PORTLAND – The oil and gas business has been dealing with three major blows to its industry all at once. With the price war between the Organization of the Petroleum Exporting Countries (OPEC) and Russia hitting at the same time as the COVID-19 pandemic, crude oil prices have fallen to historic lows. All this coming after one of the industry’s biggest years to date.
The demand for crude oil was about 100 million barrels a day and peaked in 2019 at 103 million barrels a day. This year started with 30% demand destruction from January to April alone.
With the State of Texas opening up, the economy is beginning its slow recovery. With that means more vehicles on the road and oil prices beginning their slow climb back up the energy ladder.
“We’re basically in uncharted territory,” Luke Legate of the Joint Association Oil & Natural Gas Education Initiative said during a Zoom meeting hosted by the Portland Chamber of Commerce. “You couldn’t have scripted this. This downturn is definitely going to have an impact for years to come, not only on our tax revenue as a state, but for local economies. I don’t have to tell you all how things are going there especially in Portland and in the Coastal Bend.”
Legate said that despite what the world is facing at the moment, the industry is resilient and well positioned to recover from this.
He noted that in the last 10 to 15 years they faced some of these challenges – not quite as bad as this – but similar like the 2008 industry slow down, then the 2015 price crashes. He said that the good news is that the fundamentals are still very much in place, and Texas will lead the way. With infrastructure including the Port of Corpus Christi remaining open and the recent announcement of expanding crude oil storage capacity in the area, things are already signs of improving.
“The most immediate thing we can do is open up our economy as safely and measured as possible and we continue to see the results of that,” Legate said. “When you shut down an entire world’s economy literally overnight, it doesn’t take a genius to figure out that we’re not going to have as much demand.
“So now the market is responding to (the state opening) and we’re starting to rebound. The price of oil is sadly around $30 to $34 right now, but just a few weeks ago we were at a negative position.”
Legate spoke about infrastructure and how prior to all this, West Texas had pipelines that were basically full with the price to move that product down to the Gulf Coast was sometimes in the double digits and very prohibitive for the industry.
The good news is there are a number of projects that are coming onlinesuch as new pipelines that are coming into the Houston and Corpus Christi area that will help move that crude, and get that differential price to move down from the double digits into the single digits
Legate added that the global market is also beginning to open up with China now asking for product.
“It’s going to be painful and it’s not going to be overnight,” Legate said. “We’re not going to see a return to the same production that we had, even in the next four to six months. It could be a protracted very slow process, so we just want to keep that in mind.”
He added by saying that just last month gasoline demand was down 50%, diesel was down 50%, jet fuel was down 90%. He said went a whole month without putting a drop of gas in his Ford pickup. Multiply that by 100 million and people can see the impact that this has on the country.
“I like to tell people that just last year our industry contributed $16 billion to the state’s economy,” he said. When you start taking that away, all sudden the legislative process and the budget starts looking pretty bleak.
“That money is never guaranteed. (Texas Oil & Gas Association President)Todd Staples does his annual report about the how much the industry contributes. He’s always very careful to say that the budget is not guaranteed. So, it just shows you where this industry is and how we continue to innovate and we are seeing it across the board but we feel like we’re in a good position.
“There are some positives on this, but again, we’re going to have to weather the storm and hopefully we’ll come out of it on the right side.”
Port of Corpus Christi CEO Sean Strawbridge said, “The Port of Corpus Christi, as all ports in Texas, have a dependency on energy for their livelihood. We have not been unaffected by the novel coronavirus pandemic as is the case with pretty much every sector. But here in Texas the energy sector has been particularly hard hit because of that demand destruction both here in the United States as well as global demand destruction.”
Strawbridge added that they’ve seen some recovery in the demand but the industry is in an oversupply situation because the producers can’t reduce their production rates as fast as the country saw the demand destruction.
According to Rystad Energy research that takes a 12 to 18 month view at the energy market, traffic hit rock bottom in April, but now it’s showing some recovery.
“We’re seeing that right here in South Texas,” Strawbridge said. “If anybody was in Port Aransas over Memorial Day weekend, there was a lot of traffic and a lot of people but not a lot of social distancing going on.
“Clearly people have an appetite to get out of their homes and start to travel again, probably not so much in airplanes, but the good news is road traffic is clearly showing signs of recovery.”
Another study Rystad Energy did shows what the outlook these last few months have done to the future of the global industry up until 2023.
The Final Investment Decision (FID) shows projects that are on the drawing board but had not gone to final investment decision by their boards or their investment committees and showed a significant slip in activity when it came to investing in oil.
For the global market, 2019 ended with about $175 billion spent and projected more than $200 billion in 2020 and nearly $250 billion in 2021.
“Instead of $200 billion it’s about $22 to $23 billion,” Strawbridge said. “That’s almost a 90% retracement in what was on the table that had not yet gone to final investment decision.
“I think for Portland, the relevance there would be Gulf Coast Growth Ventures (GCGV) so when all this happened I picked up the phone and called (ExxonMobil Venture Executive for GCGV) Paul Guilfoyle and asked, ‘How is this going to impact the cadence of your development of Gulf Coast Growth Ventures?’ and of course the response was, they had already secured that capital it’s already been dedicated to that project we’ve already broken ground we’re well past FID. So we’re going to continue and we believe that we’re on schedule.
“There’s certainly going to be a hangover from that into 2021. Again, a lot of that is dependent upon when are we going to get the wheels of commerce turning again get people back to work.”
While looking at the wide spectrum of areas the oil and gas industry affect and the losses it has suffered, the industry leaders have a bright outlook on the future of things to come, no matter how slowly.
“U.S. demand recovered in May by about 1.7 million barrels a day,” Strawbridge said. “It was down over 5.5 million barrels a day and the fact that we’ve seen about 20% of that come back is a good indication that we may see a fairly rapid recovery in ground transportation.”