Week Ending April 3, 2020

Producers Seek Relief; DOE Offers SPR Storage; White House Meeting Set

This Article Appears as Published in Foster Report No 3293
Producers Seek Relief; DOE Offers SPR Storage; White House Meeting Set

Some domestic oil producers are leaving no path for relief unexplored as they’ve petitioned state regulators and the Trump administration for some type of assistance from the double whammy of the global price war and effects from the COVID-19 pandemic.

An initial measure of relief came from the Department of Energy (DOE), which on April 2 announced it is making storage capacity immediately available at the Strategic Petroleum Reserve (SPR) for U.S. producers in an effort to take some oil off the market during a time of rising supplies and low prices. The announcement from DOE includes a solicitation making 30 million barrels of the SPR storage capacity available to producers struggling in the current price environment. DOE intends to make another 47 million barrels of SPR storage available at a later date.

The solicitation, which is believed to be unprecedented by some, calls for producers to deliver oil during May and June to be stored in the SPR for a short-term period, stretching into the first quarter of 2021. The request for proposals directs producers to submit proposals by April 9.

The plan marks a change after Congress shot down Trump administration plans to buy crude oil for U.S. producers to fill the SPR. President Donald Trump in March commented that the administration would aid producers with oil purchases to try and counter the ramp-up of production coming from Saudi Arabia and Russia and allies of those countries.

Trump phoned leaders of both countries recently to try and reach a resolution and oil prices showed a gain after he indicated on Twitter that production may be cut by 10 million barrels/d or 15 million b/d. “I expect & hope that they will be cutting back approximately 10 million barrels, and maybe substantially more,” which would be great for the oil and natural gas industry, Trump said in a tweet.

The veracity of his comment was questioned by many, since a production drop of that size would need actions by both countries and leaders from Russia and Saudi Arabia have shown little interest in stemming their production. Leaders from Saudi Arabia may agree to halt production gains, but only if other countries join them, and they may want something in return for such an agreement, such a limit on U.S. oil exports, market analysts said April 2.

Trump is scheduled to meet with oil industry executives on April 3, with media outlets speculating that officials from Chevron, Continental Resources and ExxonMobil intend to discuss the possibility of Jones Act waivers for U.S. shipping and tariffs on oil imports from Saudi Arabia. Individual companies may seek some type of action from the administration, but the American Petroleum Institute has maintained a ‘hands-off’ stance favoring the free market at this point.

After his tweet, West Texas Intermediate ended the day around $24/barrel April 2. That represented a gain from around $20/barrel, but anything below $30/barrel for an extended period will bring the U.S. oil industry to its knees, financial analysts have said. “There is no sugar-coating it, U.S. oilfield activity will collapse” if the WTI benchmark is well below $30/barrel, Raymond James Analyst Praveen Narra said in a recent note to clients. The pace of reduced production rig activity would likely be “at a pace we have not seen before,” Narra said.

The first big producer bankruptcy made headlines April 1 when independent shale driller Whiting Petroleum Corp. reported that it filed for Chapter 11 protection at the U.S. Bankruptcy Court for the Southern District of Texas.

“Given the severe downturn in oil and gas prices driven by uncertainty around the duration of the Saudi/Russia oil price war and the COVID-19 pandemic, the company’s Board of Directors came to the conclusion that the principal terms of the financial restructuring negotiated with our creditors provides the best path forward for the company,” said Bradley Holly, chairman, president and CEO of Whiting. “We are pleased to have secured a highly constructive restructuring framework with a critical mass of our noteholders,” Holly said in a statement. The company reached agreement with creditors to cut its debt by about $2.2 billion through the exchange of some of its notes for 97% of new equity in the reorganized company.

Whiting has drilling assets mainly in the Rocky Mountain region, with the largest projects in the Bakken and Three Forks shale plays in North Dakota and the Niobrara play in Colorado. The company has more than $585 million in cash and expects to continue operations without a material disruption to vendors, partners or employees. It should have sufficient liquidity to meet financial obligations during the bankruptcy restructuring without the need for additional financing, the company said.

A few days before the Chapter 11 filing, the board of Whiting approved executive bonus payments of about $14 million, including $6.4 million to Holly, who came to Whiting rom Anadarko Petroleum Corp. Shares of Whiting dropped almost 50% on March 31, to 36 cents/share, after being as high as $30/share a year ago and above $200/share during the shale boom in 2012.

Other companies are expected to join Whiting in a march to bankruptcy if oil prices do not rise, and in the past few weeks dozens of producers – including majors such as Shell and BP – made dramatic cuts in spending plans and operating expenditures. Tens of billions of dollars have been cut from company budgets and projects have been scaled back or postponed by firms such as Range Resources, Apache Corp., Cenovus Energy, Diamondback Energy and others.

In its April 1 announcement about COVID-19 measures and positioning the company to weather the current market volatility, BP cut 2020 spending by about 25% from previous full-year guidance, with current spending for the year planned to be about $12 billion. That includes a $1 billion reduction in upstream activity and $1 billion less in downstream operations that include marketing, refining and petrochemicals. Upstream production for 2020 is expected to be lower than 2019, BP said.

The company has about $32 billion in cash and undrawn credit facilities available, and S&P recently reaffirmed BP’s credit rating of A- while revising its outlook from positive to stable.

Because job security is a major concern amid the COVID-19 health crisis, BP said no employees will be laid off over the next three months as a result of cost cutting related to the virus.

