INTERVIEW: API head warns of partisan energy policy ahead of US election

The White House’s pause on approving new LNG exports is part of a wider approach aimed at cutting US hydrocarbon production "in any way that they can," despite global energy security concerns, the US’ top oil lobbyist told S&P Global Commodity Insights.

The remarks made by American Petroleum Institute head Mike Sommers -- who was previously an adviser to former Republican President George W. Bush -- offer a preview of the oil industry criticism President Joe Biden and Democrats are expected to face as the November election nears. Biden angered US oil producers by releasing crude from the Strategic Petroleum Reserve to lower prices in the lead-up to the 2022 midterm elections, and has also been more reluctant to offer lease sales for drilling on federal lands than the industry would prefer.

The White House could not immediately be reached for comment. Additional requests for comment from the departments of Energy, Interior, State and Treasury also were not answered by press time.

US oil output reached record highs in 2023, cementing its status as the world’s largest producer of fossil fuels. Crude output has exceeded 13 million b/d in recent months, albeit with winter weather denting output over the past few weeks. Analysts at S&P Global Commodity Insights expect output to average more than 13.5 million b/d this year and exceed 14 million b/d on average in 2025.

The Platts Dated Brent crude benchmark has risen well above the $80 mark in recent days, propelled by attacks on Red Sea shipping, and was assessed at $84.105/b on Jan. 30.

Permitting

Speaking to S&P Global after a Jan. 26 moratorium on approving new LNG exports -- which the administration says is needed to assess compatibility with environmental commitments as well as US economic and national security issues -- Sommers characterized the pause as part of a broad undermining of industry activity he said could erode record-high oil output levels. Addressing these arguments at the time, administration officials stressed that the US is already the world's largest LNG exporter, with capacity set to nearly double by 2030.

Turning to federal oil and gas leasing, Sommers on the sidelines of the Baker Hughes Annual Meeting in Florence, Italy, noted that there will be no offshore lease sales in 2024 and criticized a decline in onshore auctions. "They’ve cut off access to about half a million acres in the National Petroleum Reserve in Alaska. This is just another step along the way of what I think is their focus of trying to cut production in the US in any way that they can," he charged.

He went on to assert that increases in oil output since Biden took office "were entirely [from] lease sales that occurred under a previous administration."

"Twenty-five percent of American production is on federal lands and in federal waters and because we’ve seen such a significant decrease in the amount of lease sales both onshore and offshore I do worry about longer term production."

Sommers predicted Permian shale would continue to spearhead US production, but cautioned that part of the Permian is also under federal control. "My members are concerned about what the administration could do to that New Mexican side of the Permian because it’s all federal acreage," he said.

Red Sea

Sommers warned of the risks surrounding current levels of the SPR and the current strategy for refilling storage caverns ahead of the November elections.

Replenishment of the reserve has been done "at a pretty slow clip. We’re still at historic lows … lower than it’s been since 1983 still, but in 1983 we were using 20% less oil," he said. "Given all the volatility in the world, we would prefer to be in a position where there was more oil in the SPR. We may need it given the geopolitical risks that are out there today." The administration has maintained that the SPR is still the largest reserve in the world and at current levels is capable of meeting US supply needs during an emergency.

Sommers added that he hoped the Biden administration would not draw further on the SPR to manage prices and did not see the current turmoil impacting shipping in the Red Sea as a reason to do so.

Sommers added that he doubted recent attacks on Red Sea shipping and the diversion of tankers around Africa justified an emergency release of strategic reserves. "Energy prices have remained relatively stable. If there were to be a significant spike, I would say it would be a justifiable use," he said. "The SPR was meant to be a shock absorber to big geopolitical events, not domestic political events. We’ll see where prices end up."

At 356.5 million barrels for the week ended Jan. 19, the US SPR is now at half its design capacity, with the Department of Energy issuing monthly solicitations for buybacks expected to last at least until May.

Venezuela ties

Sommers also discussed the remaining US sanctions on Venezuela and their effect on US refiners in the Gulf of Mexico that have long relied on Venezuelan heavy crude. Though stopping short of calling for further sanctions to be lifted, he said US refiners would remain dependent on heavier crude from locations such as Venezuela, with only limited scope to adapt their facilities. Sanctions on other sources such as Russia put extra pressure on the sector, he added.

"The last time we built a refinery in the US was 1976," he said. "It’s very difficult to permit a refinery in the US; it’s also difficult to permit retooling that refinery. All of those refineries were built to process that heavier crude that’s from outside the US. That heavier crude is more expensive to refine, but American refineries are very, very efficient in doing so. If they weren’t going to be getting it from Venezuela, they were going to get it from Mexico or they were going to get it from Saudi or somewhere else."

"The combination of Venezuela not being on the market [and] us voluntarily taking off Russian crude when they invaded Ukraine -- we need to get the crude from somewhere, so Venezuelan production -- American refiners started to look there again," he said.

"It's very expensive to retool these refineries, so I think you’re going to see American refiners looking all over the globe for oil that makes sense for the refinery construct that they have," he added. "It’s a challenging refinery environment ... for sure."

Upstream companies involved in Venezuela are "excited to get that asset back online," he added.

Asked about the risk of US refinery closures, Sommers said: "We only have [134] refineries in the US and I don’t think it would be good, given gasoline demand is going up, it wouldn’t be good for any of them to close."

Sommers played down the risk of recent Venezuelan threats to seize part of neighboring Guyana’s oil assets, forecasting continued strong production from Guyana. "We’re in touch with the Biden administration on it, but we’re confident that they have that under control," he said of the threats.

Sommers closed by saying the Biden administration’s effort to impose a price cap on Russian oil was well intentioned, but ultimately proving unsuccessful. "It’s proven already that it’s not working," he maintained.

The US Treasury Department has long held that the price cap was not intended to stop the flow of Russian crude but rather to restrict the Kremlin's oil revenues.