President Biden's energy policy is remarkable. Just days after he took office, he started draining the strategic petroleum reserves, jeopardizing American energy security. And this month, he cancelled the remaining oil and gas lease in Alaska, thereby killing investor interest in drilling for oil in a state with the fourth largest oil reserves. With only 36% of U.S. adults approve of how the president is handling the economy, what could possibly go wrong?
The Draining of Strategic Reserves
Since Biden's inauguration in January 2021, the U.S. strategic petroleum reserves (SPR) have decreased by 45%, or 287 million barrels. This is the most significant drain on SPR since its inception in 1975.
In the past, SPR was only released for emergency drawdown three times: during Operation Desert Storm in 1991, Hurricane Katrina in 2005, and the Libyan oil crisis in 2011. The 2011 release was the largest of the three: 30.6 million barrels. During Biden's tenure, the SPR release was issued in response to the Russian-Ukraine war, OPEC production cuts, and... the midterm elections.
To be fair, the SPR has been dropping since early 2018, when President Trump signed a bipartisan bill requiring the sale of 100 million barrels by 2027 to help fund the government. SPR reserves fell by 27 million barrels, or 4%, between January 2018 and January 2021.
However, Democrats blocked Trump's proposal to replenish the SPR by purchasing 77 million barrels in March 2020 as part of the COVID-19 stimulus package, calling it a "$3 billion bailout" for the oil sector. In retrospect, that $3 billion investment would have cost $7.5 billion at today's oil prices.
The War on Oil
Biden's policies are always hostile toward oil and gas.
Biden cancelled permission for the Keystone XL (KXL) pipeline project on his first day in office. TransCanada and ConocoPhillips proposed the project in 2008. Unfortunately, Obama rejected the proposal, citing the possibility of oil leakage and water contamination. Trump overturned the judgment and accelerated its development. KXL development was more than half finished by January 2021, and the project was on pace to begin operations in early 2023.
The KXL pipeline connects Alberta, Canada, to Kansas and spans about 2000 kilometers. It will connect to current Keystone pipeline networks that transfer oil from Canadian oil fields to refineries and terminals in Illinois, Oklahoma, and Texas. The KXL pipeline will add approximately 830 thousand barrels per day to the existing Keystone pipeline system's 550 thousand barrels per day. To put this in context, the United States produces approximately 12.8 million barrels of oil every day.
Alberta's oil fields contain around 160 billion barrels of reserves. Its current capacity is 3.3 million barrels per day. By 2030, production is predicted to more than double. However, with the cancellation of KXL, not only has the U.S. oil output decreased, but Alberta's oil production capacity has also been reduced. It is called killing two birds with one stone.
It's not just oil. The war is also on gas. Biden and Democrats propose imposing a $900–$1,500 fee per metric ton of excess methane emissions by any oil and gas facility in October 2021. The idea was included in the Inflation Reduction Act, although it is unclear where the inflation reduction part of the methane fee is.
The direct impact on oil prices is substantial. A $1,500 fee for the entire supply chain, according to a 2018 study, can raise production costs by $0.27 per MMBtu, or more than 6% of the current retail gas price of $4 per MMBtu. Unless gas companies absorb all of the higher costs, retail gas prices may rise.
Alaska: Oil Battleground Going Hot
There's no better place to escalate the oil war than Alaska, where most of the climate change mascots reside: the melting iceberg, the (supposed to be) extinct polar bear, and recently, the birthing caribou.
In the past two years, Biden and Democrats have aggressively attacked the oil and gas industry in Alaska, a state with the 4th largest oil reserves in the U.S.
The first attack was aimed at the Willow Project, owned by Conoco Phillips.
The Willow project is located within the National Petroleum Reserve (NPR-Alaska). It holds 600 million barrels of reserves and could produce 200,000 barrels per day. ConocoPhillips has spent $925 million there, and if all legal problems are resolved, it will spend another $903 million by 2024.
The project received development permission in August 2020, during Trump's final months in office. However, during the Biden administration, a federal court in Alaska disputed the approval in August 2021.
Biden finally gives ConocoPhillips formal authority to execute the Willow project in March 2023. The ruling drew a lot of media attention and was widely covered.
However, it is little known that the approval for Willow was not for reasons of energy security or Alaskan welfare. Because ConocoPhillips' legal argument was so strong, rejecting permission would result in litigation that may cost the government up to $5 billion. The license was only applied to three of the five drilling areas submitted by ConocoPhillips, limiting the potential output. Furthermore, Willow will not begin production until 2029, giving future opportunities to delay or even halt it.
