Jonathan Thompson, Writers on the Range columnist, examines the effects of COVID-19 on the fragile oil and gas industry. PHOTO COURTESY OF WRITERS ON THE RANGE
In
early January—which seems like a lifetime ago in the age of COVID-19—President
Donald J. Trump crowed about the United States’ new status as a net-exporter of
petroleum. He claimed that the robust American oil industry, freed from the
shackles of environmental regulations, had achieved energy dominance and thus
liberated the nation from the yoke of Middle Eastern
crude.
Just
weeks later the novel coronavirus would lay waste to oil markets, forcing Trump
to beg Saudi Arabia to step in and save this nation’s beleaguered oil industry.
Energy independence, it turns out, was an illusion, and the so-called shale
revolution was built upon a shaky foundation that was poised to collapse even
before the pandemic ravaged the globe.
In
the aftermath of the Great Recession, the Federal Reserve dropped interest
rates to near zero and otherwise encouraged investment in high-risk ventures.
That opened up a gusher of easy credit for, among other enterprises, oil and
gas companies looking to drill shale formations that new drilling techniques
had made accessible.
Companies
dove into debt to finance thousands of new, multi-million-dollar “fracked”
wells, sparking a drilling boom of unprecedented scale that lasted from 2009-2014,
busted, and then came back in a limited way in recent years.
Each
new well was, initially, like a fountain of cash. Oil prices were at an
all-time high, and during the first weeks of an oil well’s life it kicks out
hundreds of barrels per day. The good times, however, were fleeting. Shale
wells have a particularly steep decline curve, meaning that after that first
surge of oil—call it the first-month buzz—its production decreases by as much
as 10 percent per month. So in order to keep the oil and money flowing,
companies have to drill more and more wells, which requires them to go deeper
into debt, which requires them to sell more oil, and so on, until, at last, the
whole scheme collapses under its own weight.
Cracks
began to appear in the hydrocarbon bubble years ago and in the months prior to
the arrival of the coronavirus a breakdown appeared imminent. Investors, tired
of shoveling money into an industry without seeing much return, tightened their
purse strings, drying up the only real cash flow many companies had.
Last
year 42 debt-saddled oil and gas companies filed for bankruptcy. Haynes and
Boone, a law firm that monitors energy sector bankruptcies, predicted even
greater casualties this year, even if oil prices stayed above $50 per barrel.
They did not, crashing to below $20 this spring and then dropping into negative
territory—meaning sellers had to pay to get the oil off their hands—on April
20.
The
effects have been devastating. During the first three months of 2020, seven oil
companies went bankrupt, including Denver-based fracker Whiting Petroleum,
which laid off one-third of its workforce last July and reported $5.9 billion
in debt.
The
number of active rigs is falling fast. Minus new wells and their first-month
buzz, production from oil fields—even the booming Permian gas field—will soon
start dropping, killing the energy-independence delusion, at least for now.
Finally,
it seems, the foolhardy CEOs are getting their comeuppance, the reduction in
flying and driving is keeping millions of tons of greenhouse gases out of the
atmosphere, and the idling of drill rigs will give ravaged landscapes and
communities in the oil patch a chance to rest and heal.
Yet
the pain will ripple outward as thousands of oil-field workers lose their jobs,
adding to the 22 million who have filed new unemployment claims in recent
weeks.
States
like New Mexico, Wyoming, and Colorado—which derives $1 billion annually from
oil and gas revenue—will watch billions of dollars of projected revenue
evaporate, gutting future budgets.
Bankrupt
oil companies will orphan thousands of marginally producing oil and gas wells,
leaving them to the taxpayers to clean up. Meanwhile, the Trump administration
eliminates even more protections on the environment and human health.
Oh,
and those oil company executives that dragged us into this mess in the first
place? They’re getting a windfall. Just days before it filed for bankruptcy,
Whiting Petroleum approved a $6.4 million bonus for CEO Brad Holly.
Jonathan
Thompson is a contributor to Writers on the Range.org, a nonprofit dedicated to
spurring lively conversation about the West. He reports on energy and the
environment.