OPEC & COVID-19 Pt. 2 – In the Oil Patch Radio Show

OPEC & COVID-19 - In the Oil Patch

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

Speaker 1: (00:00)
And welcome to In the Oil Patch radio show. I’m your host, Kym Bolado. Today, we have a great show lined up for you. We will be joined for the entire show by David Blackmon, the editor of SHALE Magazine, who is also our resident energy expert. Our show today is going to cover a whole bunch of things such as how the coronavirus is has really been impacting the oil and gas. Also, we’re going to be covering what this mean for you. It’s a show you don’t want to miss. But first, before we bring David on, I’d like to talk a little bit about what is going on here. It seems as though within the past couple of weeks everything that we have known as a normal way of life has turned upside down on us.

Speaker 1: (00:49)
And I just hope our listeners, and of course the people in the energy sector, can make a difference. We can get through this. So I do hope that if you are feeling a little upset, angry, depressed, it’s all normal. And you know when it’s something that’s abnormal in the way of being sad or scared, there are programs. There’s help, and I hope that our listeners will reach out and seek help if they need to in this very trying time. But we will get through this also. I’d like to just quickly discuss the state of energy for you guys. Many of you all know that we had a event planned in Corpus Christi for April 13th, and that now has been reset to September 22nd. The same keynote and panelists will be involved in the September 22nd event, which is the State of Energy and Corpus Christi.

Speaker 1: (01:52)
So if you purchased tickets or you’re a sponsor, don’t worry, we’re going to be honoring that at the event. We just felt that it was a good thing to push it back quite a few months to let everybody kind of regroup. Sure enough, when we come out of this horrific event, we’re going to need time to put our businesses and ourselves back together as well. So we wanted to make sure we gave plenty of time. So, September 22nd is our new scheduled date for State of Energy Corpus Christi in which our keynote will be Mike Howard the CEO of Howard Energy. It’s definitely an event that’s going to sell out, and you don’t want to miss it. For more information please go to SHALEMag.com. Tickets are still on sale; sponsorship is still there. Please go to SHALEMag.com. And now, let’s welcome back David Blackmon to this week’s In the Oil Patch radio show.

Speaker 1: (02:48)
“Hey, it’s another beautiful day in Texas.”

It is. Yesterday it had been raining for quite some time, just making this situation seem far, far, far worse because I’m a person that needs the sun. Luckily, we’ve had a few really nice days that have allowed our spirits to be lifted a little bit. So, I would definitely say today’s a great day here in Texas as well, especially weather-wise. I think you and I have discussed that while we are all in this confinement state, we’re very concerned about an industry that’s being hard hit, very hard hit, probably harder hit than the rest of the industries that are out there. And you know, as the editor of SHALE magazine, since everybody is being displaced and having to stay home, we certainly don’t want to add to anyone’s anxiety by having them come into the studio to create a show with them.

Speaker 1: (03:51)
So, we’ve decided that for the next couple of weeks, while we remain on lockdown, you’re going to be with me, and we’re going to keep navigating through this ever changing oil and gas scenario and helping our listeners understand what they can expect. Your being a 30 year veteran in the oil and gas sector, there is no one that I feel more comfortable talking to and trying to navigate through this energy industry. Do you have anything you want to say on behalf of SHALE magazine, and I’m sure you probably have a lot to say, which we’re going to cover, but go ahead.

Speaker 2: (04:29)
“Yeah. To everyone out there listening, I certainly feel your pain and share your pain. I have lived through every major oil bust in the U.S. since the early eighties. That one was the worst we’d ever had back in ’84 and ’85. This one promises to be even deeper and bad if it becomes a prolonged thing. I know it’s really tough. I remember watching the transition from prosperity to hardship in South Texas where I grew up during those years, and how the landscape changed and people’s jobs changed. Businesses went out of business, and of course we’re having the government force businesses out of business right now due to the coronavirus. So, it’s a double whammy on everyone. But we here at SHALE magazine, we do everything we can to keep you informed of what’s going on. Starting Monday I’m going to be posting a morning update of 10 of the most important events in the industry from the previous day, so everyone can keep up to speed on that. And we’ll do that every morning, and have them posted by eight o’clock, so everyone will have a place to go and just take a quick read and get up to speed on everything happening.”

Speaker 1: (05:53)
That’s going to be a wonderful thing, a wonderful thing

Speaker 2: (05:56)
“It’s just one of the things we can do. And of course you’re always welcome to comment on articles we post to SHALE Magazine, and we’ll try to answer those as quickly as we can, and just do what we can to share information and make sure everyone has the information they need to make good decisions around their jobs, and in the industry in general.”

