COVID-19 Texas Impact Pt. 3 – In the Oil Patch Radio Show

OPEC & COVID-19 - In the Oil Patch

COVID-19 (coronavirus) and its Texas Impact are the talk today with David Blackmon on this weeks special 3 part In The Oil Patch Radio Show!

Speaker 1: (01:17)
They announced that they were doing $10 billion of cuts in 2020 on their capital spending budget, which is actually the largest of any producers thus far. And most of it is really geared at the Permian Basin. I guess my question is, if it’s here in Texas, how much of an impact is this going to make on the entire economy here in Texas?

Speaker 2: (01:40)
Yeah, it’ll be a big, big impact. We’ve had many studies conducted over the years that indicate every dollar of capital spending by an oil and gas company in Texas, or anywhere else, results in $3 to $4 of additional economic impact down the line, because only gas supports so many ancillary businesses, not just in the service industry, but restaurants, gas stations, everything benefits from oil and gas activity. So, that that is going to be a major blow to Texas economic activity. It’s not just from ExxonMobil; they’re just the biggest. But you know, we’ve had probably 80 to a hundred billion dollars in cuts in capital spending nationwide from the oil and gas industry announced over the last month and a half. And all of that resonates throughout the economy. And already the comptroller is beginning to talk about the fact that the Texas state budget, when the legislature meets next January, the state budget is going to be in a deficit situation. And it’s largely because of this major impact from the coronavirus and what’s been going on with OPEC plus. It’s a big deal. It’s bad for the Texas economy, a lot of lost jobs, a lot of lost economic development.

Speaker 1: (03:12)
I have a personal story that really impacts me in this way, which is kind of what led me to do what I do now for a living. Way back when, in my other life, in another career, I did a lot of nonprofit, executive management. And one of the things that I witnessed led me to how important oil and gas is for the state. We had the comptroller come up with numbers again, that we weren’t going to balance the budget, which is required by state law. At the time, we had Governor Perry. Governor Perry across the board required every state agency to come up with a 20% budget cut across the spectrum. It didn’t matter if it was law enforcement, educators, school districts; it affected everyone.

Speaker 1: (03:58)
What I saw was some of the most vulnerable programs cut for elderly and disabled people. And so my point is that to all the naysayers who talk a lot about how they don’t want oil and gas and to keep it in the ground, yes, it’s bad right now that we have a pandemic. There’s a lot of other things to be thinking about. But, hopefully, when we get back to normal, we as a state need to really think long and hard about does Texas really want to keep promoting “keep it in the ground”? As they start seeing the next session rollout, things are going start happening; bad things are going to start happening to the average Joe in Texas. This is where the oil and gas does come in and affect their lives. And most people don’t realize that it does affect them.

Speaker 2: (04:47)
It does. It affects everybody in the state. And you know, another aspect of the budget that it impacts, is the state’s Rainy Day Fund, which is there to help balance the budget in these bad times. Well, the Rainy Day Fund is funded completely by the oil and gas severance tax. And those tax collections are going to be going down. Already they will be dramatically lower this year than they have been in past years. And so there’s about a $9 billion balance in the rainy day fund. And that may not be enough, frankly, to balance the budget for the next two years. It’s a self inflicted collapse, right? This is not an organic thing. This is something we have imposed upon ourselves to fight this virus. So the faster we can get this economy back up and running; the quicker we’ll all recover from this. But right now it’s really having a major, major impact on Texas.

Speaker 1: (05:50)
Interesting. The EIA projected this week that U.S. oil production is likely to drop by 2 million barrels per day as the price of oil is crashing. But Commissioner Ryan Sitton, who does our energy minutes for the show, feels it’s more like 4 million barrels that will be lost. Which do you feel is a more accurate estimate between commissioner Ryan Sitton or the EIA?

