Small oil producers struggle to survive coronavirus price drop
Small oil producers in the United States are being hit hard by falling energy prices resulting from the coronavirus-infected economy, raising questions about their survival.
The price of oil has plunged from $53 a barrel in mid-February to about $25 as of Thursday afternoon amid declining demand linked to the pandemic and increased supply as Russia and Saudi Arabia struggle to agree on a deal to reduce output.
While larger oil companies hit by falling prices might have the resources to get through the downturn, smaller companies could be forced out of business.
Analysts say that could put thousands of American jobs at risk and may lead to some consolidation where larger companies end up with a greater share of the market.
“Bigger companies usually have more resources to sustain this kind of period,” said Raoul LeBlanc, IHS Markit’s vice president of North American unconventional oil and gas. “They have bigger balance sheets, more in reserves, more debt capacity and ability to make it through the tough times.”
He also said smaller producers often use older wells, making their production costs higher.
“They’re exposed the soonest to the negative margins, so between the lack of resources and reserves … and the fact that they feel it before others because of their high well cost, they’re really caught in this bind,” LeBlanc said.
Patrick De Haan, the head of petroleum analysis at GasBuddy, predicted this will result in fewer producers, creating a “survival of the fittest” scenario.
“I think that’s nearly a certainty that we will see potentially dozens of smaller producers that are shutting down given the climate,” he added, although he said some of these shutdowns could be temporary.
“The longer that oil prices remain low, obviously, the more danger there is to oil production permanently going offline,” De Haan said.
President Trump on Thursday raised the hopes of oil producers that prices could start going back up. He tweeted that global oil production could be cut by as much as 15 million barrels due to talks between Russia and Saudi Arabia, but Russia appeared to deny his assertion.
Meanwhile, some in the industry cautioned against drawing conclusions now about what the industry will look like in the future.
“We’ve only been in this for a month or so, so things will shake out over the next two months and we’ll have a better understanding of where the industry is going to see consolidation,” said Jeff Eshelman, a spokesman for the industry group Independent Petroleum Association of America (IPAA).
But he also acknowledged “there probably will be some mergers and acquisitions by different companies” if things continue the way that they do.
According to the IPAA, 83 percent of U.S. oil and 90 percent of U.S. natural gas is produced by independent producers that don’t have more than $5 million in annual retail sales or that don’t refine more than an average of 75,000 barrels per day of crude oil.
Eshelman said small oil producers should be included in the small-business loans offered in the latest coronavirus economic relief package.
Republicans initially wanted the bill to include money for the government to purchase oil for the Strategic Petroleum Reserve, a move that would’ve helped the struggling industry. However, the provision was omitted from the legislation after facing opposition from Democrats and environmentalists, who labeled it a bailout for the industry.
De Haan said the only way to stop small producers from shuttering is establish a price floor.
“Every day that we continue without a deal, the Saudis and Russians are flooding the market with more oil that will take longer under the current situation to be absorbed into the market,” he said.
Russia recently declined to join OPEC members in agreeing to cut production in response to a drop in demand due to the coronavirus pandemic.
After that, Saudi Arabia decided to increase production, driving down prices by boosting supply in the market.
Trump said Thursday that talks between Russia and Saudi Arabia may result in 10 million to 15 million fewer barrels in international output.
Dmitry Peskov, a spokesman for Russian President Vladimir Putin, denied Trump’s claim, telling the Financial Times “there was no conversation” between Putin and Saudi Crown Prince Mohammed bin Salman.
After Trump’s tweet, De Haan said a decrease of the amount cited by the president would be a “sizable” change. But he also said he has doubts as to whether the reduction will take place, keeping small producers on edge for that much longer.
“I treat this with great skepticism until hearing from all parties and OPEC,” De Haan said.
The Hill has removed its comment section, as there are many other forums for readers to participate in the conversation. We invite you to join the discussion on Facebook and Twitter.