Speaker 1: (06:19)
Yes. And you know, there’s one thing about the oil and gas family, if you will. It always seems as though they rise to the occasion, and maybe it’s quite frankly because the booms and the busts, make you get really tough skinned. Some of our friends at TMI Solution, they’re a really dynamic service company for the oil and gas sector, they actually went to work and created a free website, and this website actually is tracking the cases minute by minute of the coronavirus. So, I encourage our listeners, if you want to follow where the cases are and have the most updated information of where they are, visit our friends at TMI Solutions LLC. You can find them on Facebook, and we have them linked to SHALEmag.com. I think all of us are really trying to do our part to make sure everyone is aware of what’s going on and give them hope that we shall make it out of this too. We might be a little thinner or depending on how much you don’t do exercise at home a little larger, but we’re going to make it through.

So, let’s get started. I want to talk about the coronavirus and the markets and oil collapse. We actually have not seen that since the 1980s. So talk to me a little bit about the impact on the energy industry by the coronavirus.

Speaker 2: (07:54)
“Yeah. And it’s been very substantial, obviously. The public really began becoming aware, unfortunately, about the virus only in January. Unfortunately, the Chinese government had decided to try to keep it all secret since mid-November when the first outbreak occurred in Wuhan Province. And so, in January we began to learn about it. We began to see news about how the viral outbreak there was shutting down the Chinese economy. And that of course began quickly to have a major impact on global demand for crude oil. Chinese demand is the second largest user of crude oil on earth next to the United States. And so, when their economy essentially began to shut down in January, they immediately began to create a very big glut of crude oil supply on the market to such an extent that today we have a glut probably around 10 million barrels of oil a day, more production than supply.

Speaker 2: (09:01)
So, when that happens with any commodity, any product, when you have too much supply and not enough demand, prices immediately began to go down. West Texas Intermediate price started the year around $58 a barrel, and by early March it had fallen all the way into the low forties, thanks only to the impacts of the coronavirus. And then of course, it continues to fall, even today; although we’ve had somewhat of a recovery this week, it’s still well below $30 a barrel with no real prospects of recovering above that level anytime soon.”

Speaker 1: (09:44)
It seemed as though from my recollection, that it was pretty much when the Chinese were having this outbreak, it was also that period of time that OPEC plus was scheduled to meet. And I think they were a little ahead of understanding the pandemic that was going on when they were looking at oil prices and what to do next. I think if we were in a time where they could go back to that meeting right now with what is going on worldwide, would they really have made the same decisions? When we get back from break, I want to continue the discussion on the coronavirus and of course OPEC plus and their decision. I want you to break that down for us as well so we can kind of understand the timelines of what seemed like the perfect storm. They just kind of hit one right past each other, but they kind of landed on each top of each other.

Speaker 1: (10:43)
And now we have everyone confined to home and very, very little use of energy and purchases as well. And it has caused some issues. Our good friends at the port of Corpus Christi have been very vocal on what they’re having to do to make sure the community stays safe, but the ships are starting to slow down too. I wanted to get your opinion on that, too. How does it affect those businesses as well. 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, thank you for agreeing to do an entire show with me to help our audience understand what’s going on with oil prices, the collapse, and the coronavirus. Before the break, I wanted to get back on the topic of OPEC plus because it seems to me they kind of passed right by each other, the coronavirus and OPEC plus. What do you think was the impact, the major impact, with OPEC plus and their export and limitation deal?

Speaker 2: (11:59)
“Well, that’s right. And you know, by the time OPEC plus had their meeting in the first week of March, the coronavirus had already driven the price down for West Texas Intermediate into the low forties, around $43 a barrel on the day they held their meeting in Vienna. The Saudis and the OPEC countries on that Thursday without Russia present made a recommendation to cut an additional 1.5 million barrels of oil supply from the market. And for all the countries involved in that agreement who would share that reduction, Russia’s share would have been about 300,000 barrels a day. The Russian minister came back to Vienna on that Friday, the next day, and informed the group that he had been in Moscow speaking to the leaders of Rosneft and the other big Russian oil companies, and they just decided that they could not really agree to share anymore reductions in their own exports.