Speaker 2: (06:17)
I’m going to have to go with Commissioner Sitton on this one. I think the EIA, last week or a week ago, estimated 1 million barrels a day, and this week it’s 2 million barrels a day by the end of the year. Frankly, I think Commissioner Sitton is looking at this more realistically. The EIA are very conservative in what they do. What we need to realize is that the rig count is currently dropping. The cut in ExxonMobil’s budget is just an example. There’s going to be a lot less drilling, and producers are having to go ahead and temporarily shut in wells that were already producing because they can’t find a market for the oil right now because the demand has crashed so significantly. A lot of this will be temporary. The wells will be shut in until demand comes back. China’s already restarting its economy. Several European countries are moving this week to restart their economies. So, as demand ramps back up, a lot of that production will be brought back online, and Commissioner Sitton’s estimate, over the next three months, 4 million barrels a day is going to be lost is probably a lot closer to the right number than the EIA.

Speaker 1: (07:42)
I guess it depends on how fast it comes back. Tell me a little bit about what you think, so our listeners understand. When this comes back, if it takes longer than when we go into session next year, and they have a whole bunch of bills that have fiscal notes attached to them, or school districts want more money, or law enforcement needs more money, what starts happening to those specific areas if this takes longer, and if we continue to see oil prices continuing to drop and not stabilize?

Speaker 2: (08:17)
Well, it just gets worse and worse. If this becomes any kind of a permanent thing, so many companies are going to be going out of business. I mean, there will be bankruptcies everywhere. A lot of companies, we have to understand, were already struggling with prices in the $40 to $50 range. Now, we’re sitting at $25. Hopefully that goes up in the near future. But these companies were already struggling at the prices before all this happened. So, you’re going to see a lot of bankruptcies, a lot of lost jobs, and that’s going to impact everything throughout the whole economy.

Speaker 1: (09:07)
One of the things I saw was that there will be no new added teachers and certainly no salary increases. It’ll just remain flat until we start seeing this reverse. And so, it could lead into a very ugly two years as well. Those are some of the things that have an impact on the state, even if you’re not in oil and gas. And so that’s what I keep trying to say is that oil and gas, whether you think it affects you or not, it does. And this is not a good thing for any of us here in Texas. When we get back from break, I want to cover the Texas Railroad Commission because there’s a lot going happening on that front, as well. You’re listening to In the Oil Patch radio show, and we’ll be right back. And we’re back.

Speaker 1: (09:50)
You’re listening to In the Oil Patch radio show. Our guest today is the editor of SHALE Magazine, David Blackmon. David, before the break we were kind of covering things that are happening at an OPEC level, what’s happening out in the Permian Basin? And there’s a lot swirling around the Texas Railroad Commission, as well. Last week we covered that Parsley Energy and Pioneer Natural Resources had requested a meeting specifically with the Railroad Commission. So, the Railroad Commission now is holding a hearing Tuesday to consider whether to implement restrictions on oil production here in Texas. And, in light of that decision made by OPEC plus and the countries, how do you think they’re going to move forward? Do you think this is a good idea or bad idea for the state?

Speaker 2: (10:35)
I’ve gone back and forth on this, to be honest with you. A week ago, my mindset was that you may need to do this so that the United States becomes a real contributor to supply reduction globally. And the only legal mechanism we have in this country as far as regulators is at the state level, like the Railroad Commission, the Industrial Commission in North Dakota and several other states to impose limits on wells in their own states. The federal government simply doesn’t have the authority to do that. And as this week has gone on, and we’re all beginning to digest the magnitude of just the market-based reductions that are going to take place here in the coming few months, that aspect of it really goes away. The United States is going to make a major contribution to global supply reduction.

Speaker 2: (11:41)
The problem with that though, leaving it strictly up to the market, is most of that reduction is going to fall on the shoulders of independent producers, because independent producers drill and produce most of the wells in this country, and they’re going to be the least able to continue production just due to financial conditions. They’re going to be less able than the major oil companies will be to keep their wells pumping. And so, unfortunately, without government intervention, it’s disproportionally going to impact smaller independent producers in particular. So that’s the argument, really, that the commissioners have to figure out here, and that is what Pioneer and Parsley and brought to them. Do they want this to be an orderly process, or do they want the market to simply govern this? We’ll see on Tuesday what they decide.

