Biden Aims to Spur Drilling With Plan to Refill Oil Reserves, but Producers Are Skeptical

On Wednesday, President

Biden

said for the first time that the Energy Department would begin purchasing oil to refill the U.S. Strategic Petroleum Reserve when oil prices are $67 to $72 per barrel, or less. Officials also said the department has made a final rule that would allow it to purchase crude at a fixed future price, which they hope would encourage producers to drill more.

Energy executives and analysts expressed doubts the plan would spur a large increase in production in the short term. Many oil companies are wary of locking in sales when commodity markets have swung wildly. They hope to capture high oil prices while they are in place. Rising drilling costs and pressure from investors to limit production and return excess cash to shareholders are also dimming the outlook for production growth, they said.

As he said his administration would refill the reserve, Mr. Biden said an additional draw of 15 million barrels is to be delivered in December, completing a sale of 180 million barrels he ordered earlier this year to temper soaring oil prices. The Energy Department will further draw from the reserves after that if needed, he said. 

Mr. Biden’s oil releases, roughly equivalent to Libya’s daily oil production, have brought the inventories to a 38-year low. The Strategic Petroleum Reserve can hold about 714 million barrels of oil and was down to about 405 million barrels as of Oct. 14. Mr. Biden said the releases are meant to lower Americans’ energy bills and stabilize markets following Russia’s invasion of Ukraine.

So far, the massive drawdowns have been matched by a timid increase in domestic production. Even with the benchmark for U.S. crude oil reaching $120 a barrel earlier this year, producers have kept a low profile, churning out about 12 million barrels a day, a 6% increase from January production, according to federal data for the week ended Oct. 14. 

One reason for the restraint is pressure from investors, who have been stung by years of the industry’s free spending and are demanding that oil companies keep production largely flat while increasing buybacks and dividends. That capital discipline has also allowed producers to clean up their balance sheets and put them on solid footing to weather market volatility, analysts said. 

Mr. Biden said Wednesday that oil companies shouldn’t be using their profits for investor payouts during the war in Ukraine and urged them to increase production. Administration officials say their plan to refill the Strategic Petroleum Reserve gives producers assurance of future demand, allowing them to increase drilling now.

Oil-industry groups have said Mr. Biden’s releases have been responsible for tepid production growth in recent months because drawing down reserves artificially lowers prices in the short term, dissuading investment in new oil production.

Linhua Guan,

chief executive of driller

Surge Energy Inc.,

said that Mr. Biden’s offer could see some takers but that his administration’s other policies pertaining to the oil-and-gas industry made new investments unattractive. A Wall Street Journal review of federal data found that new oil leases on federal lands have slowed greatly under Mr. Biden, a point of contention for the industry.

“The longer these bad policies last, probably the production increase will be much smaller,” Mr. Guan said. 

Mr. Biden pledged to stop drilling on federal lands as a candidate, saying the nation needs to transition to clean energy. 

Marshall Adkins,

a managing director at investment bank

Raymond James Financial Inc.,

said a view among producers that crude prices will remain elevated for the foreseeable future makes them less likely to presell oil. Shale companies have been letting their hedges—contracts to sell future production at a fixed price—roll off to maximize exposure to high commodity prices, he said. 

Mr. Adkins said production cuts from the Organization of the Petroleum Exporting Countries, combined with sanctions targeting Russia and potentially rebounding demand from China, could lead to a supply gap that would push crude prices back to $120 and even higher. “[If] I think oil is going to be a lot higher a year from now, I’m not going to hedge at $70,” he said. 

The possibility that the cost of materials, equipment and labor could keep rising also makes locking in prices unappealing to producers, said

Robert McNally,

president of consulting firm Rapidan Energy Group and a former energy adviser to President

George W. Bush.

“The shale oil companies don’t know what their costs are going to be in a year or two,” he said. 

Shifting from releasing the reserves to refilling them could remove large amounts of oil from the global market, further tightening supplies and contributing to inflation, some analysts said. 

“The time to replenish is during times of economic slack, when there’s surplus oil to buy,” said

Kevin Book,

managing director at consulting firm ClearView Energy Partners LLC. 

