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In Market: Texas oil producers are caught in a vice and virus

🕐 6 min read

COVID-19 is getting all the headlines, but without the worldwide pandemic, business writers across the Lone Star State would be tripping over their adjectives bemoaning the latest shock to the energy market.

Until the price war between Saudi Arabia and Russia is resolved, the biggest bright spot in the Texas economy – the Permian Basin – has been dimmed.

Oil and gas companies have begun reducing their operations in the Permian Basin as the two oil giants engage in a war to the bottom of the barrel. According to IHS Markit, second quarter 2020 oil production is projected to decline in every region of the world, with OPEC members, Russia, and the United States among the hardest hit.

“While key global benchmarks Brent and WTI were trading on the futures market in the $20s on 27 March, West Texas Light at Midland sold for $9.40/bbl. (a barrel) on the physical market. And Canadian heavy crude oil sold for less than $6/bbl. We are still projecting Brent prices to fall to around $10/bbl. in April. Some producers may experience ‘negative prices’ where they pay a buyer to take their crude oil,” the London-based research organization reported.

A CPA with a degree from Sears could likely figure out that paying someone to buy your product is probably not a good long-term strategy.

If that was the only problem, that would be one thing. There’s also the COVID-19 virus, which has also slowed energy demand. Can you say “double whammy”? Or as we say in Texas, “I’ve got a little hitch in my giddy-up.”

Exxon Mobil began putting on the brakes in early March with plans to reduce the number of oil rigs operating in Permian Basin and Houston-based Apache Corporation jumped on board announcing it would pull all its oil and gas rigs out of the Permian to save on short-term spending.

Irving-based Pioneer Natural Resources, which operates mostly in the Delaware Basin on the western side of the Permian and is one of the largest acreage holders in the region, has also announced a significant cut in operations. The company’s rig count will be cut from 22 to 11 while completion crews will be reduced from six to two or three. Fort Worth-based Basic Energy Services Inc. has been implementing several cost control and capital preservation measures, including reducing projected 2020 capital expenditures 60%, from the previously announced $43 million to $17 million.

Ouch. How did all this happen?

As Jett Rink said in Giant when he wildcatted a well that produced big: “It’s here, and there ain’t a dang thing you gonna do about it!” Unfortunately, Rink only had to worry about his local competitors. Russia and OPEC were far in the future. So, you can blame some of this on the very success of the Permian Basin, where oil production has been booming. While Midland oil players were grinning ear-to-ear with Jett Rink-like pride, OPEC and Russia were not pleased to see the U.S. return as a strong player in the energy game. Plenty of Fort Worth companies are involved as well. This new shale game was one reason Exxon purchased Fort Worth’s XTO Energy several years back.

There had been a quiet truce between OPEC and Russia for some time as both wanted to tamp down the new upstart competitor with a West Texas drawl without causing too much disruption to their own markets.

According to several reports, on March 6 at a meeting of OPEC, the Saudis proposed yet another cut to counter the now slow demand resulting from the virus. Russia said, “Nyet,” saying it planned to increase production and drive prices down lower. The Saudis said, “Me too,” followed by the United Arab Emirates. All that spelled bad news for the already teetering Permian Basin and the Texas economy.

Early in the year, prices for oil were in the $63 per barrel range. By early March, prices had fallen to less than $42 a barrel, before the virus impact really took hold. Now prices are down in the $25 range and IHS expects prices to drop into the $10 range. Dominic Schnider of UBS Wealth Management told CNBC on March 31 not to rule out oil prices hitting $15 in the second quarter.

Other analysts expect either the Russians or the Saudis to blink as this price drop is not easy for either economy to sustain. But even if they do reach some agreement, West Texas has already taken a shot to the noggin that is going to reverberate from El Paso to Texarkana. The Jett Rinks of the world are hoping they either hoarded cash or whiskey. More likely both.

Would this have happened without the COVID-19 virus? Probably, but the impact of the virus on several major economies exacerbated an already critical situation for domestic energy producers.

These unprecedented events are creating some unprecedented actions.

The Texas Railroad Commission is contemplating doing something it hasn’t done in decades – reducing oil production. That’s at the request of several energy producers, according to several reports, though some scoff at the idea. Reducing oil production could help stabilize prices, if OPEC and Russia cooperate as well. One of the three Railroad Commissioners is apparently in favor of the cut, so it could happen.

It’s fixin’ to hurt

What’s going to happen? Near term, Texas is going to lose money and people are going to lose jobs. The Texas economy, as diverse as it has become in the past 30 years, still looks to the energy industry as the cash cow for tax revenues. About 6% of state revenues come from the industry, but that multiplies throughout the economy.

With some companies already cash-strapped by the low oil prices prior to the virus outbreak, there will likely be some energy bankruptcies.

Now, as the state faces an oil slowdown and an accompanying business slowdown via the pandemic, Comptroller Glenn Hegar has told Texas House members on the state’s economy and budget committees that the state is in for a massive economic hit.

We know there’s federal money coming to assuage the pandemic’s impact. But there could be funds for the oil and gas industry as well. Reports are that the White House is considering federal assistance for the industry. But those funds will probably come after the feds determine the impact of the $2.2 trillion economic relief package. Despite how receptive this administration has been to the energy industry, right now its troubles are a distant second.

Where will this leave North Texas? On the plus side, gas will be cheap, at least for a while. If you could go anywhere, that would be great.

On the downside, the once promising shale gas revolution finally pushed Russia and OPEC too far. They don’t really want another competitor for the energy revenues they depend on. Not from the U.S. And particularly not from Texans who’d sooner brag than breathe.

If anything, though, the shale industry has proven that entrepreneurship and innovation can carry the once moribund Texas energy industry to new heights. It’s going to be a rough – and maybe long – road but the industry will emerge on the other side, perhaps stronger and more relevant than ever. Don’t count Jett Rink out yet, but if you run into him in a bar (when they reopen), buy the poor guy a drink.

Robert Francis is editor of the Fort Worth Business Press.

Robert Francis
Robert is a Fort Worth native and longtime editor of the Fort Worth Business Press. He is a former president of the local Society of Professional Journalists and was a freelancer for a variety of newspapers, weeklies and magazines, including American Way, BrandWeek and InformatonWeek. A graduate of TCU, Robert has held a variety of writing and editing positions at publications such as the Grand Prairie Daily News and InfoWorld. He is also a musician and playwright.

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