The oil and gas industry has long been the lifeblood of the Louisiana economy, but with the markets hitting record lows in March and wide-sweeping travel bans, the industry is getting a double whammy hit possibly unlike any other in its history. Prices took a nosedive in early March, dropping from just over $50 per barrel to $34 in a single day as Saudi Arabia dumped oil into the international market, surpassing previous agreed-upon production levels with Russia as worldwide travel was plummeting because of the coronavirus.
It’s unclear how quickly the industry will recover, and how much it might affect the long-term plans of the state’s biggest companies.
• Brent crude prices dropped to as low as $20 per barrel last month, leaving prices at the lowest levels since 2002.
• March’s bidding on oil and gas leases in the Gulf of Mexico was the lowest since the sales began in August 2017.
• “The market is trying to find the bottom and stabilize,” says David Dismukes, executive director of the Center for Energy Studies at LSU. “They’re trying to find the bottom, and trying to get there without cutting their arm off.”
• A recent LOGA survey reported that should nothing change in the price markets, 65% of Louisiana’s oil and gas workers could be laid off over the next 120 days.
• Companies are continuing to produce crude oil at lower rates, but have slowed or stopped drilling new wells.
• Refinery expansion projects are also being delayed due to market uncertainty.
• Some chemical plants have cut back production by as much as 50%, with some preparing for the possibility of a total shutdown if the pandemic worsens.
Where will prices go from here? Dismukes says Saudi Arabia and Russia won’t go back to the negotiating table until June at the earliest. That leaves the oil industry in a wait-and-see game for a few more months, with millions of dollars on the line. If and when OPEC does cut back on production, Dismukes says prices are only expected to stabilize into the $40-$49 range, still short of the month’s beginning prices in the $50 range. Other industry groups predict prices will stay below $30 a barrel for a long time.
Social distancing at plants: While Louisiana’s chemical plants were deemed essential by the federal and state government, and therefore exempt from the stay-at-home order, they still have to comply with federal and state social distancing guidelines. Staff has been reduced and quarantined, contractors have been furloughed or laid off, and supply chains disrupted. Together it has resulted in production declines that could last for months.
How long can this go on? “We’ve never been in a situation where, overnight, the pause button was hit on our economy,” says Greg Bowser, president of the Louisiana Chemical Association.
Industry supporting COVID response: Some plants have shifted manufacturing efforts to help produce medications, oxygen for ventilators and other supplies that are critical in efforts to treat COVID-19. A week after ExxonMobil cut contract workers at its Baton Rouge plant by 1,800, the company announced it would provide isopropyl alcohol—a key ingredient in hand sanitizer—to the Governor’s Office of Homeland Security and Emergency Preparedness. Exxon also delivers fuel and other products used to produce IV bags, ventilator machines, hospital gowns and medical face masks.
No federal relief: The $2.2 trillion federal stimulus package passed last month does not include funding for the Strategic Petroleum Reserve, which would have created an additional $3 billion market for Louisiana producers to sell oil into. Framed by opponents as a “bailout for Big Oil,” the money would have allowed for another 77 million barrels to go into the reserve.
Toll on state budget: While oil revenues account for a smaller percentage of the state budget than they did in the 1980s, the true revenue cost boils down to how long oil prices will remain suppressed and at what level. Stephen Barnes, the independent economist on the state’s Revenue Estimating Conference, says it’s too early for the state to make a “knee-jerk” reaction to the dramatic price drop, but it’s prompting caution from lawmakers.
What will the high water do? The threat of high Mississippi River water levels is expected to loom through at least May, meaning industry should prepare for a lengthier ban on nighttime travel for river pilots navigating the stretch between Baton Rouge and New Orleans.
• Industrial companies have aired their frustrations with the NOBRA Pilots Board of Examiners, which imposes the restrictions. Industry says the board lacks clear standards when it comes to lifting and implementing the ban, which causes major delays and slows operations for the industrial companies.
• Since then, communication has vastly improved, according to both parties. Board chair Capt. Bobby Heitmeier is expecting to publish a clear standard of care by the summer.
• However, Heitmeier, pointing to practices in other states and river level trends, issues a note of caution to local industry: “The new norm is that everybody’s attention is on safety, so if industry keeps growing and traffic becomes more congested, you’ll see more daylight-only travel on certain sized ships. It’s very possible it is here to stay.”