Write to Benoît Morenne at [email protected]

On Wednesday, President

Biden

said for the first time that the Energy Department would begin purchasing oil to refill the U.S. Strategic Petroleum Reserve when oil prices are $67 to $72 per barrel, or less. Officials also said the department has made a final rule that would allow it to purchase crude at a fixed future price, which they hope would encourage producers to drill more.

Energy executives and analysts expressed doubts the plan would spur a large increase in production in the short term. Many oil companies are wary of locking in sales when commodity markets have swung wildly. They hope to capture high oil prices while they are in place. Rising drilling costs and pressure from investors to limit production and return excess cash to shareholders are also dimming the outlook for production growth, they said.

As he said his administration would refill the reserve, Mr. Biden said an additional draw of 15 million barrels is to be delivered in December, completing a sale of 180 million barrels he ordered earlier this year to temper soaring oil prices. The Energy Department will further draw from the reserves after that if needed, he said. 

Mr. Biden’s oil releases, roughly equivalent to Libya’s daily oil production, have brought the inventories to a 38-year low. The Strategic Petroleum Reserve can hold about 714 million barrels of oil and was down to about 405 million barrels as of Oct. 14. Mr. Biden said the releases are meant to lower Americans’ energy bills and stabilize markets following Russia’s invasion of Ukraine.

So far, the massive drawdowns have been matched by a timid increase in domestic production. Even with the benchmark for U.S. crude oil reaching $120 a barrel earlier this year, producers have kept a low profile, churning out about 12 million barrels a day, a 6% increase from January production, according to federal data for the week ended Oct. 14. 

One reason for the restraint is pressure from investors, who have been stung by years of the industry’s free spending and are demanding that oil companies keep production largely flat while increasing buybacks and dividends. That capital discipline has also allowed producers to clean up their balance sheets and put them on solid footing to weather market volatility, analysts said. 

Mr. Biden said Wednesday that oil companies shouldn’t be using their profits for investor payouts during the war in Ukraine and urged them to increase production. Administration officials say their plan to refill the Strategic Petroleum Reserve gives producers assurance of future demand, allowing them to increase drilling now.

Oil-industry groups have said Mr. Biden’s releases have been responsible for tepid production growth in recent months because drawing down reserves artificially lowers prices in the short term, dissuading investment in new oil production.

Linhua Guan,

chief executive of driller

Surge Energy Inc.,

said that Mr. Biden’s offer could see some takers but that his administration’s other policies pertaining to the oil-and-gas industry made new investments unattractive. A Wall Street Journal review of federal data found that new oil leases on federal lands have slowed greatly under Mr. Biden, a point of contention for the industry.

“The longer these bad policies last, probably the production increase will be much smaller,” Mr. Guan said. 

Mr. Biden pledged to stop drilling on federal lands as a candidate, saying the nation needs to transition to clean energy. 

Marshall Adkins,

a managing director at investment bank

Raymond James Financial Inc.,

said a view among producers that crude prices will remain elevated for the foreseeable future makes them less likely to presell oil. Shale companies have been letting their hedges—contracts to sell future production at a fixed price—roll off to maximize exposure to high commodity prices, he said. 

Mr. Adkins said production cuts from the Organization of the Petroleum Exporting Countries, combined with sanctions targeting Russia and potentially rebounding demand from China, could lead to a supply gap that would push crude prices back to $120 and even higher. “[If] I think oil is going to be a lot higher a year from now, I’m not going to hedge at $70,” he said. 

The possibility that the cost of materials, equipment and labor could keep rising also makes locking in prices unappealing to producers, said

Robert McNally,

president of consulting firm Rapidan Energy Group and a former energy adviser to President

George W. Bush.

“The shale oil companies don’t know what their costs are going to be in a year or two,” he said. 

Shifting from releasing the reserves to refilling them could remove large amounts of oil from the global market, further tightening supplies and contributing to inflation, some analysts said. 

“The time to replenish is during times of economic slack, when there’s surplus oil to buy,” said

Kevin Book,

managing director at consulting firm ClearView Energy Partners LLC. 

Write to Benoît Morenne at [email protected]