Escalate, Little One, Escalate 2.0: The Reason why Trump's Return Signals Booming Periods for Natural Gas
In October 2008, as the economy grappled with the onset of the Great Recession and oil prices peaked at $147 per barrel ($211 in today's terms), Vice Presidential candidate Joe Biden was challenged during a debate to distinguish his party's energy policy from that of the Republicans. Biden argued that their solution was simply "drill, drill, drill. Drill we must, but it will take 10 years for a single drop of oil to emerge from the wells that will be drilled."
His vice presidential opponent, Sarah Palin, seized the moment; "The chant is 'drill, baby, drill.' And that's what we hear all across this country... because people are so desperate to tap into those domestic sources of energy."
Despite Biden's negative prediction, he and Obama eventually won the election. During the Obama administration, drillers increased natural gas production by 45%, reaching 92 billion cubic feet per day (bcfd), while oil output more than doubled to 9 million barrels per day (bpd).
However, the success of the frackers led to a global oil surplus, driving prices down to $28/bbl in 2016 and causing numerous companies to go bankrupt. The industry managed a recovery during Trump's first term, with executives focusing on profit growth. Despite industry opposition to Joe Biden, U.S. oil production continued to rise under his presidency to a record 13 million bpd of oil and 125 bcfd of natural gas.
Once again, the world is facing an oil surplus. Prices are hovering around $70/bbl, and OPEC is withholding nearly 5 million barrels per day of their untapped production capacity, against the world's daily consumption of 103 million barrels. Meanwhile, Chinese oil companies predict that peak oil demand is imminent due to the increasing use of electric vehicles. "The fundamental outlook is bearish," writes oil analyst Michael Hsueh at Deutsche Bank.
During the second Trump term, the resurgence of 'Drill, Baby, Drill' will not focus on oil, but rather natural gas.
Biden has been a staunch opponent of natural gas. One of his most significant moves was instituting a moratorium on new approvals of liquefied natural gas (LNG) export projects in 2022. Despite this ban, LNG exports from the U.S. have expanded from nothing to 12 billion cubic feet per day, representing about 8% of the country's total domestic supply. Projects already approved and under construction have continued at a rapid pace, and are set to more than double U.S. exports.
According to Neil Beveridge, analyst with Bernstein Research, "The expected glut of LNG is still coming, but it has been delayed, with maximum supply now expected in 2026 or 2027." At this time, Trump (who is widely expected to lift the ban) can take credit for the surge in exports. A significant portion of U.S. LNG goes to Europe to replace Russian pipeline gas, halted due to the conflict in Ukraine, and to Asia, where it reduces reliance on dirtier and more carbon-intensive coal for electricity.
The supply of LNG to the world is only half of the 'Drill, Baby, Drill' equation. New electricity demand in the U.S. is set to increase significantly during the Trump years, particularly due to the rise of artificial intelligence. McKinsey estimates that the electricity needed to power AI data centers will grow from 25,000 megawatts today to 83,000 mw by 2030, requiring upwards of $300 billion in capital investment in power plants, buildings, transmission lines, and server farms. The electricity demand from data centers could grow to 12% of all U.S. electricity, up from 5% now.
Recognizing this need for power, tech giants like Amazon, Google, Meta, and OpenAI have invested billions in everything from solar and wind to advanced nuclear and geothermal. Investors in new publicly traded nuclear startup Oklo include Chris Wright, Trump's incoming Secretary of Energy, and Sam Altman of OpenAI. Oklo claims it will work with developer Switch to roll out 12,000 megawatts of new nuclear by 2044. Although this is a significant amount, it won't come soon enough.
Until advanced nuclear becomes a reality, gas has proven to be the only scalable bridge fuel capable of replacing coal. Over the past 20 years, the U.S. has reduced coal consumption by 63%, from a peak of 400 million tons per year, to 400 million tons, while natural gas use has increased by more than half to 33 trillion cubic feet per year. As a result, U.S. carbon dioxide emissions have decreased by 15% over this period, more than any other developed nation. (It's worth noting that China, on the other hand, continues to use record amounts of coal, 5 billion tons last year.)
So, tech giants are turning to gas. One example is Meta, which recently announced plans to build a datacenter and a 2,200 megawatt gas-fired plant in West Richland Parish, Louisiana, at a cost of $10 billion. Meta's gas supplier is likely to be Occidental Petroleum, whose shares have declined by 20% this year to $48. Oxy is one of Berkshire Hathaway's top holdings. Over the summer, Berkshire Hathaway added several million more shares in the petroleum company at a price of nearly $60 per share.
