Lawmakers find markets mean more than policy in oil industry

'It’s challenging, it’s difficult and it’s really hard right now,' Murkowski says of the oil industry's slump. Democrats say its problems are self-inflicted.

Sen. Lisa Murkowski, R-Alaska, wants to find a way to support the oil industry, a key driver of her state's economy. (Caroline Brehman/CQ Roll Call file photo)
Sen. Lisa Murkowski, R-Alaska, wants to find a way to support the oil industry, a key driver of her state's economy. (Caroline Brehman/CQ Roll Call file photo)
Posted May 12, 2020 at 7:00am

Despite lawmakers’ best efforts to shore them up, struggling oil companies are heading into a grim period, with the Energy Information Administration due on Tuesday to update a report predicting no recovery at least until the second half of next year.

Indeed, there is little Congress can do to help an industry that is mostly driven by global markets rather than domestic policy. Legislative efforts pushed by oil industry allies have proven difficult to pass.

“It’s challenging, it’s difficult and it’s really hard right now,” Senate Energy and Natural Resources Chairwoman Lisa Murkowski, R-Alaska, said of the industry's woes on May 8, citing the “staggering projections.”

Data from industry analysts, including IHS Markit, and the EIA have already painted a gloomy picture for the industry in second quarter, with continued low demand for oil forcing the steepest production cuts in history as drillers take more rigs offline. The longer-term forecast report due from the EIA Tuesday is likely to offer more of the same.

[Fed change allows oil companies to qualify for recovery loans]

The pandemic-driven economic slowdown has reduced global demand for oil as people stay home and businesses close down, a gut punch for an industry with a glut of inventory after a long fight over production limits between Saudi Arabia and Russia.

Those prospects mean states with economies that rely on a healthy oil industry face job losses and budget holes, something their representatives in Congress have tried to stave off. 

The lawmakers appear to have exhausted the few legislative options they have, and President Donald Trump, who once was putting pressure on his administration to prop up the industry, seems to be more relaxed about it. Last week, he noted that prices rebounding to $20 a barrel from when they fell below $0 in April for the first time, means “good things” for the are happening in the industry.

Cutting back

Several oil companies have announced in earnings calls and financial documents they’re slashing their budgets, cutting jobs or furloughing workers, and reducing production as the market troubles take a toll.

Last week, drillers idled 34 rigs, bringing the total rig count to 374, according to oil services firm Baker Hughes, down from 988 a year ago.

The EIA last month projected U.S. oil prices averaging $29.34 a barrel in 2020, compared with $57.02 last year and $65.06 in 2018. EIA will release its updated projections Tuesday.

At less than $30 a barrel, nearly 40 percent of oil firms would face insolvency this year, a survey conducted last month by the Federal Reserve Bank of Kansas City found.

The harsh realities have forced the industry to make painful cuts, with more than a million oil fields service jobs likely to be lost this year, analysis firm Rystad Energy said in March. That is a nearly 20 percent reduction in the 5 million jobs for that sector. 

“Low oil prices are likely to persist in 2021 and could lead to further workforce reductions,” Audun Martinsen, Rystad Energy’s head of oilfield service research, said at the time. “But as we move into the second half of 2021, with better market fundamentals and a fading COVID-19, recruitment is likely to pick up in the shale sector and from 2022 will also kick off in the offshore sector.” 

Research firm IHS Markit on May 8 projected that the oil sector will face its largest volume of production cuts in history during the second quarter.

'Brutal adjustment'

Jim Burkhard, vice president and head of oil markets at IHS, projected a period of “rapid and brutal adjustment” in the industry to the supply and demand imbalance.

The group estimates that demand for oil will drop in the second quarter by 22 million barrels a day from a year ago. 

“All producing countries are subject to the same brutal market forces,” Burkhard said in a news release accompanying the forecasts. “Some will be impacted more than others. But there is nowhere to hide.”

As oil prices have tumbled since March, at one point falling into negatives, lawmakers from oil states have been scrambling to find solutions.

They’ve pushed legislation to provide $3 billion for the Energy Department to buy some of the excess oil at the low prices and fill up the Strategic Petroleum Reserves. That provision, which they want included in a coronavirus relief package, has proven politically difficult.

