Caught among the price war between OPEC and Russia, the declining oil demand as a result of the global coronavirus pandemic and mounting pressure from investors, the U.S. oil industry cried uncle. Uncle Sam, that is.
Last month, as pressure on the industry intensified and prices for West Texas Intermediate crude — which have tumbled 60% so far this year — slipped below $20 a barrel, the industry, which had long criticised government subsidies for renewables and biofuels, suddenly changed its tone and asked the federal government for help.
Independent producers urged the Trump administration to enact import tariffs on foreign oil, a measure opposed by the majors and refiners. President Trump responded in his own particular idiom, tweeting that he expected an agreement between the Saudis and the Russians to curtail production by 10 million barrels. The Energy Department proposed spending $3 billion in stimulus funds to buy 30 million barrels of crude for the Strategic Petroleum Reserve from small and mid-sized producers, but Democrats blocked the move, calling it “a bailout for Big Oil.”
Meanwhile, the Texas Railroad Commission, which regulates oil and gas production in the biggest oil-producing state, agreed to hold hearings on enacting production quotas, an authority it hasn’t exercised in five decades. More than 90 speakers, mostly from the industry, signed up to speak at the first hearing on April 14.
“If the Texas Railroad Commission does not regulate long term, we will disappear as an industry,” said Scott Sheffield, CEO of Pioneer Natural Resources, a major independent producer. Sheffield discounted any notion from his fellow executives of seeking free-market solutions to the current crisis. “That’s a joke. I haven’t seen a free market in 35 years as CEO.”
Matt Gallagher, the CEO of Parsley Energy, writing in the Houston Chronicle, said his company slashed its 2020 capital budget by 40% and urged other companies to voluntarily cut production.
Larger companies took similar measures. Chevron, for example, halved its spending for U.S. shale production and slashed 2020 capital spending by 20%, or $4 billion. Marathon Oil, a large independent producer, also said it will cut spending by 20%.
Among the hardest hit of U.S. producers is Occidental Petroleum, which paid $37 billion last year to acquire Anadarko Petroleum in a deal that saddled the company with $38 billion in debt just months before prices began to crater. In March, Oxy reduced its dividend to shareholders for the first time in 30 years and slashed spending by a third. The company followed that news a few weeks later by announcing a second round of cuts — $2.5 billion from its capital budget and $600 million from its operating budget — and reduced pay for employees by 30%. Senior executives took bigger pay cuts, and CEO Vicki Hollub saw her pay slashed by more than 80%.
Service companies, as they typically do, led the layoffs in response to the price rout. Even after a tentative deal among OPEC members and Russia, Baker Hughes said it would write down $15 billion in assets and cut capital spending by 20%. Schlumberger announced several weeks earlier it would reduce its budget by 30%, which would include restructuring, pay cuts and layoffs. Halliburton, meanwhile, previously announced it would furlough 3,500 workers in Houston and 400 in Oklahoma. Dozens of smaller players followed suit. Whiting Petroleum, which once traded as high as $150 a share, filed for bankruptcy in late March.
The price drop and the coronavirus response accentuated a bigger program in the industry: mounting debt. For years, many independent producers have overspent their cash flow, drilling new wells with cheap capital from private equity investors. In the past decade, the industry amassed some $400 billion in high-interest debt. That flow of easy money began to dry up before the pandemic. Last year, oil stocks began falling as investors demanded profitability over market share.
In the Permian Basin, the prolific engine for surging U.S. crude production, the slowdown is slow to arrive. In mid-April, 40 companies, mostly independent producers, in one week filed for permits to drill 110 new wells in the region. And companies continue to seek permits in other shale formations as well.
After several years of production increases, the U.S. Energy Information Administration now forecasts a decline of 183,000 barrels a day in May. Sheffield, the Pioneer CEO, predicted output ultimately could drop by as much as 2 million barrels.
The production declines likely mean that America’s transition to net oil exporter will be short-lived. In recent months, the U.S. exported more oil than it imported, but economists predict that will change as production falls. The biggest U.S. refineries still import heavy crude, rather than using the light, sweet crude produced from the country’s shale formations.
As oil and gas usage plunged in the first four months of the year, there are signs of other shifts in the U.S. energy sector. Coal use fell more than 13% in 2019, the most in 65 years, as coal-fired power plants shut down nationwide. The U.S. used 596 million tons compared with 688 million tons in 2018, and the EIA predicts coal consumption will continue to decline, dropping to 517 million tons this year. Coal has faced mounting competition from cleaner generating fuels, primarily natural gas, wind and solar power.
As the dirtiest fossil fuel, coal also is under pressure from policymakers concerned about climate change. Two of the most populous states, New York and California, have mandated a transition to clean energy.
Meanwhile, in the Oil Patch, the reality of a major bust is setting in. Some industry veterans are comparing the current crisis to the 1980s, but increasingly, it’s looking like the 1930s, when overproduction by American companies forced the government to intervene to control output and support prices to keep the industry afloat. So far, though, the industry is finding little sympathy from state or federal regulators.
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