Home May/June2020 Public Policies Weighed as Industry Navigates Uncharted Waters

Public Policies Weighed as Industry Navigates Uncharted Waters

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Oil and Gas Drilling Rig. Oil drilling rig operation on the platform in oil and gas industry. Global coronavirus COVID 19 crisis. War on oil prices. Petroleum concept. Environmental pollution.

The events of the last several months have been unprecedented. A global pandemic and oil price war unfolding at precisely the same time. 

Rewind to 2019. Production was at an all-time high in the United States, but signs of a weakening global economy and demand and looming downward pressure on prices were evident. Exacerbating the issue, investment capital was becoming increasingly scarce as more investors turned against oil and gas due to eroding confidence in the future of fossil energy, poor market fundamentals, and a preference for returns over growth. 

By early this year, overall industry performance was on the decline just as the pandemic started to impact energy demand in a way that mimicked the spread of the disease: a rolling thunder and then a giant crescendo as travel, commerce and transportation came to a virtual standstill. Then, Saudi Arabia and Russia sparked an oil price war. Although always an identified risk — the two countries had been at odds for some time and both wanted to inflict pain on U.S. producers — many were skeptical that they would actually open the spigots and flood the world with oil.

As the private sector took immediate steps to address the dour market conditions through reductions in exploration and production activities, the first public policy priority was to convince Saudi Arabia and Russia to end their dangerous and high-stakes market maneuvers. The United States, in particular, flexed its muscle in a successful effort to help stabilize oil markets.

The OPEC+ agreement to production cuts (albeit temporary), supplemented by additional reductions pledged by Saudi Arabia, Kuwait and the United Arab Emirates, was a welcomed move no doubt aided by the immense economic and fiscal pain shared by the Saudis, Russians, and many other nations. As governments and industry alike look for a more permanent fix, the new role of the United States in world oil markets and its status as a global power with an interest in a robust and stable price of oil all but ensures that new alliances will be formed to achieve a longer-term solution. 

Complicating the current situation, the pandemic has and will likely continue to damage U.S.-China relations. As the world’s largest growing market and one of the world’s largest consumers of energy, China is likely to seek even deeper relationships with countries like Russia as it attempts to diversify its supply chain even while it continues to rely in part on U.S. energy and agricultural products to meet the country’s needs.

Furthermore, the pandemic will not deter environmental activists and the investment community from their efforts to secure lower carbon investment portfolios and stronger Environmental, Social Governance (ESG) performance. As one example, the Environmental Defense Fund recently released data they say indicates that methane emissions in the Permian Basin are significantly higher than previously believed, and is vowing to identify serious emitters in the coming months.

The Oil and Gas Industry is Not Dead

Make no mistake: the oil and gas sector is certainly not dead. Demand will return, although how quickly and at what pace remain uncertain. The pandemic has changed human behavior, and some demand destruction will undoubtedly be long-term or even permanent. For some companies and individuals, the pandemic has shown that it might not be necessary to drive to work in an office every day. It may take a while for people to feel comfortable about flying in crowded planes. At the same time, however, those returning to work might be more inclined to drive as subways, commuter trains, and buses all showed themselves to be instruments in spreading the virus. 

In the United States, there is no shortage of domestic policy options that have been offered to address the impact of both the pandemic and the market oversupply. Yet action has been slow thus far amid the industry’s lack of consensus agreement on a path forward for possible relief.

Early on, initial purchases for the Strategic Petroleum Reserve (SPR) took some pressure off of the market, but not enough. After Congress refused to authorize funds for additional SPR purchases, and with most Democratic leadership emphatically continuing to declare their opposition to purchases and any “bailouts” for the oil and gas industry, the Department of Energy has offered up space in the SPR that producers can bid on, and pay for, with actual barrels, providing additional and helpful relief on a limited basin.

A Variety of Policy Proposals 

Some in the industry and elected offices have called for direct intervention in the form of tariffs, antidumping duties or import bans. Three states explored options to deal with oversupplies themselves. An effort in Texas to “prorate” oil production was considered, but ultimately rejected by the Texas Railroad Commission. In addition to allowing producers to shut in unprofitable wells without losing a lease, the Oklahoma Corporation Commission considered one proposal to declare some current production in Oklahoma to be waste and another that would mandate production cuts. In North Dakota, the Department of Mineral Resources’ Oil and Gas Division mulled whether production levels constituted waste and if so, what relief might be appropriate.

Others floated the possibility of incentives for refinery modifications that would allow U.S. refineries to process more crude from shale plays. Refiners opposed the idea, stressing the need to keep the door open for crude oil imports, even as they struggled to find markets or storage space for their fuel.

