over their 2017 purchases of various U.S. energy products, including crude and LNG cargoes. This amount, in today’s markets, could translate into significant export quantities, but still not equal the full extent of China’s overall domestic energy demand.

Accordingly, further examination of this Agreement may present opportunities to address our domestic oversupply and at the same time, further advance U.S. international objectives. We encourage the Administration to look to this important Phase 1 Agreement as an opportunity to strengthen America’s energy security and provide for much needed balance to the global markets.

Under the Phase 1 deal, China agreed to buy at least $200 billion of U.S. exports over the next two years, including billions of U.S. energy products. In exchange, the U.S. agreed to modify tariffs imposed on the import of Chinese goods. API President and CEO Mike Sommers talked about energy trade with China in a CNN interview:

“We also need to make sure our trade commitments are being met. Of course, there was a big China trade deal at the beginning of this year, and we would be very hopeful that China and other countries that made commitments to the United States to (buy) American energy would honor those commitments. We need to make sure that markets that are open are taking American products.”

Again, there’s not a single solution to the one-two punch of a decline in oil demand coupled with a supply abundance. Yet, working with China to buy U.S. energy could be part of the solution. Ensuring access to financial capital for natural gas and oil companies and finding ways to mitigate dwindling storage are good approaches as well. All are helpful to our industry as local and state economies begin restarting, when natural gas and oil will provide a lot of energy to help the national pandemic recovery.

Certainly, the significant decline in demand is tied to global efforts to slow the spread of COVID-19. Frank Macchiarola, API senior vice president of policy, economics and regulatory affairs, told Fox Business that world oil demand of 100 million barrels per day, built up over the past 20 years, has declined to about 75 million barrels a day during the pandemic. Macchiarola:

“In one month, we’ve gone back 20 years in demand. … We’ve never gone through a situation where the government has intentionally stopped economic growth. That 20 years of demand … globally, you look on the jobs front, you’re talking about years and years of job creation essentially being eliminated in one month.”

Indicative of this, as one market analyst said this week, is that not since 1968 has U.S. demand for gasoline been so low.

Mitigating crude oil storage issues is paramount. Sommers told CNBC that industry is looking at various solutions – such as using sea-going tankers for storage, working with the federal government to lease storage in the Strategic Petroleum Reserve, reversing pipeline flows to increase access to storage and other options.

The bottom line is that oil retains fundamental value to modern life. The current demand/supply crisis likely is temporary; Macchiarola told Fox Business there are indications that market-based reductions in the U.S. are bringing supply down, though it will take time for the rebalancing to be complete. Carefully reopening economies is critically important:

“Really, the way to bring demand back is to bring our economy back in a safe and effective manner. Oil is inextricably linked to economic growth and advancements of standards of living. So, what you [have seen] is, as an economy contracts, the price of oil and the demand for oil contracts as well. The silver lining to it is over the long term the world is going to require oil and natural gas to be able to drive that economic growth and to be able to move people and lift them into better standards of living.”

In the meantime, it’s a good idea to discuss energy with countries looking to buy oil, including China. Let’s allow markets to determine production levels and explore methods and technologies to increase storage capacity. These are sound courses of action as our industry – as well as the broad range of U.S. business and industrial sectors – adjusts to and manages the current crisis.