The US Oil & Natural Gas Industries are Facing Severe Financial Issues

by Duane Nichols on April 2, 2020

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Financial Instability of the Oil & Gas Industry in the Face of COVID-19

From the FracTracker Alliance, March 30, 2020

The COVID-19 health crisis is setting off major changes in the oil and gas industry. The situation may thwart plans for additional petrochemical expansion and cause investors to turn away from fracking for good.

Persistent Negative Returns

Oil, gas, and petrochemical producers were facing financial uncertainties even before COVID-19 began to spread internationally. Now, the economics have never been worse.

In 2019, shale-focused oil and gas producers ended the year with net losses of $6.7 billion. This capped off the decade of the “shale revolution,” during which oil and gas companies spent $189 billion more on drilling and other capital expenses than they brought in through sales. This negative cash flow is a huge red flag for investors.

“North America’s shale industry has never succeeded in producing positive free cash flows for any full year since the practice of fracking became widespread.” IEEFA

Plummeting Prices of oil AND natural gas are BOTH problematic

Shale companies in the United States produce more natural gas than they can sell, to the extent that they frequently resort to burning gas straight into the atmosphere. This oversupply drives down prices, a phenomenon that industry refers to as a “price glut.”

The oil-price war between Russia and Saudi Arabia has been taking a toll on oil and gas prices as well. Saudi Arabia plans to increase oil production by 2 – 3 million barrels per day in April, bringing the global total to 102 million barrels produced per day. But with the global COVID-19 lockdown, transportation has decreased considerably, and the world may only need 90 million barrels per day.

If you’ve taken Econ 101, you know that when production increases as demand decreases, prices plummet. Some analysts estimate that the price of oil will soon fall to as low as $5 per barrel, (compared to the OPEC+ intended price of $60 per barrel).

Corporate welfare vs. public health and safety

Oil and gas industry lobbyists have asked Congress for financial support in response to COVID-19. Two stimulus bills in both the House and Senate are currently competing for aid.

Speaker McConnell’s bill seeks to provide corporate welfare with a $415 billion fund. This would largely benefit industries like oil and gas, airlines, and cruise ships. Friends of the Earth gauged the potential bailout to the fracking industry at $26.287 billion. In another approach, the GOP Senate is seeking to raise oil prices by directly purchasing for the Strategic Petroleum Reserve, the nation’s emergency oil supply.

Speaker Pelosi’s proposed stimulus bill includes $250 billion in emergency funding with stricter conditions on corporate use, but doesn’t contain strong enough language to prevent a massive bailout to oil and gas companies.

Hopefully with public pressure, Democrats will take a firmer stance and push for economic stimulus to be directed to healthcare, paid sick leave, stronger unemployment insurance, free COVID-19 testing, and food security.

The industry is now grasping at straws

Fracking companies were struggling to stay afloat before COVID-19 even with generous government subsidies. It’s becoming very clear that the fracking boom is finally busting. In an attempt to make use of the oversupply of gas and win back investors, the petrochemical industry is expanding rapidly. There are currently plans for $164 billion of new infrastructure in the United States that would turn fracked natural gas into plastic.

There are several fundamental flaws with this plan.

One is that the price of plastic is falling. A new report by the Institute for Energy Economics and Financial Analysis (IEEFA) states that the price of plastic today is 40% lower than industry projections in 2010-2013. This is around the time that plans started for a $5.7 billion petrochemical complex in Belmont County, Ohio. This would be the second major infrastructural addition to the planned petrochemical buildout in the Ohio River Valley, the first being the multi-billion dollar ethane cracker plant in Beaver County, Pennsylvania.

Secondly, there is more national and global competition than anticipated, both in supply and production. Natural gas and petrochemical companies have invested in infrastructure in an attempt to take advantage of cheap natural gas, creating an oversupply of plastic, again decreasing prices and revenue. Plus, governments around the world are banning single-use plastics, and McKinsey & Company estimates that up to 60% of plastic production could be based on reuse and recycling by 2050.