Speaker 1: (12:37)
That’s kind of what has been discussed in the town hall meetings with President Trump. Some of the reporters have been inquiring about OPEC and OPEC plus requesting the United States step up to this as well. Part of it is because as prices start recovering North American shale producers have been quick to fill the pipeline, and so therefore, Russia and Saudi can’t really go anywhere with this. They’ve asked president Trump, where are you sitting in this and will you look at that as well. I don’t know if you were at a conference a couple of years back, and the keynote speaker was Harold Hamm. It’s so strange to listen to him three or four years ago when he was bringing this to everyone’s attention, that at some some point we keep drilling ourselves back into low oil prices, and what can we do about it? And while he didn’t really have an answer for it, he was of course bringing it into question. And it seems like the time has arrived now where what he said a couple of years ago is definitely coming into play.

Speaker 2: (13:52)
That was really very forward looking for him to say that. I actually, along about that same time, wrote a piece in SHALE Magazine discussing whether or not the commission should be considering that doing this at that time for those exact reasons, because you could see this train wreck coming two years ago, right? I mean, the industry has been able to go through this boom over the last two and a half years precisely because OPEC and Russia have entered into that export limitation deal for two and a half years. But that was inevitably going to fall apart at some point. And that’s what happened in early March. When you make yourself dependent on countries like Russia and Saudi Arabia being rational actors, you’re really taking a very high risk. We’ve seen the results of that here over the last six weeks.

Speaker 2: (14:54)
The other thing we have to all think about where the Railroad Commission is concerned too, is it’s computer systems are not the most state of the art. There are 200,000, oil wells in the state of Texas. This would be a very complex thing for them to try to do on a well by well basis. And they’re always hurting for staff at the Railroad Commission. The Railroad Commission simply is really not staffed in a way to handle what would be a massive amount of additional work. So, if they do decide to go down this road, they’re going to have to figure out how they’re going to pay for additional computer resources and additional staff to administer a program of proration. It’s really going to be a very difficult decision. I’m frankly glad I’m not one of the commissioners having to make it.

Speaker 1: (15:58)
Right. Well, we’re getting ready for a break, but when we return, I want to stay on this topic because there have been some big oil associations here in Texas that have supported more of the ExxonMobil’s and the big companies, and then, of course, there’s the independents. SHALE Magazine did a cover of Pioneer Natural Resources, Scott Sheffield, and his son Brian with Parsley Energy. Both of these CEOs are very, very seasoned. And so, I want us to talk about why are they on the opposite ends of the spectrum and what that means. You’re listening to In the Oil Patch radio show, and we’ll be right back. We’re back. You’re listening to In the Oil Patch radio show. Our guest today is David Blackmon, the editor of SHALE Magazine. David, before the break, we were kind of discussing the different opportunities or positions that the Texas Railroad Commission might be taking next week pertaining to should they regulate a little bit more of the oil and gas sector.

Speaker 1: (16:59)
This week, also in past weeks, we’ve had some discussion coming in from some of the industry’s biggest lobbying groups that typically tend to represent the big integrated companies. One of the associations wrote in a statement that they believe that the market-based reductions and production that are already taking place is enough, and that limiting production from the Texas Railroad Commission is just not necessary. These are the large integrated in that they drill all over the world, and then we have North American shale producers that are the independents, the Pioneer Natural Resources, Parsley Energy, and there’s 730 more of those independents that provide most of the wells here in Texas. What is the difference between an association like the Texas Alliance of Energy Producers that specifically lobby for the little guy and these larger associations that are lobbying for the big integrated companies? What’s your position on who’s right and who’s wrong, and should our small independents be rushing to join the Texas Alliance of Energy Producers, so their voices heard potentially?

I agree. Any of the producers should join the Alliance. It’s a great association, and does great work on behalf of independent producers. Texas, first of all, has five major trade associations here in this industry. There’s Texas Oil and Gas Association, which you know, represents the major oil companies and big independents, and has a lot of the smaller independents also as contributing members. You have the Texas Alliance which has I believe upwards of 5,000 members; they are virtually all independent producers. Texas Association of Independent Producers and Royalty Owners is also an independent focus trade association. You have the Panhandle Producers and Royalty Owners Association up in Amarillo, and you have the Permian Basin Producers Association there in Midland that represents the producers out in the Permian.

