Trump’s oil deal may not be enough to save some U.S. oil companies

Source: By Dino Grandoni, Washington Post • Posted: Tuesday, April 14, 2020

Saudi Arabia, Russia and the United States reached a major Easter weekend deal to cork the gush of oil flooding the world market during the coronavirus pandemic. But the move may not be enough to rescue the U.S. petroleum producers most struggling to stay afloat during what is shaping up to be the biggest economic downturn to hit the oil and gas sector in decades.

Now some American oil producers are bracing for a long haul with low oil prices. They’re turning to President Trump’s deputies, as well as to state governments, for more help as they try to forestall bankruptcy.

President Trump speaks during the daily coronavirus briefing at the White House on Monday. (Reuters/Leah Millis)
The huge production cut of nearly 10 million barrels per day for May and June falls short of sopping up the excess oil.

That’s because the fall in oil prices is due not only to an oversupply from the Saudis and Russians, but also to a drop in demand for gasoline, jet fuel and other petroleum products as people hunker in their home to avoid spreading the contagious virus.

While the deal may keep the world from testing the limit of tanks to physically store oil, global oil markets barely nudged at the news of the deal, with the price of Brent crude, the international standard, hovering around $31 a barrel.

“The impact of the OPEC supply cut was largely baked into the price already, as markets have been expecting an agreement and remain concerned that even this historically large supply cut will not be sufficient to offset the massive loss of global oil demand,” said Jason Bordoff, director of Columbia University’s Center on Global Energy Policy.

The cut is simply too little, too late, Goldman Sachs said in an investor note echoing that sentiment. “Ultimately, the size of the demand shock is simply too large for a coordinated supply cut, setting the stage for a severe rebalancing.”

On Twitter, Trump initially touted the deal that came together over the holiday weekend after an OPEC video conference on Thursday. “The big Oil Deal with OPEC Plus is done,” Trump tweeted Sunday.

But by Monday morning, perhaps in a sign of recognition that the agreed-upon cut may not be enough to reassure domestic producers, Trump wrote on Twitter that “the number that OPEC is looking to cut is 20 Million Barrels a day, not the 10 Million that is generally being reported.” Trump’s doubled figure contradicts the one posted on OPEC’s website.

Sun sets behind an idle pump jack near Karnes City, Texas. (AP Photo/Eric Gay, File)
In a sign of uncertainty, some oil producers in hard-hit parts of the country are asking for even more help.

In both Texas and Oklahoma, small to midsize independent drillers are boring into regulators to step in and install production quotas.

The Texas Railroad Commission will consider on Tuesday a petition brought by two Texas producers, Pioneer Natural Resources and Parsley Energy, to “prorate” oil production in the state. Despite its name, the panel has the power to regulate the quantity of oil produced in Texas, but hasn’t exercised it since 1972.

As my colleague Will Englund reports, proponents say that without some safeguard against the steep fall in prices, big oil companies will able to scoop up assets once smaller firms go belly up. “This crisis, aggravated by government actions around the globe, calls for appropriate government measures to mitigate the economic consequences,” Mark Berg, executive vice president of Pioneer, wrote to the Texas Railroad Commission.

In agreement with Berg is Trump friend and fracking billionaire Harold Hamm, founder of the Tulsa-based Continental Resources. Regulators on the Oklahoma Corporation Commission received a similar appeal last Friday.

But big oil companies that stand to gain from consolidation, led by the American Petroleum Institute, are urging the Texas board not to manipulate output. Prorationing, said API’s R. Dean Foreman, “appears unlikely to improve market conditions — and could become a precarious and slippery slope.”

One of the three Texas commissioners is not yet ready to publicly commit to anything. “I have not advocated for Texas to prorate,” said Ryan Sitton. “I have advocated that we consider it. I felt that we should be open to evaluating any path that helps to bring the international oil community together in a global deal.”

Offshore drillers, meanwhile, also are also still eyeing their own aid from the federal government.

Oil producers along the coast of Texas, Louisiana and other Gulf states were already clamoring Monday for relief on royalty payments to a federal government as demand for oil continues its slump. Erik Milito, head of the National Ocean Industries Association, which represents offshore producers in the Gulf of Mexico, urged Trump on Monday to “utilize his full policy toolkit, including offshore royalty relief and lease extensions.”

The Trump administration has already dismissed the idea of a blanket royalty waiver for offshore drillers. But Sen. Bill Cassidy (R-La.), chair of a Senate subcommittee on energy, said Interior Secretary David Bernhardt promised that his department would do “targeted royalty relief” for companies that applied for it.

One offshore producer has begun the process of requesting relief, according to Interior Department spokesman Conner Swanson. The department’s Bureau of Safety and Environmental Enforcement is not disclosing the name of the company.

Despite all the outstretched palms, Trump’s deal is still history-making.

The trilateral tango between Saudi Arabia, Russia and the United States is remarkable both for the sheer volume of the production cut — constituting a tenth of global supply — and for the direct involvement of a U.S. president.

“Everything about the virus crisis is unprecedented, including this mega-deal, which six weeks ago could not have been imagined,” the Pulitzer Prize-winning oil historian Daniel Yergin said. “Also, what could not have been imagined is that Donald Trump, who has been a critic of OPEC for years, is the one who put it together.”