The gist: The purpose of the recently passed federal stimulus is to counterbalance the hit that’s happening from stay-in-place orders crippling economic activity. While this stimulus will help a number of businesses weather this storm, it’s not near enough to protect Lafayette’s oil and gas industry, which faces existential threats that require more than short-term subsidies.
The problem is it’s not profitable to drill for oil at current prices. Two months ago, the price of West Texas Intermediate crude — the benchmark price for oil that’s traded most frequently — was more than $50 per barrel. Now it’s hovering around $25 per barrel. Breakeven for most producers requires prices above $40 per barrel. While this disparity has some impact on oil production, where it really hurts is on oil exploration, as it makes no financial sense to drill new wells with prices this low.
A lack of oil exploration hurts Lafayette’s economy particularly hard. Many local service companies make their money helping oil companies drill new wells.
“Louisiana oil and gas companies are scrounging every day figuring out how to make payroll,” says Gifford Briggs, president of the Louisiana Oil and Gas Association, a trade organization that represents small- and medium-sized oil companies.
The recently passed stimulus includes no special funding for the oil and gas industry, though it does offer relief for small businesses. If a business has less than 500 employees, it can apply for a loan from the Paycheck Protection Program. Generally, PPP loans are forgivable if the money is used to keep employees on the payroll and up to 25% of these loans can be used to pay for rent, mortgages, and utilities. But it’s only designed to cover the cost of two months worth of these expenses.
“If two months from now somehow, magically, everything’s fixed and the industry’s moving back up, the stimulus would have helped,” says Briggs. “The challenge we’re facing is likely longer than two months, though. So it helps but it’s not a solution.”
The problem in a nutshell? Supply of oil is up while demand has cratered. A price war between Russia and Saudi Arabia has flooded the world market with cheap oil. Meanwhile, coronavirus has frozen the global economy. People aren’t buying or moving around, shrinking demand for oil.
“The decisions by Saudi Arabia and Russia to add just 2-3 million barrels per day more production to global supply was enough to send shockwaves through the market and cause the price to fall really low,” Briggs says. “But what we’re facing now is much larger than that. We’re looking at a 20-30 million barrels per day decrease in demand. It’s a fundamental change in how the world operates. We haven’t really ever seen anything like that.”
There’s a big meeting of all major oil producing countries Thursday, with talk of production cuts, but even that might not be enough. Even a 10% production cut wouldn’t make up for crash in demand, Briggs says. So long as economies remain sluggish, production cuts would only improve prices slightly.
Meanwhile, the glut of oil is filling up storage capacity, which guarantees that any recovery in closing the gap between supply and demand will be slow. Briggs paints a stark picture of the gap between supply and demand, even if things rebound. Storage supplies have gotten so big, he says, demand would have to exceed production by 5 million barrels per day for 200 days — both of which would be unprecedented — to eat through the stockpile that will be built up during the slowdown. “But even then, now it’s December and we’re still having to hope the coronavirus doesn’t come back again,” he says.
LOGA is advocating several policies to help keep Louisiana’s oil and gas industry alive. Many are perennial legislative priorities for the oil and gas lobby, including lowering royalty rates and severance taxes, and pushing through changes to the legal system that would prevent or eliminate lawsuits filed against producers over legacy environmental damage. “The idea is that we need to do whatever we can to lower the breakeven point so some production can continue that otherwise would not,” says Briggs. “Though that’s not a saving grace when we have no place to put the oil.”
Last week President Trump met with major oil companies to discuss how to protect U.S. oil production capacity. So there is some chance that more help is on the way. But just because something is done to help U.S. oil doesn’t necessarily mean it will help protect Louisiana oil companies. Ponders Briggs: “The questions for Louisiana and the federal government are how much help are we going to provide to weather this storm, how long is this storm, and when the economy and our industry rebounds, is Louisiana going to play a part and to what degree will we play a part?”
The unfortunate reality is Louisiana’s oil and gas industry can’t survive this current climate for long. And we don’t know how long this current climate will last. “We haven’t seen anything that would indicate that a shift is around the corner back to normal any time soon,” says Briggs.