API Briefing: Europe’s Ongoing Energy Crisis, Needed Energy Actions at Home

Mark Green
Posted March 8, 2022

API conducted a briefing late last week on energy market dynamics amid the ongoing Russian invasion of Ukraine and its potential energy impacts in Europe.

Frank Macchiarola, API senior vice president of Policy, Economics and Regulatory Affairs, and Dustin Meyer, vice president of Natural Gas Markets, discussed the current energy demand/supply balance, Europe’s growing energy crisis and steps the Biden administration could take to address those issues, as well as increased energy costs for American consumers.

API and the U.S. natural gas and oil industry stand with the people of Ukraine. Recent events show how the American energy revolution of the past decade and a half, dramatically increasing U.S. oil and natural gas production, strengthened America’s energy security – providing opportunity for the U.S. to help allies abroad and undermine hostile regimes that have used energy as a weapon against others.

This was a bipartisan energy policy, one that recognized American security overall was linked to energy security. Unfortunately, Biden administration energy policies have fallen short of that precedent.

Macchiarola noted three things the administration could do immediately, to address situations at home and abroad:

• Allow for oil and natural gas leasing on federal lands and waters and complete a five-year offshore leasing plan to replace the one that expires this summer.
• Permit energy infrastructure so that energy can move from areas of supply to areas of demand around the country.
• Approve pending applications for liquefied natural gas (LNG) export projects.

Meyer pointed out that the European natural gas market is precariously positioned right now, with prices around $60 per metric million British thermal unit (MMBTU) – the equivalent of $340-per-barrel oil prices. Meyer:

“These are record, astronomical highs, about six times the long-term average. … The world has never seen natural gas prices like this, and it’s indicative of just what a dangerous position Europe especially is in.”

Though the U.S. largely has been insulated from those price levels, Meyer said, spot LNG prices in Asia are nearly $40 per MMBTU, which exceeds its long-term averages. Meyer pointed out that European and global natural gas markets were already tight before the Ukrainian crisis and the world needed more natural gas. Ukraine has made this even more clear.

The U.S., the world’s largest natural gas producer, has shored up Europe’s energy supply. Meyer said that in January, 75 of 98 U.S. LNG cargoes went to Europe. In February, 70% of U.S. cargoes went to Europe and for a period of time American LNG exceeded Russian pipelined gas received by Europe. Meyer:

“As we speak, the U.S. is actually in the process of bringing online additional LNG export capacity, with both an expansion train and a major new project starting exports down in Louisiana. These strong and increasing flows of U.S. LNG are obviously more critical now than ever. But simultaneously, we have to realize that the U.S. can do more and indeed needs to do more. We are certainly not alone in believing that the current conflict in Ukraine is poised to fundamentally and permanently alter the European energy map.”

Meyer said this export capacity resulted from decisions during the Obama and Trump administrations to support the U.S. LNG export industry. But he said it’s unclear where the Biden administration stands on American natural gas. He pointed out there are a number of applications for LNG export projects pending at the U.S. Energy Department. Similarly, a number of natural gas projects are pending before the Federal Energy Regulatory Commission – with FERC recently issuing policy statements that actually add uncertainty to the review process for natural gas infrastructure. Meyer:

“We think this is as misguided as it is mistimed. Instead of slow-walking approvals for new infrastructure, we believe the administration has an opportunity now to speak clearly in encouraging these vital investments in American energy leadership.”

Highlights from the briefing’s question-and-answer segment:

Q: What steps can the administration take today to help get additional U.S. LNG to our allies and in other countries?

Meyer: There are three easy steps that the administration could take. Right now, I think the Department of Energy could approve those applications that are in front of them and indeed even encourage FERC, which is an independent entity, I know, but work with FERC to do the same for the LNG applications in front of them. I think both of those agencies can then also establish these clear and consistent timelines for improving new applications going forward for that additional capacity that the world is going to need long after the smoke clears from the crisis right now.

Finally … I think that there's a good opportunity for the Commerce Department, working with the State Department as well as working with our allies around the world, to focus on financing and developing critical energy projects, especially in energy, in Eastern Europe, including those focused on natural gas. Right now, the administration's perspective on financing overseas energy projects largely excludes the option of natural gas infrastructure, and we think that is misguided, especially now.

Q: What alternatives exist to the importation of Russian crude oil?

Macchiarola: The administration needs to send a clear signal that the U.S. is open for investment in oil and gas over the long term. How can they do that? They can do that by approving infrastructure projects that are necessary to be able to utilize more of the resources that we have here in the United States.

We've seen historic levels of production in areas like the Permian Basin. We need infrastructure to be able to support that growing supply. We also have a five-year [oil and gas] plan for the outer continental shelf that is due to be [final] in the summer. Our expectation, based on both public and private conversations, is that the administration is behind on [building] a five-year plan. On the onshore, [the Bureau of Land Management] has not held a lease sale since the Biden administration took office. The Mineral Leasing Act requires quarterly lease sales by statute, and so the administration has failed on that front.

The administration has talked about wanting to lower [gasoline] prices. In fact, I believe the administration is committed to talking about lowering gas prices, but the administration is not committed to policies that will help lower gas prices.