North Dakota GOP Sen. Kevin Cramer said lawmakers gave up the push for $3 billion in the previous spending bill because Democrats would have only accepted that provision if the package included tax credits for renewable energy and other environmental provisions, which Republicans compared to the Green New Deal.

“That was pretty much a nonstarter for us … so that puts us at a stalemate,” Cramer said in an interview with Fox Business News on May 7.

Outside of congressional action, the lawmakers pushed for the Federal Reserve to broaden the terms of its Main Street Lending Program, making it possible for larger firms with up to 15,000 employees to qualify for the coronavirus relief loans that had been set up for smaller companies.

The Federal Reserve is now under pressure from Democrats and environmental groups accusing it of acting in favor of the fossil fuel industry by helping it with challenges it faced even before the pandemic took its toll on the economy.

“This pandemic was not the source of the oil and gas industry’s dire financial condition, as is the case for countless small businesses with an urgent need for the Fed’s assistance,” Sens. Brian Schatz, D-Hawaii, and Sheldon Whitehouse, D-R.I., wrote in their May 8 letter to Fed Chairman Jerome Powell.

“This was just the final straw for an industry built on a foundation of distressed debt.”

While the Federal Reserve has maintained that the changes to its Main Street Lending Program were not aimed at helping a specific sector, Schatz and Whitehouse urged the central bank to reconsider, saying its changes “exactly mirror” those sought by the oil and gas industry and its allies. 

'No silver bullet'

Democrats have also introduced legislation that would prevent fossil fuel companies from receiving coronavirus relief funds. It’s unclear whether such language will be included in a coming relief package.

This kind of resistance from Democrats highlights how difficult it is for oil allies to get any help for the industry in a divided Congress.

“This is a situation where there is no one silver bullet here, so we’re working all angles,” said Murkowski, who also criticized lenders that have, under pressure from environmentalists and investors, stopped lending to fossil fuel firms.

Still, oil allies have proposed other options to the administration, including tariffs on Saudi Arabia oil imports and embargoing oil-laden ships bound for the U.S. Some of those options are complicated to implement and could be counterproductive for the industry.

Last week, Sens. James M. Inhofe, R-Okla., Dan Sullivan, R-Alaska, and Cramer said they had spoken with Commerce Secretary Wilbur Ross to push for tariffs on oil imports from Saudi Arabia and Russia “as a result of their anticompetitive” behavior.  

“This is intentional — Russia and Saudi Arabia are tired of competing with us and want to put American oil and gas producers out of business so they can once again dictate energy prices to the world,” the lawmakers said in a joint statement. “The consequences are significant — thousands of jobs and millions in capital investment have been lost to these foreign market manipulations.” 

 As oil industry troubles persist, so does the likelihood of small firms shutting down or being acquired by larger foreign companies, a prospect that worries allies of domestic oil producers.

Cramer is pushing for a lending facility to help troubled independent oil companies restructure their debt and avoid being gobbled up by larger multinational corporations. Cramer’s aide didn’t say whether Cramer is seeking to do so legislatively or to coax Treasury to create a program using existing money.

“They’re good companies. They’ve been creditworthy in the past and will be again when they come to the other side of this,” Cramer said on Fox Business News, referring to domestic producers. “The thing is having a bridge to get them to the other side.”

In a Friday meeting with Trump at the White House, oil-state lawmakers highlighted their fears about the industry’s troubles.

Rep. Mike Johnson, R-La., said a combination of the pandemic and oil market troubles have given his state a tough run. 

“I mean, the pandemic hit us pretty hard,” Johnson said. “And then, of course, we've got the crisis in the oil and gas market, and we're going to recover from that.”

When making decisions on how to help oil, administration officials have been taking their cues from Trump, who now appears optimistic about the oil situation, touting the recent increase in prices, which were around $24 a barrel Monday afternoon. 

“So it's going to be very good,” Trump said. “A lot of good things are happening in energy."

That is contrary to the reality the industry and its allies in Congress are coming to terms with.

“This is a situation where there is no one silver bullet here, so we’re working all angles,” Murkowski said.