Operators on federal lands and waters requested royalty relief, lease and permit extensions, and federal land reform. Other provisions included targeted items like regulatory reform, temporary suspension of Jones Act provisions, modernization and strengthening Master Limited Partnership (MLP) designations, and expedited permitting for LNG export facilities. Oil refiners sought relief from renewable fuels standard requirements, while biofuels producers opposed those requests and sought federal relief themselves.

With such disparate needs and requests coming from the broader industry, and little appetite in Congress to do anything for fossil energy, very little targeted government assistance has been made available to the oil and gas industry. Rather, the primary focus has been geopolitical maneuvering to keep global production cuts in place, storage of crude oil in the Strategic Petroleum Reserve (which can be paid for in actual barrels of oil), and loans to oil and gas companies that need them.

However, President Trump has asked Energy Secretary Dan Brouillette and Treasury Secretary Steven Mnuchin to work together to find ways to provide loans to oil and gas companies that need them but are not likely to become insolvent. As of mid-May, that process remains underway.

For much of the past four years, there has been discussion about a potential bipartisan infrastructure bill that would direct federal funds to important projects such as roads, bridges, and ports. Such a bill could include provisions that are helpful to the energy industry and would support future U.S. energy demand and energy transportation. While there are continued discussions about an infrastructure bill, the clock is winding down, with the House and Senate still working on additional COVID-19 relief bills and passage of FY2021 appropriations bills. Of course, this all occurs as both bodies determine how to work without catching the virus and with the November elections upon us.

Amid the legislative activity, speculation and talk continues on a possible grand compromise that could provide relief loans, fund SPR purchases, and provide financial incentives for carbon footprint reduction technology, while at the same time providing support for renewables and addressing environmental issues like methane emissions. Such a compromise is never easy to achieve, and would be especially difficult to accomplish in the current environment. Notably, draft COVID relief legislation introduced by House Democrats included Green New Deal-type provisions, such as tying relief loans to the adoption of ESG standards. While the language was not adopted, it is likely a harbinger of things to come, especially if major changes occur in the upcoming presidential and congressional elections.

For now, it appears that the prospect for public policy solutions for the oil and gas industry are somewhat limited. In the short run, the administration’s diplomatic efforts have prevented further damage, but longer-term solutions on global supply are needed. Policies aside, however, the market will ultimately resolve the current crisis, and the industry may emerge as strong or stronger when it does. Signs have already emerged for a brighter near and mid-term landscape for natural gas, and the same is likely to unfold for oil as well. There is good reason for both, given the world’s growing energy demand. 

That is not to say that there won’t be painful fallout from the current crisis. Sadly, there will be. Many companies will cease to exist and many workers have lost their jobs and many more will. Many will never return to the oil patch.

 

Emerging From the Abyss

As the industry reemerges from the recent abyss, it needs to start addressing the reasons why investors are shying away from oil and gas stocks. It needs to understand that investors value returns over growth, want to avoid companies with large debt and small margins, and value companies that are reducing their carbon footprint and addressing other ESG-related factors. These trends will not be easy to address. While trade associations and public policy may play a role, it will mostly be up to individual companies to align themselves with investor needs and desires.

Against this backdrop, the need for more attention to risk assessment and mitigation has never been greater. While the unexpected cannot always be anticipated, companies can plan and better prepare for those moments when their organization, industry, or even the world at large are temporarily turned upside down. In the last 20 years, the United States has experienced Sept. 11, the financial crisis and accompanying Great Recession, and now the COVID-19 pandemic and global supply shock.

With history as our guide, we’re destined for more surprises, and as a core industry intertwined into every fabric of society, it is incumbent on the oil and gas sector to understand, prepare for and mitigate that risk, addressing every facet thereof, from labor and financial to operational and social and beyond. The industry has been through tough periods many times before and emerged with resilience. Although perhaps one of the most painful so far, with the right approach, this time will be no different.

About the author: Jack Belcher joins Cornerstone in 2019 with over 25 years of experience in energy and energy policy. As senior vice president of Cornerstone Energy Solutions, he provides strategic and tactical advice to energy and transportation companies and financial institutions, focusing on government relations, regulatory affairs, public policy, strategical communications, situational risk management, and Environmental, Social, and Governance (ESG) performance. Jack also serves as managing director of the National Ocean Policy Coalition.

About the author: Brent Greenfield serves as Vice President and Counsel at Cornerstone Energy Solutions. He provides clients with strategic policy and management guidance, research, analysis and communications support across the upstream, midstream, and downstream segments of the energy industry. In addition, Brent serves as executive director of the National Ocean Policy Coalition, an organization comprised of members representing sectors including energy, fishing, waterborne transportation, construction, agriculture, and critical infrastructure.

Shale Oil & Gas Business Magazine

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