Speaker 2: (19:23)
And so they all are all representing their own memberships and, yes, the business interests of an independent producer, like let’s say Parson and Pioneer Resources. Both companies are exclusively Permian Basin focused. They’re independent producers. They don’t have pipelines; they don’t own refineries. They produce the oil, and they sell it at the wellhead or at a market center along the way on the pipeline. Where an ExxonMobil and Chevron and BP and Shell, they’re fully integrated. So, they own their own production; they own pipelines; they own refineries, and they’re able to take that production from cradle to grave all the way to retail gasoline stations. So their business interests are different than an independent producers’ business interests. And because of this the price of the commodity is a much bigger factor on an independent producers’ business ability to remain in business than it is on an integrated company where when the price of the feedstock is very low for a refiner. Well, the refining end of the business tends to become more profitable when commodity prices are lower.

Speaker 2: (20:52)
And even though their production end of the business is not as profitable, the refinery makes up for it. And that’s, frankly, the reason why these companies become fully integrated. It creates this tension between the trade associations. So, you’ll see Texoga have one position on what the Railroad Commission is considering doing, and the Alliance and TIPRO and the other trades probably are going to have a different position on it.

Speaker 1: (21:21)
Which is a great divide that’s going on between the independent producers and like ExxonMobil who publicly came out and weighed against us with the RRC. When we get back from break, I want to get back on that topic. You’re listening to In the oil Patch radio show. And we’re back. You’re listening to In the Oil Patch radio show. David, before the break we were discussing the whole position of where the Texas Railroad Commission seem like they’re stuck in between the majors and the independents in this tug of war. This great divide going on between the industry itself. ExxonMobil has come out publicly against the Railroad Commission cutting any kind of production, yet a lot of the very, very well respected independents have been pushing and actually asked for this meeting with the Railroad Commission. There’s not just can they cut? There are also other tools that they have as well, like Commissioner Christie Craddick encouraged the Texas comptroller’s office to extend filing deadlines on the oil and gas tax payments to help the producers weather the storm. Is that possible? And so where do you think the Railroad Commission is? I kind of feel like they’re fighting between two different sets of children.

Speaker 2: (22:40)
They are, and that’s exactly the problem because you have an industry that can’t even agree among itself. And so when you look at it, the commission has moved to limit production in Texas since 1973, 47 years ago. That’s almost half a century since they’ve even considered doing this. And this illustrates why.

Speaker 1: (23:06)
You can’t make everybody happy.

Speaker 2: (23:08)
Right. You can’t make everybody happy. And these are public office holders, and they’re getting pulled in all different directions. And at the same time, the fact that the industry can’t agree among itself makes it a lot more difficult for the federal government to take any action to help this particular industry. The President had that meeting with the executives. Harold Hamm was there and executives from ExxonMobile and Phillips 66 and several other companies. The President is sitting there asking them, what would you like me to do? And he’s getting all these different answers. So even the President can’t really figure out what it is the industry needs in terms of any assistance from the government.

Speaker 1: (23:55)
But one of the most respected gentlemen in the industry, Scott Sheffield, alluded to the meeting on an interview he did with MSNBC. He said that if something doesn’t happen quickly, we could lose close to 63 independent operators, leaving maybe 10 operators for the entire United States. And I can just see all kinds of issues with that, such as negotiation problems, not to mention all of the unemployment, we’ll see and lost revenue. This is dramatic if Scott Sheffield is right.

Speaker 2: (24:37)
If you think about that, if he is right, then the American industry ends up looking an awful lot like Russia’s oil and gas industry, which is a dozen or so oligarchs with their own companies doing all the oil and gas business in that country. Well, I’m not really sure you want an American industry that looks anything like Russia’s industry. And so it’s a really valid point he’s making.

