Oil price drop rocks industry

by Camille Erickson

Casper Star-Tribune

Via Wyoming News Exchange

CASPER — Volatile markets roiled Wyoming’s energy sector again this week, with oil prices tumbling and investors shedding energy shares as the coronavirus, or COVID-19, continued to spread worldwide.

The Federal Reserve’s emergency rate cut over the weekend did little to stop the free fall in oil prices Monday morning. A glut in oil supply worldwide, coupled with weak fuel demand has brewed what several analysts have called the “perfect storm.”

The toll on Wyoming operators could be brutal but temporary, several analysts said.

West Texas Intermediate, a U.S. benchmark, tumbled to $29 a barrel Monday for the second week in a row. Public officials weighed several dramatic measures to quell the spread of the virus over the weekend, many potentially bringing the economy to a near standstill.

“All of those (measures) are going to put a big cramp in demand for motor vehicle products, like gasoline and so forth,” said Charles Mason, a University of Wyoming economist specializing in oil and gas markets. “That, in turn, means there will be less demand for things like crude oil. I think that is a big part of what you’re seeing today.”

In other words, the threat of falling fuel demand has likely spooked traders and has had energy operators on edge, Mason added.

Sustained geopolitical tensions have only compounded the economic fears associated with the virus. Leading oil producer Saudi Arabia advised OPEC to slash oil production by 1.5 million barrels per day in early March to stabilize global markets in light of the COVID-19 outbreak. Cutting the supply of oil can sometimes help buoy prices. But Russia opted out of Saudi Arabia’s plan to curb production. Russia is the third largest producer of oil but not a member of OPEC.

Saudi Arabia responded by cutting prices and upping production instead. The two countries continue to joust, with Saudi Arabia vowing to keep up its oil production.

For Wyoming operators, low oil prices could be a reality that stretches from weeks into months, some economists predicted.

“The price fluctuation is a lot like late 2015 and early 2016 — with (West Texas Intermediate) dropping to as low as $30 per barrel,” the state’s chief economist, Wenlin Liu, wrote in an email to the Star-Tribune. “(Operators) probably have to fight for their lives.”

Liu predicts companies will need to reign in capital expenditures, temporarily halt dividend payments and slow, or even halt, drilling operations. Ultimately, producers may have no choice but to lay off or furlough workers, Liu said. That’s because continuing drilling operations when oil is less than $30 a barrel can be difficult, if not impossible.

“The production breakeven price point varies widely on a well-by-well basis based on the volume of oil being produced and costs, mainly electricity, needed to pump the well,” said Ryan McConnaughey, communications director for the Petroleum Association of Wyoming. “Companies will start shutting in wells that are the least profitable based on those factors.”

For every dollar chipped off the price of oil, the state of Wyoming sustains an annual loss of $12.5 million, McConnaughey added.

What’s more, for every rig shut down, roughly 100 workers will be displaced. The state’s active drilling rigs have fallen by 44 percent since the fall of 2019, going from 36 to a mere 20 rigs, according to the state’s Economic Analysis Division.

Nonetheless, oil prices will likely recover and markets will balance out this year, predicted Mason, the UW economist.

“I would imagine that by summer crude prices will have rebounded,” he said.

But that doesn’t mean energy firms, particularly the ones already in debt, won’t take a hit in the meantime.

Operators in the red at the time of the economic slowdown may turn to risky, high-interest loans to generate desperately needed revenue, Mason said. That choice that could fare poorly for companies in the long run.

“If it’s a bad business decision over the long term — they’re just going all-in on a pair of deuces, as it were — I think you’re going to see some bankruptcies come out of that,” Mason said.

That has conservation groups, like the Center for Western Priorities, worried about future reclamation, or clean up, obligations down the line. A 2018 study, conducted by an economic consulting firm and Center for Western Priorities, found producible wells on public lands in the U.S. could require over $6 billion to properly plug and clean up — a liability far exceeding the amount of reclamation bonds in place.

In light of plunging oil prices, Policy Director Jesse Prentice-Dunn warned of a future when taxpayers could be left shouldering the steep costs of clean up, especially if more and more oil firms go insolvent.

“When small producers go out of business in another boom-bust cycle, far too often taxpayers are stuck with the cleanup costs,” Prentice-Dunn said in a statement.