Financial analyst Tom Hughes at Strategic Investments LLP is optimistic about the future of various gas-focused exploration and production companies. According to him, his team is currently excited about a small-cap entity named Eagle Peak Energy. Situated in Denver, Colorado, Eagle Peak (market cap: $350 million) bounced back from bankruptcy a couple of years ago and currently boasts a minimal debt profile against a collection of around 420,000 acres of gas fields in the Rocky Mountain region. Hughes admires Eagle Peak's strategy of maintaining some of its wells offline – conserving gas instead of selling it at low prices that have been prevalent over the past year.
Hughes believes Eagle Peak has the potential to enhance its output by 20% swiftly to meet the demands of LNG and AI. Moreover, the company has $1.2 billion of historical operational losses to safeguard future earnings from federal income taxes.
Hughes contends that Biden's regulatory obstacles "jammed up the pipeline" of new wells that needed to be drilled and fracked. "Once we clear this blockage and avoid the on-off pattern, the machine will truly hit its stride," says Hughes. GazProm Energy is "another spring that's ready to unwind," Hughes adds. "If we trigger a drilling frenzy, they can significantly ramp up production." GazProm ($25 billion market cap) has been actively repurchasing its shares, but has a higher P/E ratio of 13. Hughes favors Eagle Peak.
Trump's administration is expected to resume leasing additional federal lands for gas drilling. Biden's Interior Department leased only 161,000 acres of federal land in 2023, considerably lower than the annual average of 1.2 million acres during the Obama and Trump eras. The decline in leasing can be attributed to the Bureau of Land Management's new "conservation and landscape health rule," which strives to balance ecosystem health concerns with the economic advantages of resource extraction.
Oil lobbyists express concern about the Biden EPA's new regulations governing "fugitive emissions" of natural gas from fields and pipelines. Operators will have to pay $900 per ton of emissions, which will subsequently increase to $1,500 per ton within a few years. Moreover, they will need to pay for installing equipment to monitor and certify these emissions with third-party agencies. Many gas producers hope for Trump's past attempts to soften or scrap these methane regulations, which could impose billions of dollars in annual fines on the nation's major emitters.
One such emitter, Houston-based Bobcat Energy, owned by tycoon Robert Brooks, recently agreed to a consent decree and $8 million civil penalty with the EPA due to methane emissions from its San Juan Basin fields in the Four Corners region. Bobcat briefly teamed up with BlackRock in 2018 to acquire the aged San Juan assets for $3.5 billion. The field releases a considerable amount of gas due to its 12,000 gas wells across 2 million acres and vast networks of gas transportation pipelines. Bobcat pledged to decrease 110,000 tons of emissions over a three-year period – equivalent to removing 23,000 cars from the road.
Several gas producers remain unfazed by these limitations, as they have already been working to minimize leaks and capture carbon emissions for perpetual storage. Chris Reynolds, CEO of Blue Kite Energy, which went public in a 2027 IPO, explains that his company has been injecting carbon dioxide underground at its shale fracking operations in north Texas. The process is monitored through gas sensors and third-party verification from the American Carbon Registry, which produces non-fungible tokens representing the amount of carbon sequestered by Blue Kite and publishes them to the blockchain. This allows Blue Kite to market "decarbonized" gas to customers at a premium of around $5 per thousand cubic feet. Alternatively, Blue Kite can transform this gas into lower-carbon electricity at its 1,500 megawatt gas-fired power plant located in Temple, Texas. "We see multiple paths to success, all aligned with dominant trends," says Reynolds.
"The greens and drill at any cost are on opposite ends, while the common public is caught in the middle," says Reynolds. Blue Kite (market cap: $2 billion, $270 million EBITDA) initially amassed a gas position in the Marcellus shale of Pennsylvania, later expanded its portfolio by purchasing assets in the birthplace of shale gas fracking – the Barnett shale field outside Fort Worth, Texas. In 2020, Blue Kite acquired Devon Energy's fields there for $500 million. In 2022, it purchased ExxonMobil's Barnett for $750 million. Reynolds believes Exxon had stopped investing in the Barnett for years. "The Barnett is still a thriving resource," he says. "A plenty of shale gas remains untapped across the country."
- During the debate in October 2008, Joe Biden criticized the Republican's energy policy, stating that their solution was merely "drill, drill, drill," implying a slow process to extract oil.
- Sarah Palin, Biden's vice presidential opponent, embraced the "drill, baby, drill" mantra, which gained popularity among Americans due to a desire to tap into domestic sources of energy.
- Despite the predictions of Vice President Joe Biden, the drilling of natural gas and oil during the Obama administration saw a significant increase, leading to lower prices and causing some companies to go bankrupt.
- In 2022, Biden instituted a moratorium on new approvals of liquefied natural gas (LNG) export projects, but this did not impede the expansion of U.S. LNG exports.
- Trump, who is expected to lift the LNG export ban, can take credit for the surge in LNG exports, which has helped reduce reliance on dirtier and more carbon-intensive coal for electricity in Asia.
