In a state well-accustomed to the fickle behavior of commodities, big swings in oil prices don’t necessarily create a stir. But when billions of dollars worth of planned industrial investment are potentially at stake, the story is a little different.
The decline in oil prices from more than $110 a barrel last June to below $50 a barrel in January sparked worry in some quarters that the drop might not only strike a blow to the petroleum industry, but could also endanger what many see as the biggest industrial expansion in Louisiana’s history.
A theoretical alarm sounded in January when South African energy company Sasol Ltd. put on hold its plan to invest as much as $14 billion into a new gas-to-liquids plant in Lake Charles. The plant was one of two large projects the company had on tap in the area.
Though oil prices have edged up in recent weeks, some concerns linger about how prolonged volatility might affect other industrial construction projects across south Louisiana.
David Dismukes, executive director of the Center for Energy Studies at Louisiana State University, says that gauging the future of those projects requires speculating not only on the direction of commodity prices, but also on how close the price of oil may come to the price of natural gas.
“It’s not the absolute price that matters for some of these projects, it’s the differential between gas and crude,” he says.
Among the projects that make up the $100 billion-plus basket of industrial development on tap across south Louisiana, the big gas-to-liquids plant by Sasol was heavily dependent on oil remaining much more expensive than natural gas. That’s because the plant aimed to profit by using gas to create liquid fuels that could be substituted for oil-based fuels produced by conventional refiners. When the price gap between gas and oil narrowed so dramatically, the project no longer looked as viable, though the company has said it may revive the plan later.
CHEAP GAS MATTERS
Cheap natural gas, on the other hand, is the driver behind the natural gas liquefaction plants being built in the Lake Charles area by Cheniere Energy, Sempra Energy and several other companies. While these projects would benefit from a bigger price difference between oil and gas, ongoing demand for natural gas in developing countries around the globe helps assure a relatively stable market for their product.
So far, the planned LNG plants in Louisiana not only remain on track, but a new project has joined them: Houston-based Parallax Energy announced it will build a $2 billion LNG plant in Lake Charles.
The other major category of industrial development in Louisiana encompasses projects that arose primarily from the availability of cheap gas and growth in global demand for a wide range of products.
Big petrochemical expansions and projects announced by Dow Chemical, Cornerstone Chemical Co., Williams Olefins and more than a dozen other companies—including an $8.1 billion ethane cracker already underway by Sasol—appear to remain on solid footing.
“These projects are not harmed because natural gas prices are staying low,” Dismukes says. Even if gas prices edge up, he notes, the stability of Louisiana as a source of supply gives the companies confidence in their local expansions.
“I still see billions [of dollars worth] of activity being maintained and the bulk of the announced projects materializing,” he says.
Chemical industry spokesman Dan Borné agrees, adding that most of the projects that do benefit from a spread between natural gas and oil prices are still viable even at current price levels.
The president of the Louisiana Chemical Association says that oil at $50 a barrel and natural gas at $3 per million British thermal units makes for a ratio of nearly 17 to 1 on an energy-equivalent basis. “That is still very competitive,” Borné says.
“A lot of capital is being bet on the availability of natural gas at a competitive price,” he adds.
As long as demand exists and the United States is able to provide gas more cheaply than other countries, most of the natural gas-based manufacturing expansion in Louisiana should remain viable, he says.
Borné also points out that the current lower oil prices carry some benefits, particularly to chemical manufacturers that use oil derivatives. “Low oil prices in America put more money into the wallets of consumers,” enabling the purchase of more products made using chemicals manufactured in local plants, he says.
Optimism aside, there’s no question that the plunge in oil prices is taking a toll in some quarters.
Oil industry service companies—businesses that serve and supply drillers and producers and provide transportation—are always on the front lines in absorbing oil price shocks, and some companies have reacted.
Service giants Schlumberger NV, Baker Hughes Inc. and Halliburton Co. in January announced plans to cut some 17,000 jobs to bring their spending more in line with revenue. The layoffs will likely hit hardest in areas with the highest concentrations of shale oil drilling, such as North Dakota.
But Louisiana is feeling the squeeze as well. Don Briggs, president of the Louisiana Oil and Gas Association, whose membership represents small and mid-size oil and gas-related businesses across the state, says some shale producers, service companies and other onshore drillers in central and north Louisiana have taken blows to their bottom line.
“The low prices are having a significant impact on the hundreds of very small producers,” Briggs says.
Landmen—individuals who find and lease properties for drilling—are among the hardest-hit thus far. “Maybe 300 to 400 landmen have lost their jobs,” he says.
Still, across south Louisiana in general, the picture is far from dire.
Jason El Koubi, president of One Acadiana (formerly the Greater Lafayette Chamber of Commerce), says that even though south-central Louisiana is heavily populated with oil-related businesses, data such as drilling permits and rig counts are not yet showing cause for alarm.
“Any job losses can cause anxiety,” he says. “But much of the service industry in Acadiana is focused on deepwater (offshore drilling and production), which is sustainable at a lower oil price.”
With job losses so far concentrated mainly in onshore plays and shallow water, the negative impact of lower oil prices on the south Louisiana economy “has been muted,” El Koubi says.
Companies focused on drilling and producing from deep waters of the Gulf of Mexico generally keep their eyes on long-term goals, given that it can take five to seven years or more to develop and begin extracting hydrocarbons from a deep-water field. Within that time, the spot price of oil on world markets will rise and fall, perhaps substantially, but the companies are making calculated wagers that prices over the long-term will more than support their activity.
STAY THE COURSE
Chris John, president of the Louisiana Mid-Continent Oil and Gas Association, says that while “anyone who says they know what prices are going to be next year is just guessing,” the large companies that form the bulk of his organization’s membership spend a lot of time making and revising long-term oil price forecasts.
“From what I see, they believe in staying the course … and they think that prices will rebound,” he says.
John says myriad factors affect the price of oil, but neither the current glut nor softer demand in major consuming countries such as China are new situations, and now is not the time to panic.
The price drop “doesn’t change the fact that we use 20 million barrels of oil a day in this country,” he says. “We’ve got to keep producing.”
The downturn in the price of oil has had some Louisiana residents recalling the economic horrors of the 1980s, when oil prices took a nosedive, bankers began calling in loans and the resulting real estate crash soured the entire regional economy.
But industry leaders say such pain is less likely this time around, in part because companies are leaner and operate more efficiently than they once did, lessening their risk of financial failure.
In addition, it may not be long before oil prices begin to creep upward and stabilize.
Dismukes says that, despite the current oversupply, crude oil is unlikely to languish around $50 a barrel for an extended period. Though he says “it’s very hard to call this market,” he guesses that oil will start a slow climb toward $70 a barrel and over the course of a few years finally settle in the range of $75 to $80.
As this publication went to press, West Texas Intermediate crude was trading at $50.14 (April 6), up from a one-year low of $42.60 in mid-March.
This article was originally published in the Spring 2015 issue of 10/12 Industry Report.