The oil industry’s major lobbying arm, API, has not advocated for the Trump administration to intervene in the oil market, but oil-producing state representatives on Capitol Hill have pushed for certain actions. When the coronavirus relief package was being debated, Republican Senate leaders sought to include funding for oil purchases to try and limit the financial losses in the producing sector and increase SPR levels, but agreement could not be reached with Democrats and the energy measures were left out of the legislation.

Sen. Lisa Murkowski (R-Alaska) has joined with senators from other states in seeking assistance from the State Department and Commerce Department after Russia and Saudi Arabia agreed to ramp up production. On March 31, Murkowski sent a letter to the head of the Energy Information Administration (EIA) about oil storage data, which has become more vital as global supplies flood the market and demand has been affected by COVID-19. The threat of shutting in production is felt most acutely by small and medium producers that have fueled U.S. energy gains over the past decade, said Murkowski, chairman of the Senate Energy and Natural Resources Committee.

“Based on my conversations with energy experts, I believe that we must prioritize the collection and analysis of data related to petroleum storage,” Murkowski told EIA Administrator Linda Capuano. “Producers will continue to produce, filling up all kinds of tanks and tankers, until capacity is reached. Available petroleum storage can serve as a gauge of the potential for shut-in production, providing us some measure of both imminence and severity,” she said.

A group of about 40 lawmakers from the House of Representatives sent an April 2 letter to the White House with several suggested actions to provide assistance to producers. Royalty relief from the Department of Interior, regulatory relief from the Environmental Protection Agency, including clarity on methane regulations to replace the Obama-era plan, continued use of the SPR by DOE and measures to address unfair actions by Saudi Arabia and Russia were listed in the letter. News of a special energy envoy to Saudi Arabia is a great first step, but both Russia and Saudi Arabia “must be quickly brought to the negotiating table to resolve this crisis and address their hostile actions,” the House members told Trump.

Signing the letter were Republican Reps. Steve Scalise and Clay Higgins of Louisiana, Tom Cole and Markwayne Mullin of Oklahoma, Jeff Duncan of South Carolina, who co-chairs the House Energy Action Team with Mullin and many others.

If the oil market is not stabilized soon, the success of U.S. energy producers over the past decade will be rolled back, which would have a disastrous effect on the economy and jeopardize energy security, the lawmakers said.

Trump has spent years touting U.S. “energy dominance” and the gains made in domestic shale drilling, but with global oil prices around $25/barrel he is trying to avoid an industry collapse at the hands of foreign producers that have break-even prices lower than U.S. companies.

Prices available to producers have plummeted to the single digits in Western Canada and there have been indications of negative pricing for some oil grades in parts of North America, the International Energy Agency said in a new report. Producers in North America are more exposed to harsh effects of low oil prices compared with producers in Russia and the Middle East.

Source: International Energy Agency

Some producers may continue pumping oil even if they are losing money if the costs of shutting facilities, and perhaps restarting them, exceed the financial losses in the current market, IEA said. Other producers can wait out the market while weaker rivals go out of business, improving the prospects for those who continue operating.

Oil price volatility in the past taught producers to hedge their output, which can provide protection for those companies with hedges priced around $50/barrel, IEA added. But such hedges rarely extend very far in the future, and the design of some hedges is not providing much protection in the extreme market conditions.

Producing projects that were considered low-cost at $40/barrel just a few weeks ago are suddenly looking high-cost today, so companies are cutting costs by as much as 35% for 2020, according to Tim Gould and Neil Atkinson, lead authors of the IEA report. The prospects for further cost reductions is more limited today than it was in the last major price drop, in 2014-15, because much of the efficiency gains were wrung out of the system during those lean years. “As a result, the current declines in investing are translating more directly into cutting back activity,” the authors wrote.

As demand dropped due to COVID-19 and the dispute between Russia and Saudi Arabia flooded the market, storage is filling and the impacts will be felt all along the chain of refineries, freight shipping and storage, IEA said. “For some producers, there could soon be no place for their oil to go.”

DOE is trying to address that situation, noting in its announcement about making SPR storage capacity available that limited storage in the market is forcing production to be shut in and hurting the U.S. economy and its workforce. Trump directed DOE to fill the SPR to its maximum capacity, which is a logical action to address the market disruptions, said Energy Secretary Dan Brouillette.

DOE will work with Congress to find ways to make funding available to buy U.S. oil for the SPR, but it is moving with urgency to use available storage capacity for the benefit of American companies, Brouillette said.

At the state level, the Texas Railroad Commission (TRC) is undergoing its own debate on whether to use its prorationing authority, which has not been used since 1973, to limit production as a means to improve market conditions for producers. Producers have requested a hearing, and the TRC scheduled a hearing to take place by webcast April 14. Comments on the idea of using prorationing are being accepted through April 8, and some parties may be asked to testify live by video for the hearing, the TRC said.

TRC Chairman Wayne Christian, a Republican who has said he is wary of using prorationing, applauded Trump for his efforts to stabilize oil prices with the phone call involving Saudi Arabia and Russia. Trump “understands that American Energy Dominance has given us far more than economic growth and jobs,” Christian said, stating that it provided unprecedented national security.

The dual effects of COVID-19 on demand and the international price war has been devastating to Texas producers. “It is essential for us to stabilize the market quickly to ensure the future survival of the industry,” Christian said.

Commissioner Ryan Sitton, who lost in the Republican primary in March to keep his seat on the TRC, has suggested that the state could trim production by 10% from pre-pandemic levels if Saudi Arabia and Russia were to do the same. On Twitter April 2, Sitton said he had “a great conversation” with Russian Energy Minister Alexander Novak about reducing global oil supplies, and he looks forward to speaking with Saudi Prince Abdulaziz bin Salman soon.

By Tom Tiernan ttiernan@fosterreport.com

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