Covid-19, and the Oil Business

Trouble in the oil patch:

Rogers, who also worked as an adviser to oil giant BP and its auditors on liability estimates and disclosures arising from the Deepwater Horizon disaster, describes fracking as being “like a Ponzi scheme, it only works as long as you continue to get new suckers to sustain growth.”

The global spread of the COVID-19 virus has caused both supply and demand for global goods to plummet as factories are shuttered, workers stay home, and businesses are ordered to close or cut their hours drastically by states across the U.S. Jets are grounded as people cease traveling, and talk of an ongoing global recession, or even depression, is now commonplace.

Oil prices sank to nearly $20 per barrel, the lowest price in more than 18 years, due to the combination of the ongoing global pandemic coupled with an oil price war between Russia and Saudi Arabia, which has caused a supply glut – ironically, one that is also exacerbated by fracking itself. (Most oil companies in New Mexico that are fracking need oil to be $50 per barrel just to break even.)

The Financial Times recently ran a story which posited, “Oil crash only a foretaste of what awaits energy industry: The end of hydrocarbons as a lucrative business is a real possibility. We are seeing that in dramatic form in the current oil price crash.” Oil companies are already announcing major cuts in spending in response to the rapid devaluation of stock prices. American oil companies are now frantically racing to restructure their massive debt, as the price war appears poised to cause numerous bankruptcies across the entire shale patch. Seven of the most active companies involved in fracking in Texas have already cut $7.6 billion from their budgets as a response to the oil price collapse.

...“I don’t know from a financial standpoint that it ever becomes a calamity, but it becomes a calamity if we depend on this oil and gas and think it’s going to grow forever,” she told the host. “People forget about the idea that somebody had to pay the money back. And so, I think there is an analogy to this today when I get asked the question, ‘Why on Earth would Wall Street fund these guys [frackers] if it’s this uneconomic? You must be wrong.’ I say no, no, no, just look at the history of Wall Street: they’ve funded plenty of things that are uneconomic at the end of the day.”

...Rogers sees what he calls a “tsunami of bankruptcies” across New Mexico, Colorado and California that appear imminent. The earthquake in this case is the peaking demand for oil and gas. “The tsunami, then, is all the asset retirement obligations that come sweeping in after the earthquake that a lot of people hadn’t anticipated,” he said.

But Rogers also gave another warning: “The interesting twist is from financial markets that are always looking ahead and pricing in futures. If the markets become keenly aware of the impending tsunami, they will price this into current costs, in which case the tsunami accelerates the earthquake.”

Rogers continues, “Say you are JP Morgan and lend oil and gas a lot of cash, and you figure out this is a permanent decline in the industry, and there is $400 billion of ARO debt out there, and most of that is positioned ahead of you to pay states before you get paid,” Rogers said. “Do you want to keep loaning money? Not likely. So that would be a way of the tsunami causing the earthquake. I think that is what is going to happen here.”

...The long-term outlook for the global oil and gas industry, given the climate crisis and now the global pandemic, does indeed look bleak. Additionally, given that Saudi Arabia and Russia have large petroleum reserves and the lowest production costs in the world, the current oil glut does not bode well, according to Rogers.

“They are saying, If climate change and the energy transition means that oil is to be left in the ground, it’s not going to be our oil that goes unburned,” he said. “The U.S. can’t survive a sustained price war, and they know it.”

From Rogers’s perspective, New Mexico’s time to extract itself from the dying industry it has tied so much of its budget to, is now.

“The coronavirus is an ideal opportunity for Russia and Saudi Arabia to do what is in their economic interest and also within their power — bury the U.S. oil and gas industry involved in fracking once and for all.”