Speaker 2: (13:02)
And so at that point, the agreement that had been in place for two and a half years and had been very successful in supporting a more healthy price for crude oil at a level where everyone could make money fell apart. And the Saudis unfortunately, I think, in a fit of anger at the Russians said, ‘Look, okay, if you’re going to break up this deal, then we’re just going to increase our own production by about 2 million barrels a day and flood the market with oil and intentionally drive the price down as low as we can in order to do the greatest amount of harm to not just the Russian oil companies but U.S. shale companies as well.’ And so you just had this perfect storm of the coronavirus already destroying demand in China and all over the world combined with now both the Saudis and the Russians and the other OPEC countries are now also going to increase their own production and try to grab market share. And the main entities that will be harmed by this, in addition to all of those countries who will have a fire sale of their own at low prices, will be the United States producers who have so significantly increased our own domestic production in recent years. It doesn’t seem logical or reasonable. It’s a completely irrational act. Particularly on the point of Saudi Arabia.”

Stay away from the red buttons guys.

Speaker 2: (15:47)
“Well, they, they do respond quickly, and luckily for many of the producers, not all of them, they have very large percentages of their own equity production hedged at prices above $50. So they’re going to continue to receive income thanks to those hedging deals based on prices that existed before the coronavirus outbreak on at least a large percentage of their production. There were some producers that have almost virtually all of their production hedged for the rest of this year and even into 2021. But that being said, there is still going to be major impacts to all of these companies from this price crash. And they’re all moving right now to cut budgets very significantly. We saw this past week Chevron and Shell both announce 20% cuts to their 2020 capital budgets. We’ve seen big Permian Basin producers like Diamondback and Apache Corporation and EOG Resources and Noble Energy and just right up and down that list of big producers out there and in the Eagle Ford shale producers as well, announced major budget cuts. That’s going to include unfortunately cuts to employees. One interesting thing that we saw late in the week was from Oxy, who also announced a major cut to their budget. But rather than lay off so many employees, they’re actually reducing pay up to 30% for their existing employees and really slashing the pay of their senior executives dramatically in order to try to not lose employees, to retain as many of the employees as they can.”

Speaker 1: (17:40)
And you know, David, that being said, it’s a great opportunity for some of the other operators to really see that maybe this is a solution for you guys, too. When we come back from break, I want to get back on the topic of how energy companies are responding to these low prices. You’re listening to In the Oil Patch radio show. 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, before the break we were talking about Oxy, and how they responded. Instead of laying off, they opted to start reducing executive pay and salaries to save jobs. Obviously, any collapse in price is going to lead to actions impacting the whole energy industry and these companies. Are there any other energy companies that are doing something that is pretty dynamic or something that we should be paying attention to? Go ahead.

Speaker 2: (18:34)
“Yeah. One great example there is Halliburton.”

Speaker 1: (18:38)
The furloughs, right?

“Right. Furloughs rather than layoffs, 3,500 of their Houston employees. Which makes a lot of sense. What’s going to happen with those employees is, they’re going to work one week on and have one week off. They’re going to get paid only for the time they’re working because they’re mostly hourly employees, but the company is going to be able to retain them as employees. And the company is going to continue to fund full healthcare and other benefits to those employees. It makes so much sense to do it that way because these companies, when they lay people off, particularly in the service side of the business, those employees go out and look for jobs elsewhere and most of them don’t want to come back to a company that has laid them off completely. And so you end up with the cycle of having to go find new employees and train them to do these complex jobs out in the oil fields. So that’s a very creative solution, and then every company is going to be as thoughtful and innovative as they can be in circumstances like this, trying to find better ways to do this than just straight laying people off. So it’s good to see those approaches by Halliburton and Oxy.”

Speaker 1: (19:55)
So David, you mentioned earlier about the huge budget cuts. What are some of the downstream impacts there when we talk about restarting or reactivating the drilling rigs? Does this lead to similar actions in the service industry side as well?

Speaker 2: (20:17)
“It really does, and one thing we’re already seeing is a very significant reduction in the number of rigs and the rig count. It’s gone down more than 5% in the month of March. You’re going to see that rig count begin dropping more rapidly than that. I expect it to be cut in half by mid-summer. And of course, every drilling rig supports 50 to 70 jobs in the oil field. So every rig that goes away, you know, you don’t have that income source to support those employees anymore. And so it goes from the layoffs and the reductions, starting with the upstream businesses – the drillers, the producers, and then it goes to the service companies because of the budget reductions among the upstream companies. And then it gets to the midstream companies as production goes there. And it flows, as you mentioned in the last segment, all the way down to the ports and the refiners. As you’d have lower global demand for crude oil, there’s less reason to export to foreign countries. And that means less business at the port of Corpus Christi and the other ports. And so it just all flows downstream.”

