Industry Infighting as Oil and Gas Seek Government Help

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The $2 trillion stimulus bill that the U.S. Congress rushed to pass in order to respond to millions of job losses provided a once-in-a-generation opportunity for corporate lobbying. The oil and gas industry has been no exception, but some of the proposed initiatives are dividing theย industry.

Crude oil prices went into a freefall in early March following the one-two punch of an OPEC price war and the meltdown of financial markets because of the coronavirus pandemic. In less than two weeks, prices of the oil benchmark Western Texas Intermediate (WTI) dropped from $45 to the low-$20s per barrel, plunging the global oil industry into a state of deep crisis. A tenth of global oil supply could become uneconomic toย produce.

U.S. shale executives immediately went to Washington. Continental Resourcesโ€™ CEO Harold Hamm, who personally lost billions of dollars as his companyโ€™s stock price dropped, reached out to the Trump administration for government help. Ideas have ranged from a tariff on imported crude in response to the Saudi-Russian price war, to low interest loans for drillers, to the Department of Energy buying oil for the Strategic Petroleum Reserve (SPR).

President Trump announced the SPR purchase to much fanfare, but the idea did not survive in the stimulus billโ€™s final passage. Neither did the low interest loans, at least not directly, although the $500 billion for American businesses impacted by the coronavirus (which some have called a โ€œslush fundโ€) could function as a bailout for shaleย drillers.

House for rent in Permian Basin
A sign advertising house and RV spaces for rent on a house in Coyanosa, Texas,ย in the Permian Basin, where the shaleย industry has seen a slowdown.ย Credit:ย Justinย Hamelย ยฉย 2020

Meanwhile, the idea of a tariff or a ban on imported oil remains alive and appears to be inching forward. On March 20, a group of Republican Senators urged the U.S. Department of Commerce to investigate โ€œdumpingโ€ of oil by Saudi Arabia and Russia. โ€œIt is essential that the American government respond with decisive action,โ€ the senators led by Sen. James Inhofe (R-OK) wrote in aย letter.

North Dakota Senator Kevin Cramer (R) pressed President Trump on a March 31 phone call to prohibit imports of oil from abroad, forcing refiners to instead buy oil from U.S. shale fields. It would be an โ€œAmerica firstโ€ policy, Sen. Cramer said, according to S&P Global Platts. โ€œI don’t think we lose a lot by considering a more protectionist oil policy now that we produce enough for our country’s use forย sure.โ€

The logic is that refiners would have to buy American oil only, with some exceptions, providing an outlet for the massive surplus of oil coming from places like the Permian and Bakken shales. Sources from within the White House told S&P Global Platts that President Trump was considering theย idea.

โ€œI never thought I would be saying this: Maybe we have to have an oil [price] increase. Because we do. The price is so low now,โ€ President Trump said on a Fox News interview on Monday, shortly before calling Russian President Vladimir Putin to discuss, among other things, low oilย prices.

Industryย Infighting

While the U.S. government is looking for ways to prop up unprofitable drilling, the industry is not a monolith. The collapse of the oil markets appears to be leading to infighting from various factions within the fossil fuel industry. For example, the oil majors are content to let smaller shale oil drillers fail, as DeSmog has reported, which would allow them to snatch up the shattered pieces on theย cheap.

But the idea of tariffs on imported crude or a more comprehensive ban on imports is creating another fissure in the industry. Refiners, many of which import from abroad, are dead set against the idea. Refiners โ€œarenโ€™t seeking bailout relief from the government or financial stimulus, but they do need to avoid having additional hurdles thrown their way,โ€ Susan Grissom, Chief Industry Analyst for the American Fuel and Petrochemical Manufacturers (AFPM), said in a post on the groupโ€™s website. AFPM is a lobby group for refineries and petrochemicalย producers.

AFPMโ€™s wish list includes โ€œkeeping the energy market free and open by avoiding embargoes or tariffs that would drive up consumer costs,โ€ Grissom said. A growing number of refineries are shutting down as oil consumptionย collapses.

