America’s energy challenge: Oil recovery hinges on effective public health policy

By Bryan Livingston
Managing Partner and CEO

The boom-bust cycle of the oil patch is nothing new, but the speed of collapse this spring, which turned Permian Basin cities into ghost towns nearly overnight, was something to behold.

Energy prices were already falling when OPEC flooded the market in early March after OPEC+ negotiations failed. A deal was finally worked out on April 12, but by then, the coronavirus pandemic had caused demand to plummet around the globe.

And, here we are.

In the U.S., gasoline demand is down by 40% from a year ago, inventories are up 10% and refineries are only operating at 70% of their capacity, reports the Houston Chronicle.

The pain that came so quickly to oilfields in Texas, North Dakota, Montana and elsewhere won’t disappear overnight. But relief in the form of potential state and federal policy moves are in the works to encourage recovery.

Texas Railroad Commission votes down oil production limits

Texas Railroad Commission (TRC) Chairman Wayne Christian went on the record in a Houston Chronicle opinion piece April 29, saying he would oppose limits on Texas oil production, and the commission voted them down 2-1 on May 5.

The TRC hasn’t used proration since the 1970s.

Christian said producers are cutting production on their own, so regulators should let the free market work. In the meantime, he’s created a blue-ribbon task force to look for regulatory relief and best practices to help the industry.

On the federal level, President Trump has said his administration is formulating a plan to make funds available to the oil & gas industry, but so far nothing definitive has emerged.

Politico reports several ideas that were floated have been scrapped. Those included a plan to fill the Strategic Petroleum Reserve, eliminate royalty payments for oil produced on federal lands and pay producers not to drill.

Bloomberg reported that Treasury Secretary Steven Mnuchin is looking at creating a Treasury Department lending facility, in which the government would take partial ownership stakes in oil & gas producers, while requiring the companies to scale back production, according to Politico, under the premise that less oil will cause prices to rise. But some have deemed the idea unworkable politically and financially, as the government stakes would have to be large enough to exert control over production.

Opening the economy

Getting the economy moving again will help. Dozens of states, including Texas, have begun phased reopening of their economies. Whether that will spark meaningful demand for oil and gas in the short term remains to be seen. It will take some time to see if Americans are comfortable getting out for entertainment, commuting to the office, or going on vacations this summer. Over 50% of respondents to a recent Dallas News-University of Tyler poll said they are unlikely to venture onto an airplane until August, and the airlines are slashing staff and flights.

Much hinges on the restoration of global growth and energy demand. The pace of recovery depends on whether developed countries are able to successfully contain the coronavirus and combat it with treatments and potentially, a vaccine. And of course, OPEC+ moves will bear watching as well.

Progress in fighting the virus should go a long way toward boosting consumer confidence and jumpstarting the economy, which in turn should provide relief to the oil & gas industry.

Some traders are feeling optimistic. Oil prices climbed 20% on May 5, as traders bet on a demand pickup with easing lockdowns. WTI for June deliveries settled at $24.56 while Brent crude was trading near $31 on ICE Futures Europe. Still low, but not as bad as the April blood bath.

Capital Alliance Corporation is a Dallas-based investment banking firm with a four-decade history and deep operational and M&A experience across many sectors, including energy infrastructure, oilfield services and oilfield manufacturing/supply chain. Capital Alliance is affiliated with Oaklins International, the world’s most experienced mid-market M&A advisor, with 800 professionals globally and dedicated industry teams in 40 countries worldwide. We have closed over 1,500 transactions in the past five years.