At first glance, Congress’ recent legislation to help the U.S. deal with the public health and economic fallout from the coronavirus has little to offer the hard-pressed oil and gas sector. A closer look at the purpose of the aid package and the reaction from industry interests, however, reveals complex internal stresses confronting the sector before, during and after this crisis.
As IHS Markit has noted, oil and gas returns have been poor for years
The legislation is meant to help companies hurt by the economic downturn caused by the COVID-19 pandemic. But before the coronavirus hit, the oil and gas industry already faced market forces that whittled away any robust demand scenarios. Industry attempts to rebalance an oversupplied market were undermined by a price war between Russia and Saudi Arabia. As energy consultancy IHS Markit noted, oil and gas returns have been poor for years. The industry is weakly positioned for the future.
As the coronavirus scenario unfolds, demand for oil and gas will continue to plummet and Russia and Saudi Arabia may or may not come to any agreement despite growing financial distress. Bottom line: Expect continued oversupply and oil prices that are much lower for much longer. After the crisis passes ‒ none too soon ‒ there is little likelihood of a fast rebound for oil and gas.
While current legislation has little to do with any recovery for the sector, it illustrates acute stresses and strains within the industry. Three primary provisions in the legislation offer clues to these stresses.
So, why did Congress and the President short-change the oil and gas industry at a time when Washington spends in trillions and chatters in billions? There are significant rifts in the oil and gas sector. Individual company and subsector interests now weaken the historical unity of the industry. In a recent interview, Scott Sheffield, the CEO of Pioneer Natural Resources, an independent oil producer, suggested that ExxonMobil hopes smaller independents will fail so that they and other large players can come in and “pick up the pieces.” He also concluded “we have no solutions” to the financial conundrums facing the industry. Sheffield’s comments highlight the rift between oil majors and smaller independents. Another rift, according to Sheffield, was the Russia-Saudi Arabia conflict, which he believes is sufficiently disruptive to warrant a direct appeal for White House intervention.
In a constricted market, looking to gain market share through the failure of others is unlikely to succeed. For example, some of the fracking and coal interests believe the current economic downturn will favor them over any growth in renewable energy. Recently, IHS Markit made it clear that the oil and gas sector is poorly positioned to take advantage of any rising market activity and that renewables are likely to fare better as the economy rebounds.
To meaningfully restructure the oil and gas industry would have required even more than $2 trillion
Amidst these conflicts, ideas that surfaced in Washington to include a purchase for the Strategic Petroleum Reserve or to support industry debt relief did not explicitly make it into the law. For the federal government to meaningfully restructure the oil and gas industry would have required an even larger allocation than $2 trillion and probably weeks of additional horse‑trading over issues unrelated to the coronavirus. Sheffield acknowledged as much with his oblique reference to independent players’ debt load, which would make consolidation of the independents unlikely because of too much debt.
The economic downturn will reduce oil and gas demand temporarily. Over the short- to medium-term, the oil and gas sector will recover, albeit slowly. But the headwinds facing the industry will remain. Long after the current crisis is resolved, the industry will still face fierce technological competition that will restrain prices and crimp profits. It will still confront rising competition from energy alternatives, particularly renewable energy and storage. It will still have to deal with persistent oversupply in electricity, transport and petrochemical markets. And its political influence will further decline as the sector’s historical cohesion continues to fracture.
Expect any largesse from the new legislation to the oil and gas sector to be based on special dispensations to lobbyists bearing gifts during an election year. These grants of taxpayer‑supported benefits ‒ if and when they occur ‒ will have little to do with the smooth functioning of the nation’s energy supply, and even less to do with the coronavirus.
Tom Sanzillo is IEEFA’s director of finance.
Kathy Hipple is an IEEFA financial analyst.