But it isnโ€™t just refiners that oppose the tariffs. The shale gas industry is also against restricting imported oil. The Marcellus Shale Gas Coalition, a trade association, sent a letter to U.S. Secretary of Commerce Wilbur Ross on March 25, opposingย tariffs.

โ€œWe have watched with some concern recent advocacy โ€ฆ to impose tariffs on imports of crude petroleum,โ€ the letter said. โ€œFrankly, such remedies do little to address the condition of natural gas producers in Pennsylvania and elsewhere in ourย region.โ€

The letter added that tariffs โ€œmay even do harm to natural gas producersโ€ because it could โ€œstimulate crude oil production which in turn would cause the production of additional incidental or โ€˜freeโ€™ gas to be produced out of those crude-oilย plays.โ€

As the letter states, in some ways shale gas drillers in Appalachia are in direct conflict with oil drillers in the Permian Basin. The fracking craze in West Texas targets oil production, but a gusher of โ€œassociated gasโ€ comes up as a byproduct. The result has been a glut of natural gas that has contributed to a crash in prices nationwide.

natural gas pipeline warning sign
Pipeline warning flag.ย Credit:ย ยฉย 2016ย Lauraย Evangelisto

Even before the global coronavirus pandemic, natural gas prices fell below $2/MMBtu, threatening gas drilling in Appalachia. Pittsburgh-based EQT, the largest natural gas driller in the country, said late last year that โ€œa lot of this development doesnโ€™t work as well at $2.50 [per MMBtu]ย gas.โ€

Prices are trading at roughly $1.70/MMBtu currently, and the gas industry finds itself in a crisis. EQT suspended its dividend on March 26 in order to deal with its debtย load.

At the same time, in some ways gas drillers have more reasons for optimism than Texas oil drillers. Thatโ€™s because some forecasts suggest that gas prices will rise next year, precisely because some Permian oil drillers would be put out of business. Less oil drilling in Texas means lower gas production asย well.

โ€œ[A]s we enter the 2020/21 winter, we expect production declines to be visible enough that gas prices will rally sharply in our view to help summer 2021 reach comfortable inventory levels,โ€ Goldman Sachs wrote in a report on March 24. The investment bank sees gas prices averaging $3.25/MMBtu in the summer of 2021, roughly twice as high as todayโ€™sย prices.

This is a welcome development for frackers in Pennsylvania, which is why they are trying to head off a tariff on imported oil, a move that could lead to more Texas gas produced than theyโ€™d like.ย ย 

Lobbying Blitz toย Continue

The U.S. Congress is already discussing a fourth round of pandemic-related stimulus measures, and the oil industry is pressing Congress to consider a suite of goodies, which will likely see the revival of the SPR initiative atย least.

On many fronts, the various factions of the fossil fuel industry are in alignment, and are eager to capitalize off of the emergency atmosphere in the country. As The New York Times reported, the plastics industry has launched a campaign to roll back plastic bag bans, calling them a โ€œsafety riskโ€ and citing flimsy research to single out unwashed reusable bags as โ€œvirus-laden,โ€ while disposable plastic isย clean.

At least three states have passed new laws criminalizing protests of the fossil fuel industry. The oil lobby has used the global pandemic as justification to label pipelines as โ€œcritical infrastructure,โ€ imposing harsh fines and felony charges for any property damage fromย protesters.

The Trump administration is also easing off of enforcement of environmental violations and watering down fuel economy standards.

But the tariff on foreign oil has the distinction of being the quickest action that the Trump administration can take to aid failing oil companies, while also being one of the most divisive actions, pitting Big Oil against indebted shale, upstream producers against refiners, and gas against oil. As the crisis sweeps over the fossil fuel industry, the desperate calls for government help are dividing erstwhileย allies.

Main image:ย A roughneck couples drill pipe to the drilling line on Citadel Rig 6. Citadel moved into the Permian Basin after a downturn in Alberta. Reeves County, Texas.ย Credit:ย Justinย Hamelย ยฉย 2020

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Nick Cunningham is an independent journalist covering the oil and gas industry, climate change and international politics. He has been featured in Oilprice.com, The Fuse, YaleE360 and NACLA.

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