2021 US Oil and Gas Trends and Impact on Construction
by Tom Reilly, President of the 1st Source Bank Construction Finance Division
The first oil well in the United States was discovered in Titusville, Pennsylvania, in 1859. Since then, oil and gas have become vital to the economic and logistical health of the country. Oil processing creates the fuel that powers cars, trains, and aircraft, while nearly 6,000 products you buy in-stores and online are petroleum-based. In the years between the first and second World Wars, the United States became the world's largest producer, refiner and exporter of petroleum, producing around 10 million barrels per day.
Fast-forwarding to 2021, demand for oil and gas remains concentrated in the United States, while supply is concentrated elsewhere. Since COVID-19 swept across the world, oil and gas prices have seen pandemic market volatility which affects the construction industry. So, how will the United States construction industry be impacted by fluctuating prices for oil and gas, and what can the industry expect for the future?
Oil and Gas Forecast for Construction in the United States – 2021
The oil and gas industry has a direct impact on many other industries in the United States –especially construction. Extraction, refining, transportation, and marketing of oil and gas produces a high volume of revenue and jobs for the construction industry. And, the United States is home to some of the most highly producing oil basins and natural gas reserves in the world.
The construction industry thrives when new projects are undertaken within the oil and gas industry. But, the production of oil and gas depends on the market dynamics of supply and demand, which saw greater volatility during the pandemic economy of 2020. The areas of the country where construction is most affected by volatility in the oil and gas industry are those located near abundant, naturally occurring oil and gas deposits.
In late April 2020, pandemic shutdowns caused a steep downturn in oil and gas prices, briefly falling below $0 per barrel. The price of crude oil quickly rebounded to around $40 per barrel, albeit well below the pre-pandemic price closer to $60 per barrel. And, during the height of pandemic closures in March and April of 2020, the United States took advantage of consumers' low demand and OPEC's high-production output to bring the national stockpile to a total of over 535 million barrels.
Oil and Gas Supply, Inventory, and Price Forecast for the Remainder of 2021
Today, just over a year after West Texas intermediate (WTI) crude oil prices fell into the negatives on April 20, 2020, crude oil is trading higher than ever before and setting near-record highs. Whereas, petroleum is forecast to see an upturn in consumer and industry sector demand in 2021 and beyond, the same is not forecast for natural gas. In the United States, demand for natural gas is forecast by the U.S. Energy Information Administration to slightly increase over the next two years. Natural gas, however, is forecast to steadily decline from its pre-pandemic demand, in part due to more competitive prices for coal and renewable energies.
The construction industry can count on a healthy outlook on oil and gas industry projects in the coming months. The United States leads the way in new oil and gas projects beginning construction between now and 2025. Out of all global oil and gas construction to start between 2021 and 2025, the United States is responsible for around 70 percent, and 83 percent of these are new build projects. Most of the expansion projects are consolidated in the upstream sector. Pipeline construction projects account for around 44 percent of all new buildings in the midstream sector. Oil storage and natural gas processing account for over 20 percent of new construction projects. Over the next 4 years, over 600 new construction projects will begin. These will include over 100 upstream construction projects, and over 330 projects to commence in the midstream sector.
Impact on Oil and Gas Construction Following Change of Administration in DC Sweeping changes to new oil and gas construction projects have followed the inauguration of President Joe Biden, including a moratorium on new leases on federal lands. The changes have mostly impacted the oil and gas production segments, wherein nearly 25 percent of procurement comes from federal lands and waters. Following 2020’s record pandemic unemployment numbers in oil and gas hotspots, like the Williston Basin in North Dakota, the construction industry is wary of further stagnation.
On Jan. 20, 2021, Biden signed into law an executive order rescinding leases awarded by the previous administration of President Donald Trump, which granted contracts for oil and gas projects in the Arctic National Wildlife Refuge. This order acts to rescind the lease on lands to build the Keystone XL pipeline, among others. Around 24 percent of oil and gas production in the United States takes place offshore, in the Gulf of Mexico, and these contracts are unchanged by Biden's executive order.