Speaker 1: (21:39)
It sure does. And you know, we’ve had such good years. I know the port of Corpus Christi is very, very, very good to the community in Corpus Christi. And in my discussion with them yesterday, Omar Garcia, is they’re seeing that there’s going to be a 20% reduction of income. And while that’s not bad, it does affect all the charitable things they were doing all year long for the community. That’s probably where it impacts the community. So you know, it is not a good thing for us to be in this cycle. It isn’t just affecting oil and gas, it’s going to affect the state of Texas. It’s going to affect what we raise in the way of the rainy day fund. It’s also going affect community programs and social outreach. When we get back from break, David, I want to talk about the Texas Railroad Commission because there are things that they have that they might want to use to try to help us right now.

Speaker 1: (22:31)
We’re going to take a quick break. 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 talking about the port, and how it’s affecting the community and the lower prices. Let’s switch gears a little bit. You know, in Texas oil and gas is so vital to us for many, many reasons. But the Texas Railroad Commission, their agency, their regulatory agency, do they have something they can do to help the situation?

Speaker 2: (23:00)
“Surely they do, yes. They have regulatory tools. The commission has always had the ability to enforce production limits on a well by well basis. They call it proration and allowables, with which the commission has the regulatory authority to establish allowable number of barrels and production for every well in the state of Texas. Now, that’s a very difficult and complicated process to go through, but commissioner Sitton wrote an op-ed in Bloomberg last week in which he talked about the fact that the Railroad Commission does have that authority, and he talked about the possibility of potentially implementing that kind of limit on production here in the state of Texas in conjunction with actions by international players like Russia and Saudi Arabia and OPEC. You don’t want Texas to take an action like that, to reduce its own production artificially, to control it that way without all the other actors around the world, not just in the United States, taking similar actions.

Speaker 2: (24:18)
The reality is that here in the United States, the states with the biggest oil production – North Dakota, Oklahoma, Wyoming, and Mexico – all have similar authority to the Texas Railroad Commission to limit production. Now, I don’t think Alaska does, but those states in the lower 48 that are the biggest oil producers have similar authority. So, theoretically, all those regulators could agree to implement those kinds of limits on production in order to try to soak up some of that glut that’s on the market here in the U.S. by reducing our own production that way. But of course, you would only want to do that if the Saudis and the Russians agreed to take a similar action, maybe reimplement that OPEC plus agreement in order to try and soak up that enormous glut and get back to a healthier price level sometime in the near future. So that’s one thing the commission could do in this particular circumstance.”

Speaker 1: (25:26)
And you know, we’re going to come back to Commissioner Sitton because he does our Energy Minutes. He’s a true energy expert. But before we get into that, I remember sometime back, Harold Hamm discussed this very topic, saying somewhere North American producers have got to understand that we just can’t keep filling the pipeline. It’s to our own disadvantage in the long run. And I look back now and see he right on the money. When they said, how do we monitor this, how do we make this change? It’s impossible unless they come to the table, but the Railroad Commission also should have probably been having this discussion with the operators, saying, look, this really ends up bad for all of us. Maybe we want to take a comprehensive approach right now. Let’s go back to Commissioner Sitton because he has been invited to the next OPEC ministers meeting. My question is, what do you think he’s going to accomplish there?

Speaker 2: (26:32)
“Well, if nothing else, you can share information and help educate the OPEC countries on the fact that the United States, other than this authority we just talked about with the state regulators, the federal government in the United States doesn’t really have any authority at all to limit our own oil production. Like all of those countries that are members of OPEC do.”

Speaker 1: (26:53)

Speaker 2: (26:53)
Those are virtually all state owned, or state controlled, oil companies. And so it’s a different world here in the United States. Yes, we realize that Saudi Arabia and Russia are upset that the U.S. shale industry has grown so dramatically in the recent few years and is taking over such a large part of market share, but at the same time, there just hasn’t been any way for the national government here in the United States to control that growth. And that’s something that appears to me, anyway, that those countries seem not to really understand about the United States and its industry. So, if nothing else, it’s information sharing that can go on. Another thing too is that the United States President just appointed an ambassador, a special Envoy to Russia, to go over there and be there at the same time to engage in discussions with those OPEC countries about what can we all do together to try to calm these markets and get back to a more healthy situation for everyone. So for Commissioner Sitton to be out there at the same time, I think, is very useful. And I wish, frankly, more of the state regulators could be there as well to engage in those kinds of discussions, because it’s going take to do something like that. It’s good. As I mentioned before, it’s going to take everyone being willing to engage in some sort of a comprehensive approach to this issue.”