Sharp declines in feedstock prices do not lead to rising demand for petrochemical end products.

Third, oil and gas companies were overly optimistic in their projections of national economic growth. The IMF recently projected that GDP growth will slow down in China and the United States in the coming years. And this was before the historic drop in oil prices and the COVID-19 outbreak.

“The risks are becoming insurmountable. The price of plastics is sinking and the market is already oversupplied due to industry overbuilding and increased competition,” said Tom Sanzillo, IEEFA’s director of finance and author of the report.


See also: Proposed PTTGC Petrochemical Complex in Ohio Faces Significant Risks, Institute for Energy Economics and Financial Analysis, March 2020

“Financial outlook dims as financial and policy pressures mount”

The PTTGC Petrochemical Complex planned for Belmont County, Ohio by Thailand-based PTT Global Chemical (“PTTGC”) and Daimler of South Korea promises jobs, taxes and spinoff benefits to the State of Ohio and the people of southeastern Ohio. The project is also a critical element of a larger plan to establish a second U.S. petrochemical hub in the Ohio River Valley, akin to the Gulf Coast. This report highlights risks to the PTTGC project. The risks, left unheeded, strongly suggest that the plant will face financial distress when it opens and into the foreseeable future, reducing potential economic benefits.

{ 5 comments… read them below or add one }

C. P. Dubbs April 2, 2020 at 1:37 pm

Tell Trump: Focus on combating COVID-19, NOT oil industry bailouts!

Western Values Project | Defending America’s Public Lands, April 2, 2020

The Trump administration is pushing for an all-out bailout for oil and gas corporations and billionaire oil tycoons that will cost American taxpayers a hefty price.


Barb Klinger April 2, 2020 at 4:46 pm

They should put as much thought and energy into saving the earth and it’s people. When you are trying to do the wrong thing out of greed it just doesn’t work for anyone.


Bloomberg Update April 15, 2020 at 6:27 pm

Oil Declines as Concern of Steep Recession Counters OPEC+ Cut – Bloomberg, April 13, 2020

Oil declined as projections for the steepest recession in almost a century outweighed planned output cuts from the world’s biggest producers.

Futures in New York fell as much as 5.7% amid persistent concerns of a massive supply glut. The International Monetary Fund estimated on Tuesday that global gross domestic product will shrink 3% this year, signaling that energy demand will plunge, and could be worse than anticipated if the coronavirus lingers or returns.

At the same time, a key timespread on the American benchmark — a gauge of the health of the market — is at its weakest level in more than a decade as speculation grows that the main U.S. storage hub will fill to capacity.

Overwhelming supplies push WTI deeper into contango despite output cuts

This weekend’s OPEC+ deal to slash production by 9.7 million barrels a day amounts to the largest coordinated cut in history, but the decision doesn’t go into effect until May and is still dwarfed by the decline in oil consumption as the coronavirus pandemic keeps multiple countries in lockdown.


NGI Daily April 19, 2020 at 11:08 am

Lower 48 Oil, Gas Permitting Expected to ‘Collapse in April’ Amid Pandemic

From Andrew Baker, NGI Shale Daily, April 17, 2020

Having already plunged by 62% year/year (y/y) in the first three months of 2020, permitting for Lower 48 oil and natural gas drilling is expected to drop further in April, according to a team of Evercore ISI analysts led by James West.

Permit submissions for oil drilling in the Permian Basin and Eagle Ford Shale dropped by 26% and 23% respectively for the week ended April 10 compared with the previous week, the Evercore team said in their latest tally, which was released Wednesday. That equated to 140 permits in the Permian and 27 permits in the Eagle Ford. Nonetheless, total permitting activity in oil formations actually rose 4% as permitting in other shale plays remained strong, analysts said.

