Week Ending March 27, 2020

COVID-19 Measure in Congress, Oil Market Instability Top Washington Policy Concerns

This Article Appears as Published in Foster Report No 3292
COVID-19 Measure in Congress, Oil Market Instability Top Washington Policy Concerns

The veracity of the crisis or consensus adage about Congress – that it takes a crisis or consensus to pass legislation – was on display as legislation was passed unanimously in the Senate to address the COVID-19 health and economic crisis while a lack of agreement on oil market intervention is evident.

At press time March 27, the House of Representatives was poised to consider and approve the $2.2 trillion COVID-19 relief legislation that was passed by the Senate in a rare 96-0 vote. The Senate legislation includes billions of dollars in relief for individuals, health care facilities, small businesses, unemployment benefits and aid to hard-hit industries.

Relief for the energy sector, including tax measures for renewable resources, funding to boost Strategic Petroleum Reserve (SPR) levels and other measures that were the subject of lobbying by different constituencies, was not included in the Senate package, sources said. Republican Senate leaders sought to include funding for oil purchases to try and limit the financial losses in the producing sector and increase SPR, but agreement could not be reached with Democrats and the energy measures were left out of the legislation.

The low oil prices – around $20/barrel for West Texas Intermediate at different points in the past few weeks – are viewed as positive for consumers if gasoline prices drop, even though the quarantine restrictions of COVID-19 in different states are limiting travel, officials noted.

The regions where low oil prices are devastating the economy are limited and consuming-state lawmakers are unlikely to endorse efforts to raise oil prices, said Kirsten Fontenrose, director of the Scowcroft Middle East Security Initiative at the Atlantic Council. Any short-term action to address oil market concerns looks like it will have to come from the Trump administration itself and not Congress, Randy Bell, director of the Global Energy Center at the Atlantic Council, said March 26.

And there have been plenty of pushes to have the administration intervene. Compared with the unanimous vote on the relief bill, there are different opinions among lawmakers about when does the oil market disruption from Saudi Arabia and Russia call for a U.S. policy response and what would that response look like. A handful of Senators from oil-producing states asked the State Department to intervene in the dispute between Saudi Arabia and Russia that has global oil prices below $30/barrel with no end in sight to the current price war.

Republican lawmakers have also sent direct pleas to Saudi Crown Prince Mohammed bin Salman, asking the kingdom to reconsider its decision to ramp up production. Separately, Republican senators from Oklahoma, Alaska, North Dakota, Mississippi, South Dakota, and Wyoming also asked Commerce Secretary Wilbur Ross to impose tariffs on oil imports from the two countries under Section 232 of the Trade Expansion Act of 1962.

Sen. Lisa Murkowski (R-Alaska), chairman of the Senate Energy and Natural Resources Committee, has been part of all of those efforts, including the March 25 letter to Secretary of State Mike Pompeo. They said Saudi Arabia should “leave the antique OPEC cartel immediately” and partner with the U.S. on strategic infrastructure projects as a free market powerhouse.

The senators told Pompeo that the U.S. has plenty of tools at its disposal to use in working with Saudi Arabia, such as aid and assistance that should not be deemed to be perpetual or unconditional. “We are reminded of the levers of statecraft the Administration is empowered to exercise. From tariffs and other trade restrictions to investigations, safeguard actions, sanctions, and much else, the American people are not without recourse,” they said.

Texas Republican Sens. John Cornyn and Ted Cruz were not part of the letter-writing efforts, mirroring the hands-off stance of free-market supporters that include the American Petroleum Institute and others. The debate of whether intervention is necessary has included what some viewed as “unthinkable” a few weeks ago – the Texas Railroad Commission (TRC) acting to limit production through prorationing.

TRC Commissioner Ryan Sitton penned an opinion piece that said leaders need to stave off an extended oil war and the TRC could use its prorationing authority, which has not been used since 1973. The TRC could trim production in the state by 10% if Saudi Arabia is willing to cut production by 10% from pre-pandemic levels and Russia is willing to do the same, Sitton wrote. Because Texas controls its destiny, but the oil market is global, “we would need our federal government, and our president to make a deal that stabilizes oil markets,” he said.

If oil prices are stabilized into the mid-$30s/barrel, it would still mean hard times in the oilpatch, but it would fend off a total industry meltdown, Sitton said. “We don’t have the whole picture yet, but with a global pandemic disrupting our lives, perhaps it is worth discussing whether pro-rationing for Texas producers is appropriate, if it can return the world back to the market,” he wrote.

TRC Chairman Wayne Christian said he is wary of using the Commission’s prorationing authority, and API President and CEO Mike Sommers advocated federal policymakers avoid market interference. “We have always supported the market to be an arbiter of the price of oil and gas, and during times of crisis it is not appropriate to abandon those principles,” Sommers said in a statement. “Because we are in a global marketplace, imposing sanctions on any country for free flow of crude across borders would be very damaging to the broader oil and gas industry” and would add uncertainty into global supply chains, he said.

U.S. natural gas demand and prices have generally been stable amid the oil price collapse, with some areas seeing lower prices recently and the associated gas tied to oil production expected to decline as producers cut back on investments and operations. The number of oil and gas companies cutting their upstream budgets and spending plans due to the oil price collapse grows almost daily.

While the debate in Texas is taking place, another oil-producing state, North Dakota, took a step to try and stem the financial losses in the upstream sector. The North Dakota Industrial Commission directed the Department of Mineral Resources to reinstate waiver guidelines that allow producers to keep wells in an uncompleted or inactive status for one year. The waivers could be extended if operators apply for renewable until WTI prices exceed $50/barrel for 90 days.

The individual state measures are similar to some of the steps being taken to keep energy sector workers healthy and on-site at different energy facilities and control centers while the COVID-19 virus expands its reach. Utilities have said power plant employees may be restricted to certain sites and limiting contact with those outside the workforce, and different energy sector trade groups are seeking state designations of their member company employees as essential workers.

FERC and the National Association of Regulatory Utility Commissioners (NARUC) urged state authorities to designate utility workers as essential to the nation’s critical infrastructure. The U.S. Homeland Security Cybersecurity and Infrastructure Security Agency issued a memorandum March 19 designating a full list of essential workers, which includes healthcare, law enforcement, first responders, energy, water and wastewater, transportation and logistics among the sectors covered. The agency acknowledged that the list is only advisory in nature and is not a directive, as states and local communities have authority to take measures to address critical infrastructure workers within their jurisdictions.

In a March 26 joint statement, FERC and NARUC leaders encouraged state and local authorities to consider employees who maintain critical energy infrastructure, such as line workers maintaining the power grid and operators of pipelines, to be deemed essential so they can continue to keep facilities operating.

By Tom Tiernan ttiernan@fosterreport.com

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