They've canceled [the Keystone] XL pipeline, they put a leasing moratorium on oil and natural gas on federal lands and waters. We get 23% of our oil in the U.S. from federal lands and waters and about 13% of our natural gas. They have reformed the [National Environmental Policy Act] process to make it more difficult for energy infrastructure projects. The FERC recently issued two new policy statements that are going to make it more difficult for pipeline projects to be approved. They are slow-walking approvals of natural gas projects. They are proposing federal regulators that have stated their intention to stifle investment in American oil and natural gas. They have suspended oil and natural gas leasing in [the Arctic National Wildlife Refuge] in Alaska, and they have announced they will take millions of acres off the table in the [National Petroleum Reserve-Alaska].

This set of policy measures combined shows a lack of interest in investment in oil and natural gas here in the United States, and it's why I conclude that the administration is committed to talking about lowering gas prices and committed to proposing policies that will raise gas prices.

 
Q: How much can the U.S. ramp up production in the in the short term?

Macchiarola: The pandemic really impacted the markets in ways that were sort of unprecedented. From a high of 13.1 million barrels per day of production, demand flattened. Between March and April of 2020, we went from 100 million barrels a day of demand globally to 80 million barrels per day. This sent a signal to the markets that supply was going to pull back. … During this period of significant demand decline, Saudi Arabia actually produced in April of 2020 their largest month of production ever. What [OPEC+ was] trying to do was make things more difficult within the marketplace.

Over time, the U.S. market adjusted, and we were actually producing here in the United States about 10 million barrels per day. We had really ramped down supply in response to those market conditions. … Demand came back very quickly. We are now up to the near pre-pandemic levels of demand, with even jet fuel just off slightly from where we were before lockdowns. Clearly, we have a situation now where demand has exceeded supply, and supply is trying to catch up. … Over time you're going to see this supply come back. You're going to see production levels get higher and respond to the price signals that we're seeing today. But again, this imbalance takes time to shake out.

What can policymakers do? Policymakers can send signals that the environment for producing oil and natural gas here in the United States is a welcoming environment. They can get moving on the five-year plan, they can hold lease sales for future production. … If the administration takes some of these steps to send signals to the market, I think you're going to see that production [return].

Q: How much has the administration's actions to disincentivize investment in the U.S. domestic energy sector led to an increase in reliance on foreign oils, specifically from the Middle East?

Macchiarola: Fifteen years ago, most energy commentators believed that the United States’ best days were behind it with respect to energy production. Most people believed that the Permian Basin was an area that was going to sunset as an area of production. Almost overnight that changed this year. We're going to see record levels of production in the Permian.

We’ve become less and less reliant on foreign sources of energy. We've strengthened our energy security over the past several years, and … that's put us in the position that we're in today. A lot of what we've warned about as a country – not being energy secure and not producing our own resources – is being borne out, unfortunately, in Europe. …

We do still use more [oil] than we produce here in the United States. Fortunately, much of what we import is from Canada, and we have a strong working relationship with Canada. That's why the Keystone XL [pipeline] decision is so impactful. In addition to the thousand jobs that it eliminated, in addition to the potential for 10,000 jobs, including many good union-paying jobs – that was sort of the domestic impact of that decision. But the broader impact of a decision like that is to send a message to Canada, one of our friendly training partners, at the U.S. is going to change course on energy policy.

It's important to send a message now more than ever that we're not going to change course on energy policy. We're going to continue to be energy secure, we're going to continue to produce more of what we have here in the United States, and that's why we're outlining these policies today. That's why we're advocating that the administration reverse course. That's why we're suggesting that actually these policies will help the administration achieve their objectives of lowering [gasoline] prices.

Q: Can you talk about the regionalization of pricing of energy sources in the U.S.?

Meyer: Right now, natural gas prices in the United States are right around $4.50 per MMBTU – a massive discount from global prices – and that's the direct result of the amount of production of natural gas that we have here in this country. That being said, $4.50 per MMBTU is still a little bit higher than what we've seen over the last five years. It’s actually much lower if you look at U.S. natural gas prices over a 20-year time span. During the shale revolution, gas prices have been averaging maybe closer to $3.20, so we are a little bit above that as a national average. …

But there are exceptions to that in the United States, and there are two regions of the country that chronically, every year and perhaps this year more than ever, are experiencing much, much higher prices: New England and California. In contrast to $4.50 [nationally], in New England … natural gas prices [have been] north of $20 per MMBTU.

The clear explanation for that is the lack of pipeline import capacity into that region. Especially coming from Pennsylvania. I mentioned what a large producer of natural gas Pennsylvania is compared even to the global scene, and yet they can't get that natural gas from Pennsylvania into New England. It's clearly a failure of the political environment up there to build and support this new pipeline infrastructure, which would very swiftly bring down prices and allows those in New England to benefit from the low prices just the way most of the folks around the rest of the country do.

Q: Can you expand on the impact of the Biden administration’s decision to release oil from the Strategic Petroleum Reserve?

Macchiarola: This is what the Strategic Petroleum Reserve is designed for – times of disruption in supply. And so we supported that decision. But it's important to note that that's not going to provide long-term relief for the American consumer. The total amount was 60 million barrels, which amounts to three days of U.S. supply. If we're really serious about addressing energy costs, particularly the rising costs of gasoline, we need to be serious about producing more of our domestic resources here in the United States, increasing our supply and providing that relief for consumers.