Biden signed the Executive Order to Combat Climate Change on Jan. 27, 2021. It halts any new oil and gas construction projects on federal lands and waters – but it does not interfere with current federal land leases. Nor, does the executive order impose any restrictions on oil and gas leases on privately owned lands. And, it includes an exemption from the moratorium for Native American sovereign nations and lands.
In anticipation of these changes, shale oil and natural gas producers shifted attention to new lease contracts on private lands with rich reserves, like the Permian Basin. Today, the total oil and natural gas production from the Permian Basin exceeds 33 billion barrels of crude oil and over 118 trillion cubic feet of natural gas. In the United States, the Permian Basin accounts for around 20 percent of all crude oil produced on land. And, according to recent surveys, the basin still holds over 5 billion barrels of crude oil and over 19 trillion cubic feet of natural gas.
For the 26 million onshore acres and 12 million acres currently under lease in the United States for the exploration and procurement of oil and natural gas, the recent administration's policy shift causes a minimal impact for the next 10 years. If the administration decides to implement permanent bans on new oil and gas contracts for federal lands, it likely will drive new construction projects into privately owned lands with access to basins, like New Mexico.
Does the Oil and Gas Industry Bode Well for New Construction in 2022?
The construction industry will see the most impacts in states like Pennsylvania, Colorado, Montana, and Wyoming, where a permanent ban on new leases will signal a permanent decline in ongoing exploration and production. Construction in the Appalachian and Anadarko basins would see a considerable decline in new oil and gas construction. Estimated to contain more than 100 Trillion cubic feet of natural gas, the Anadarko Basin is the 5th largest reservoir responsible for America's surplus natural gas production. The Appalachian Basin is home to one of the most abundant natural reservoirs of coal on Earth and the most important coal reserves in the United States.
Some states have already begun litigation against the executive orders, worried about further loss of investment, jobs, and revenue to the states. The response by the Biden administration has been surprising, to say the least, and has advocated in support of many leases granted by the Trump administration for oil drilling and gas exploration on federal land in Wyoming. Furthermore, in stark contrast to his campaign rhetoric, the Biden administration recently made the choice to uphold leases for development of the large Willow oil drilling project on the North Slope of Alaska. In a briefing filed with the Alaskan U.S. District Court, the Biden administration supported the continuation of developing the Willow project, which is estimated to produce over 100,000 barrels of oil per day for the next 30 years. The filed brief cites the considerations given to wildlife and greenhouse gas emissions on the part of the previous administration when granting the lease to ConocoPhillips. The oil drilling and exploration as part of the Willow project is taking place in the northeastern part of Alaska's federal petroleum reserve – an area already designated for drilling by the U.S. government. The Willow project has been in service since the oil field was discovered by ConocoPhillips in 2017. In total, the project is expected to create over 1,000 jobs, of which 400 are long-term or permanent positions. Construction on the Willows project is estimated to complete nearly 40 miles of paved roads, along with over 385 miles of new pipeline. Shortly after defending the continued oil drilling at the Willow project, the Biden administration showed further divergence from its campaign rhetoric, by fighting for the continuation of construction on the Dakota Access Pipeline. Construction on the pipeline, which carries over 500,000 barrels of oil per day, would have been halted by courts – if not for the recent intervention from the Biden administration.
Beyond the Willow project, and looking further into Biden’s plan, it is not without hope for the construction industry. Following a decrease in exploration and production of oil and gas, the administration is also creating new and expanded incentives for new renewable energy construction projects. Biden has been resolute in promoting the gradual shift to renewables, touting that it will account for a surge of new, well-paying jobs. And, indeed, as oil and gas construction begins to give way to renewables, the shift dictates a swelling number of new construction projects for renewable energies and the infrastructure needed to bring it mainstream.