Speaker 1: (25:03)
I think the most interesting thing on that is the fact that these operators of the independents are primarily just drilling in the United States, and they’re not drilling all over the world. And that does change when you’re drilling all over the world because you’re a large integrated company. They’re great companies. I’m not trying to portray them as not being great companies, it’s just they’re going to be a little bit different. They’re going to see things differently than American independent operators. A lot of the integrated companies focus on shareholders and what do they want, versus you don’t really see a lot of that in independents. There’s just a big difference. Let’s go back to Commissioner Christie Craddick andher encouraging the comptroller’s office to file an extension on the oil and gas tax payments. How much will that help the industry, do you think?

Speaker 2: (26:04)
Well, it would help temporarily, very temporarily, for a month or so with company’s cashflow. One of the things that’s happening right now, one of the reasons that you see so many people being laid off is companies are simply running out of cash and having a hard time accessing credit just because of the collapse in prices. And so it would potentially give companies a little bit of breathing room for 30 to 60 days, but at the end of the day, you’re still going to have to pay the taxes. So, it’s kind of a half measure that gives companies a little breathing room, and you hope in the meantime that we’re able to begin restarting our economy and creating more demand for the production for the longer term relief. So, it’s certainly a valuable idea and a good thought from Commissioner Craddick, but it’s not a panacea for anyone one.

Speaker 1: (27:05)
Let’s switch gears real quick and talk about two Texas senators, John Cornyn and Ted Cruz. They’re cosponsoring a bill that would authorize the federal government to spend up to $3 billion to completely fill the strategic petroleum reserves at the low prices today. Do you think this is a smart thing to do? Also Democrats in Congress are refusing to allow this to be included in the stimulus bill. Why are the Democrats opposed to this?

Speaker 2: (27:35)

Speaker 1: (27:36)
Because they’re opposed to everything, right?

Speaker 2: (27:40)
Yes, and because President Trump and Cornyn and Cruz are in favor of it, they’re going to oppose it, basically. It’s just purely a political football.

Speaker 1: (27:49)
But, it is so smart to be doing it. You buy cheap to sell high. That’s just basic economics, and they’re defying the law of economics.

Speaker 2: (28:02)
We have 250 million barrels of excess capacity right now in the strategic petroleum reserve. It’s a national security measure, to protect our country. And then, if we ever ended up in a big war and oil flows from overseas get interrupted, we’ve got basically 90 days of supply in that strategic petroleum reserve. And you would think Congress in its infinite wisdom would want to keep that thing as full as possible. And so, to do that you want to buy the oil when it’s very cheap. And here we are. Unfortunately politics intrudes on literally everything in our society these days. And that’s a very sad thing.

Speaker 1: (28:52)
I couldn’t agree with you more, David. We’re going to get ready for break. You’re listening to In the Oil Patch radio show, and we’ll be right back. And we’re back. You’re listening to In the Oil Patch radio show. Our guest today is the editor of SHALE Magazine, David Blackmon. David, when we were on break, we had some breaking news about the meeting that was happening between Saudi Arabia, Russia, the OPEC plus meeting, and if they were going to be cutting oil. So tell me, you have an update? Let’s discuss what happened in that meeting, and let’s break it down.

Speaker 2: (29:26)
So, OPEC and the other countries, Russia, Brazil, Canada, and other non-OPEC countries did meet Thursday in Vienna on an emergency meeting to consider what to about the massive crash in oil prices. As it turned out, they agreed to cut 10 million barrels of oil per day in production by those countries. If you combine that with the anticipated reduction in the United States production of three to 4 million barrels a day, as we were talking about earlier, you ended up taking roughly 13 to 14 million barrels a day off the market. So, my view is that’s not nearly enough. I think the OPEC plus group needed to be willing to cut more like 15 to 20 million barrels a day.

Speaker 1: (30:24)
Well, like for Saudi Arabia and Russia, so it’d be closer to like 30 million.

