Oil & Gas 360 Publishers Note: Justin Mikulka has written an outstanding opinion piece of current issues surrounding the oil companies dire straights. The key takeaway:” “What happens?” Sheffield said. “As you know there’s about 74 public independents, there’s only gonna be about 10 left at the end of 2021 that have decent balance sheets. The rest are going to become ghosts or zombies.”

The Washington Post reported March 10 that the Trump administration was considering some type of financial help for the failing U.S. shale oil and gas industry, “as industry officials close to the administration clamor for help.” Those officials — billionaire shale CEO Harold Hamm was likely among them — seemed desperate for government assistance because, as DeSmog has documented, their deeply indebted businesses have lost billions of dollars during the fracking boom. Even before the recent oil price war and COVID-19 pandemic, these companies could hardly stay afloat, making cries for some type of corporate welfare likely unavoidable.

Exxon May Crush Bailout Hopes for Suffering Fracking Companies -Fig 1 -oilandgas360

But that’s not the same message across the entire oil and gas industry.

At the same time, the head of the American Petroleum Institute — the oil and gas industry’s most powerful lobbying group — said the industry was not interested in seeking a bailout, which didn’t exactly sound like the desperation reported by The Post. It seemed like an odd mix of messaging from the industry.

The idea of bailing out the shale companies was not well received by many politicians, environmental groups, and conservatives. Efforts to directly bail out the shale industry in the federal stimulus package were apparently abandoned.

The next proposed oil industry bailout came March 19 when the Department of Energy (DOEformalized its intent to buy 77 million gallons of oil to fill the Strategic Petroleum Reserve (SPR), an emergency stockpile of oil. That idea lasted a bit longer than the first bailout proposal, but the DOE killed the idea late on March 25.

On March 26, World Oil magazine quoted DOE spokeswoman Shaylyn Hynes, who seemed to indicate that the agency still wanted to provide assistance to “small to medium size American energy companies and their employees.” Independent shale companies, unlike the oil majors like Exxon and BP, would fall into that smaller size category.

The American energy sector is a major driver of our nation’s economy and it is being significantly harmed by the impacts of COVID-19 and international market manipulation,” Hynes wrote. “Small to medium size American energy companies and their employees should be provided the same relief being provided to other parts of our economy, and the Secretary calls on Congress to work with the Administration to fund the President’s request as soon as possible.”

That marks two failed efforts to bail out shale companies while the oil and gas industry’s top trade group continued saying the industry didn’t want a bailout. What’s going on here?

Exxon May Crush Bailout Hopes for Suffering Fracking Companies -Fig 2 -oilandgas360

Strategic Petroleum Reserve Purchase Wouldn’t Help Shale

The U.S. shale industry received its first real bailout in 2015 when the 40-year crude oil export ban was lifted under President Obama. This spurred a huge boom in shale oil production because companies could now sell their light oil directly to the rest of the world, without first passing through U.S. refineries.

At that point, the shale industry was running out of markets in the U.S. Refiners couldn’t take any more light oil coming out of shale regions like the Bakken because many U.S. refineries are set up to process heavy oils from Mexico, Venezuela, and Canada.

With no more U.S. buyers, shale firms needed the export ban on domestically produced crude oil lifted, and Congress acquiesced at the end of 2015. By the end of 2019, U.S. oil exports reached levels of 4.4 million barrels a day — a remarkable amount of oil.

In another move that would allow the industry to sell more oil, the government’s proposal to fill the Strategic Petroleum Reserve seemed like another potential bailout for the shale industry.

The SPR reportedly has 77 million barrels of spare capacity and filling it would require somewhere near $3 billion. However, such a purchase would unlikely change the financial dynamics of the shale industry. That amount is equivalent to about two months of the current U.S. crude exports. And if U.S. oil producers are only getting current (extremely low) market prices for the oil, it certainly won’t help shale oil producers make the money they need to pay back the wave of debt looming over them.

Daniel Yergin, an oil historian who has been a champion of the industry and was instrumental in getting the oil export ban lifted, recently made this point. “The government may not be able to buy enough oil to prop up the oil market,” Yergin reportedly said, according to E&E News.

There’s another flaw in the plan to bail out the shale industry by filling the SPR. As DeSmog has recently reported, much of what’s being fracked and drilled out of shale regions is not actually considered “oil” but instead an extremely light petroleum known as “condensate,” which means it likely can’t go into the SPR. According to the Department of Energy, over 60 percent of the current oil in the SPR is heavier “sour oil,” while the shale industry produces light “sweet oil” and a lot of even lighter condensate and natural gas.

Topping off the Strategic Petroleum Reserve was never going to save the shale industry.

Shale Companies Have No Long Game, Exxon Does 

In a remarkable interview on March 26, CEO Scott Sheffield of shale firm Pioneer Natural Resources added great clarity to why shale companies are unlikely to get bailed out and why the American Petroleum Institute has been touting free markets and opposing bailouts. Exxon has a huge stake in the Permian shale play in Texas, and Sheffield appears to admit that Exxon holds all the cards right now when it comes to any type of shale bailouts.

Sheffield appeared on CNBC’s Fast Money with analyst Brian Kelly, and the two discussed the current oil price war between Saudi Arabia and Russia and how the shale companies and politicians like Sen. Kevin Cramer (who represents the shale oil state of North Dakota) have been clamoring for President Trump to try to get Saudi Arabia to stop the price war.

Sheffield explained why these efforts weren’t going well.

“We’ve had opposition from Exxon who controls API and TXOGA,” Sheffield said. “They prefer all the independents to go bankrupt and pick up the scraps.”

API is the American Petroleum Institute and TXOGA is the Texas Oil and Gas Association.

Kelly then asked, “Is it the big supermajors against the mid and small companies?”

“Exactly,” Sheffield replied. “That is definitely what’s going on.”

For the past two years, DeSmog has detailed the failed finances of the shale industry and predicted that it couldn’t last forever. All the while shale CEOs like Sheffield were pitching a different story to investors.

Kelly asked Sheffield what happens if nothing changes to help the shale industry.

“What happens?” Sheffield said. “As you know there’s about 74 public independents, there’s only gonna be about 10 left at the end of 2021 that have decent balance sheets. The rest are going to become ghosts or zombies.”

The Rest of the Story: DESMOG



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