The second attack came in the form of proposed oil tax increase in March 2023. Lead by Democrats, Alaska legislator is now pondering to effectively increase oil tax. The schema is to lower the tax credit on each barrel of oil extracted from $8 per barrel to $5 per barrel. And the total tax credit will be limited by the amount a company spend on new drilling. So, if a company spend $200 million on new drilling, that’s the maximum amount they can deduct from their production tax payments in a given year.
The proposed legislation will essentially raise the oil tax by 40%. Because of the tough terrain and several layers of compliance, extracting oil in Alaska is already costly. In Alaska, the average cost of production is around $52 per barrel. That cost does not include any payments or taxes owed to the state or federal governments. Increasing taxes is one method to make Alaskan oil less competitive and discourage future investment.
The third and most recent attack came early this month. President Biden cancelled the remaining seven oil and gas lease in Alaska’s Arctic National Wildlife Refugee (ANWR), citing necessary steps to protect polar bears and caribou.
The leases, also called 1002 Area, were purchased by the Alaska Industrial Development and Export Authority, an Alaska state body, during the Trump administration. It contains an estimated 7.6 billion barrels of oil and 7 trillion cubic feet of natural gas. The size of this area is less than 8% of the total ANWR area, which is estimated to have 10.4 billion barrels of oil reserves.
The 1002 Area was actually a decision by President Carter in 1980. It was not designated as ‘wilderness’ like the adjacent ANWR area. An oil development plan in that area would only take about 500,000 acres, less than 3% of total ANWR acreage. And this small area can provide access to majority of ANWR oil reserves, and could supply up to 1.45 million barrels of oil per day. This is more than what the U.S. imported from Saudi Arabia.
What is the End Game?
Alaska's oil reserve is 3.1 billion barrels, or 7.6% of US total reserves. However, its production is only 3.3% of total US production.
Alaska's dry natural gas reserve is 99 trillion cubic feet, or 16.8% of US total reserves. But its production is only 1% of total US production.
Moreover, Alaska is estimated to have far larger undiscovered oil and gas reserves. According to the U.S. Geological Survey (USGS), there are undiscovered oil resources of 24 billion barrels and gas resources of 85 trillion cubic feet.
In 2022, Alaska oil production is up by 6000 barrel per day, from 477,000 to 483,000 barrel per day. This is a rare feat since its peak in late 1980s because of aging oil fields. Without new oil fields, Alaska’s oil potential will be closed in no time. Maybe this is the ultimate goal?
IPO — Such a Busy Week!
It was a packed week for primary market with these 7 listings hit the street.
RYZB 0.00%↑ RayzeBio, Inc. is building a vertically integrated radiopharmaceutical therapeutics (RPT) company to treat various cancers, with its lead program in a Phase 3 clinical trial.
NMRA 0.00%↑ Neumora Therapeutics, Inc., a clinical-stage biopharmaceutical company founded to confront the global brain disease crisis by taking a fundamentally different approach to the way treatments for brain diseases are developed. Its most advanced product candidate, navacaprant (NMRA-140), is a novel once-daily oral kappa opioid receptor (KOR) antagonist that is being developed for the treatment of major depressive disorder (MDD), which is believed has the potential to provide significant advantages relative to the standard of care, if approved.
DTCK 0.00%↑ Davis Commodities Ltd, an agricultural commodity trading company based in Singapore which specializes in trading of three main categories of agricultural commodities: sugar, rice, and oil and fat products.
CART 0.00%↑ Maplebear Inc. (d/b/a Instacart), the leading grocery technology company in North America, works with grocers and retailers to transform how people shop. The company partners with more than 1,400 national, regional, and local retail banners to facilitate online shopping, delivery and pickup services from more than 80,000 stores across North America on the Instacart Marketplace.
SRBK 0.00%↑SR Bancorp, Inc. is a new Maryland corporation that was formed by Somerset Savings Bank, SLA (“Somerset Savings Bank”) to be the holding company of Somerset Savings Bank upon completion of its conversion from the mutual to stock form of organization. SR Bancorp has had no operations to date and has never issued any capital stock.
KVYO 0.00%↑ Klaviyo, Inc. enables businesses to drive revenue growth by making it easy to bring their first-party data together and use it to create and deliver highly personalized consumer experiences across digital channels.
MDBH 0.00%↑ MDB Capital Holdings, LLC is a public venture platform with the objective of growing the public venture marketplace and optimizing the way meaningful technologies are financed and built. Its model typically includes a two-step financing approach with the partner companies: MDB Capital Holdings put in seed capital, as founders, and the first round of capital of between $5 to $10 million dollars to set the business on an operational foundation. The plan is to then raise an additional amount of substantive capital to bring the technology closer to validation or to be able to commence commercialization, typically in the range of $20 to $60 million and often via a public offering or an alternative value realization.