Speaker 2: (30:28)
You’re right. We’ve had a reduction in demand globally of 25%, which is 25 million barrels per day. And to just cut 10 million barrels a day off the market still leaves you with one of the biggest all gluts we’ve ever seen in industry. So, I think the likelihood is that over the next week we’re going to see the market, frankly, respond pretty negatively to this, and oil prices will continue to fall. This action doesn’t really do anything real to resolve the issue. Now, the other side of that is if, as I think the President has been signaling all week, if we begin to open up the U.S. economy beginning the second half of April through the month of May and demand begins rising fairly quickly, because China is already restarting its economy, then you could see the other side of that big glut begin to disappear fairly rapidly. That, combined with this 10 million barrel a day reduction by OPEC plus, could end up rebalancing the market and seeing prices began to rise again by December. That’s an optimistic outlook on it. I try to be an optimist.

Speaker 1: (31:56)
Good. What about the tariffs? Any chance that they keep asking President Trump, are we going to slap tariffs on with the cut? Right now they basically put a bandaid on it, being more cautious of let’s wait and see when the economy start opening back up. What about the tariffs? And does this change the position with the Texas Railroad Commission on their meeting next week?

Speaker 2: (32:22)
I don’t think it changes the calculation the Railroad Commission has to do because they can either take a short term view or a longterm view to this. The short term view is we’re going to lose all this production on market based on what the market forces temporarily, and then it’s all going to come back when demand comes back. The problem with that approach is it’s still completely dependent on this OPEC plus deal. It leaves our industry in the United States dependent on what irrational actors like Saudi Arabia and Russia are going to do in the future. Or, they could take the longterm view and say, we really need to have an orderly process here in Texas, and we as the Railroad Commission, it’s our duty to prevent the waste of the state’s resource at these ridiculously low prices.

Speaker 2: (33:18)
And so we’re going to take the longterm view and try to manage this. I still think that equation is still there. On the tariffs, we’re just going to have to take a look this week at how President Trump reacts to all of this. If he’s happy with the OPEC plus action and Saudi Arabia, then I think you will see him not do anything on tariffs. But the reality is that we still have a situation in which both Russia and Saudi Arabia aggressively attacked one of our country’s most important industries. And there needs to be some price extracted for that by the United States government from those two countries. And it wouldn’t shock me, frankly, if the President decided it was justified to implement a tariff on Saudi and Russia their oil imports into the United States, but not related to imports from other countries. But I can’t predict how the President is going to react. But I certainly think there is ample justification for him to do something.

Speaker 1: (34:32)
Well, it seems like we’re also living in an era where countries that have somewhat acted in bad faith typically tend to get away with it. And this president is more of the buck stops here and now. And so with a lot of the discussion going off topic, China is going to get a bill. They were bad actors. The WHO is having their funds cut as well as potentially Russia and Saudi Arabia also being smacked with tariffs. You know, maybe will start a discussion. You guys, your countries should get it together and stop acting in bad faith when you’re talking about the world and world issues. Just my little humble opinion. But it would be nice to see that because just like as a parent when you get after your child for bad behavior, it typically tends to fix that. So I’ll give you the last words. What’s your opinion?

Speaker 2: (35:32)
Your point on China, I think, is particularly well taken. China didn’t only attack the United States with this virus through its government’s dishonesty, it attacked the entire world. And, frankly, any country who doesn’t believe that there needs to be a price to be paid for that kind of behavior is not protecting its own people. We in the United States need to become an awfully lot less reliant on China for anything.

Speaker 1: (36:04)
Well, the good news is we’re seeing that happening as we speak. And, for God’s sake, they need to shut down those wet markets. I just thank God there are some elected officials, I think there are more of the Republican party like Lindsey Graham who was interviewed, saying this needs to stop, or we’ll have every pandemic that keeps coming out. It keeps coming out of China, and it keeps coming out of those wet markets. So, how long do we have to keep doing this until we understand this is the problem, these wet markets. And they need to do something about it. David, thank you for joining me today on the show. I look forward to having you back next week, which I’m sure we’ll be able to now really cut into what’s going on between the Texas Railroad Commission and OPEC. Until next week, thank you for joining me on the show.

Speaker 3: (36:56)
Okay. Whenever you’re ready.


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