Speaker 1: (28:31)
I couldn’t agree with you more. It’s honestly a matter of together we can all rise. All boats are going to rise together. We work together, or we’re all going to fall together, and it’s good to see that President Trump and the federal government is trying to find new ways of trying to engage a discussion on a global scale, because obviously what we’ve been doing in the past has not really been working so well, especially right now with the coronavirus and everyone stuck at home. So there’s really very little use worldwide of this commodity. So it’s just adding, adding, adding to the misery, if you will. And so hopefully there’s some real engagement there. I just don’t think they could have picked a better person than Commissioner Sitton. He is so talented, and being an engineer we were very fortunate to have him at the Texas Railroad Commission for as long as we had him. And I look for him to do big things when he leaves the commission. When we get back from break, David, I want to talk about the stimulus bill and things that might be affecting the oil and gas industry in the stimulus bill. But we do have to get ready for break. 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 talked about the oil and gas industry. Would it be included in the stimulus bill that was passed this week and in the low interest loans that are contained in this bill? How does the industry apply for it?

Speaker 2: (30:06)
“Well, there’s a process to apply for those loans. That particular aspect of the bill isn’t really going to be so helpful to the oil and gas industry. Those are loans that eventually have to be repaid. And we have a situation here where these companies are going to be non-profitable if this becomes a long-term deal. And so the more debt you take on is not really helpful. There is a lot of help in that bill for the employees who are being laid off in terms of enhanced unemployment benefits, which is a good thing, and is the positive that will hopefully tide a lot of these people over until they can find other jobs. Otherwise, there’s not really a lot in that bill. There is more on the announcements by the federal reserve to inject trillions of dollars of liquidity into the market that will help these companies find more investors willing to support their business during these tough times. I think that’s very important, but the bill itself doesn’t really have a lot in it for the oil and gas industry.”

Speaker 1: (31:11)
Okay. Let’s switch gears and talk about the administration and their plan to fill the strategic petroleum reserve with oil. Since the prices are so low, there was a lot of chatter on Facebook about this. Will it have an impact, and if so, how large?

Speaker 2: (31:27)
It will have some impact. It’s a great idea. Let me just say upfront, it’s a great idea. You always want to, in any business endeavor, buy low and sell high. There had been a plan to actually sell off from the strategic petroleum reserve this month, which was insane that these prices, so the plan to actually fill the reserve back up, and I think there’s somewhere between 100 and 150 million barrels of capacity, will take some of the glut of the oil off the market. So that’s a positive, but it’s a small impact in the context of this giant daily glut that we have. But it’s a great idea, and I’m glad they’re doing it, and it’s absolutely something that needs to be done.”

Speaker 1: (32:17)
You know, with little bites of the apple, you finally eat the whole apple. Let’s talk about President Trump as well. Now, he is also having talks with Saudi Arabia, and there’s even a proposal being floated for the U.S. to somehow form a new cartel with Saudi Arabia and some of the other OPEC countries. How feasible is that, and where do you see that going?

Speaker 2: (32:40)
“You know, that’s such an interesting idea because with our antitrust laws in this country, it’s actually illegal for the companies themselves to get together to limit production. The regulators can do it if the regulators want to do it. The companies themselves, because they’re corporations subject to antitrust laws, simply cannot do that. They cannot do anything, band together in any way, that would try to control the price of their commodity. I did see those reports, and the President apparently has had a discussion with the Saudis about it. How that would work is kind of a mystery. You would have to somehow either have the federal government order companies through some authority that I’m not aware of to artificially reduce their production and give them some kind of an exemption from those antitrust laws in order to coordinate that activity among themselves. It would be a great thing frankly in this particular situation if you could make that happen. But it seems to me that you would almost need an act of Congress. One house, of which is dominated by a party that doesn’t like this industry to act, to exempt us temporarily from antitrust laws. It’s just really hard for me to see how that works.”

Speaker 1: (34:14)
Maybe after November when we see a whole bunch of Republicans coming in, it might be an opportunity because I kind of feel that it always seems like it’s them against us. And shale and exploration is 10 or 11 years old, and it probably won’t go anywhere. So why aren’t we having this is a global commodity? Surely there has to be a solution with the largest countries providing this, that they have a way of coming together. But when you have OPEC, OPEC plus, and then you have us, it seems like it’s a little strange that they’re not all at the table together trying to figure out best practices as the world.


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