There is no doubt that COVID-19 has shaken our country to its core. Families and communities across the nation are adapting to unforeseen challenges from record unemployment, shuttered business and schools as well as stay-at-home orders. These are significant hurdles, and while it’s hard to imagine – that is only half of what Louisiana energy producers are facing.
Before COVID-19 began to make its impact on the United States, Saudi Arabia and Russia had parted ways, retreated to their corners, decided to end their production cuts, and began planning to increase production. This news laid waste to oil prices, creating a 30% drop in prices over the first weekend in March. Coupled with the decline that began Jan 1, 2020, US oil producers were facing a 79% decline in prices from $61.06 to $12.34 at the time of this writing.
Over the next few weeks, as COVID-19 swept across the globe, demand for oil began to tumble, bringing prices down with it. With consumption suppressed everywhere, storage facilities began filling up. With oversupply thrown open by Russia and Saudi Arabia, a perfect storm began brewing for the oil and gas industry.
Larger companies, multi-nationals, super-majors and the like have the ability to weather the storm. They can reduce their capital expenditures as many have already done, focus on their refining capabilities, minimize expenditures and survive on reserves. The same cannot be said for the service companies and smaller independents.
This environment is crushing independents, the backbone of the industry. A survey of our members indicated that many are expecting to lay off as many as 70% of their workforce over the next 90 days, and we are very early still in this downturn. The margins were thin already with the break-even price for oil at $37 and $2 for natural gas in Louisiana. Now with prices half or even a third of break-even, companies are left with the choice at producing at a loss or no longer producing. As many as four or five have already begun shutting in production.
The service companies that support the industry will be hit the hardest. With wells not being drilled and work-overs not being completed, their services will no longer be needed, completely eliminating the income stream for many and greatly reducing it for the rest. These are the hard-working men and women, unsung heroes all, who spend weeks at a time far away from their families, producing affordable, abundant, American energy for everyone to enjoy.
Today those businesses are predicted to shutter, communities are expected to be ravaged by unemployment, and the revenues and wages those jobs bring in are projected to all but dry up. Our story does not have to end this way.
We are a proud industry. We have brought energy independence and security to our country that was once thought impossible. We are a leader in exporting natural gas to countries around the globe. Given a chance, we will be there to lead our country and our communities out of the challenges we are facing today.
We need bold action now on two specific points to ensure our industry, its families, and communities, are a proud fixture of Louisiana’s economy, history, and culture for decades to come.
In addition to the OPEC+ price war and the demand destruction brought on by COVID-19, our energy industry is facing an additional war, this one being waged by a small group of trial lawyers, who have taken control of local governments to file abusive lawsuits against the industry. It does not have to be this way. The Governor and the Attorney General have the ability to take control of the lawsuits and bring them to an end. The state can then immediately begin an administrative review to ensure our precious coast is protected right now, instead of waiting years to outsource the enforcement of our coastal programs to the judicial system. Please ask your legislators to support Senate Bill 359, Senate Bill 440, and Senate Concurrent Resolution 7 to address the massive issue of the coastal lawsuits.
Secondly, the industry needs the legislature to immediately suspend the severance tax on producers, especially the oil producers that are subject to the highest severance tax rate in the nation (12.5%). With prices so far low below what’s needed to break even, severance tax reform is one of the things we can change. Please ask your legislators to support HB 506 to suspend severance taxes. Follow these bills and many others that might impact the industry at www.loga.la/tracker.
The challenges we are facing as an industry will not end when we have moved past COVID-19. No, our challenges are just beginning. We are looking for bold action from our leaders in Baton Rouge to address the coastal lawsuits and severance taxes to give our industry fighting chance, so we can keep Louisiana’s oil and gas producers proudly working, our wells flowing, and our people working to produce the energy our country needs.•