Permits for natural gas drilling fell by 53% week/week, driven by a 61% decline in the Marcellus Shale to 12 permits, according to analysts, who said, “We expect permitting to collapse in April.”

The projection follows a forecast by the International Energy Agency that global oil demand will drop by a staggering 9.3 million b/d this year amid unprecedented demand destruction wrought by the Covid-19 pandemic.

For the first quarter of 2020, the Rockies and Northeast regions drove steep declines in permit submissions for oil and gas formations, the Evercore team said.

Permit submissions for oil-directed drilling fell by 63%, analysts said, led by sharp declines of 85% in the Denver-Julesburg (DJ)/Niobrara and 97% in the Powder River basin.

The DJ straddles Colorado and Wyoming, while the Powder River covers Northeast Wyoming and Southeast Montana.

Total Wyoming drilling permits totaled 67 in March, down from 3,535 in the same month a year ago, while Colorado permits fell to 43 from 556.

Total permits in Texas fell 45% y/y to 666 in March, while permits in Pennsylvania dropped 35% to 48.

California was an outlier, with permits skyrocketing to 492 from 32 in the year-ago month.

Permitting in natural gas formations fell 36% to 714 for the quarter, West’s team said, driven by a 43% decline in the Marcellus shale to 251 permits, partially offset by a 21% increase in the Haynesville Shale.

On a month/month (m/m) basis, total onshore permitting stayed relatively stable in March, dropping by just 2%.

Respective declines of 12% and 18% in the Permian and Eagle Ford were partially offset by stronger activity in other shale plays, where permitting was up 76%, West’s team said.

However, the relative month on month stability belies the steep y/y decline for the quarter, analysts said, “as the onshore permitting collapse is only 20% above the 2016 low.”

Rig count data published Friday by Baker Hughes Co. appeared to support Evercore’s prediction of a steeper plunge in April, with the oil rig count dropping to 438 this week from 504 the previous week, a 13% decline. The natural gas rig count shed seven to land at 89.


Rigzone Update May 7, 2020 at 10:30 pm

Oil Will Hit $100 in Around 18 Months

From an Article by Andreas Exarheas|Rigzone, May 07, 2020

The oil price has been predicted to hit $100 per barrel in around 18 months.

The oil price will hit $100 per barrel in around 18 months.

That’s what Orascom Investment Holding Chairman and CEO Naguib Sawiris believes, a new CNBC television interview has revealed.

“I actually believe that in, let’s say, 18 months from now the oil will hit $100,” Sawiris told CNBC via phone in the interview, which was published on CNBC’s website on May 6.

“The shale industry will vanish for at least one year … and the start-up is going to be difficult because banks are going to be very reluctant to finance them back because they know that they’re very vulnerable … even [in] traditional oil many of the U.S. facilities have closed down,” Sawiris added.

“The world is growing anyhow, even with this recession, so suddenly when the demand is still there and is coming … and they want oil, it will not be there because most of the people are shut down. So, the offering will be less than the need … and then the price will go back very high,” Sawiris continued.

According to the U.S. Energy Information Administration’s latest short-term energy outlook, which was released on April 7, Brent crude and WTI will average $45.62 and $41.12, respectively, in 2021. Standard Chartered currently believes Brent and WTI will average $44 and $41, respectively, next year.

Without giving exact figures, Rystad Energy told Rigzone on May 6 that Brent and WTI will strengthen “a bit” in 2021 from where it will average this year and then rise “quite a lot” in 2022.

“Demand will be back up, but supply will not be where it normally would due to the shut-downs and the lack of investments and drilling,” A Rystad spokesperson said.

At the time of writing, Brent was trading at around $29 per barrel and WTI was trading at around $24 per barrel.

Orascom Investment Holding is a holding company investing in industries that are “critical to shaping the future”, according to the company’s website. Sawiris, who is also the chairman of La Mancha Holding, a private natural resource investment vehicle of the Sawiris family group, has a net worth of $3 billion, as of May 7, according to Forbes.


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