For most people, low gasoline prices are a reason to smile: Like a small raise, they mean an extra $10 or $20 of spending money each week.
But for many Louisianians of a certain age, cheap gas also calls to mind unpleasant memories of the worst recession to hit the Pelican State in modern times: the oil bust of the 1980s, when banks closed, subdivisions were left half-built, and the state’s unemployment rate soared to the highest in the nation.
Will the latest price swoon bring a repeat of those dark days? Probably not, experts say — but that’s not to suggest it won’t hit Louisiana hard.
Last week, tumbling oil prices claimed their first big casualty in Louisiana when Sasol Ltd. postponed a decision on whether to build a planned $14 billion gas-to-liquids plant in southwest Louisiana, touted as the largest single investment in the state’s history.
Meanwhile, a number of other large planned projects that aimed to profit on the once-wide difference between the prices of oil and natural gas may also land on the chopping block, taking much of the shine off Louisiana’s budding industrial revival.
The shelving of some big projects bears more on Louisiana’s long-term future than on its current outlook. But there, too, reverberations are already being felt.
State legislators are scrambling to plug one of the worst budget deficits in recent memory, a $1.6 billion hole for the coming fiscal year that has ballooned by nearly $400 million as oil prices fell by 60 percent, sapping much-needed state revenues.
Elsewhere around the state, low oil prices are likely going to grind oil fracking operations to a near-halt, industry experts warn, because tapping into the Tuscaloosa Marine Shale’s hard-to-reach reserves is costly compared to other onshore drilling areas. Major layoffs are imminent or already underway for a few major oilfield service providers that service onshore drilling.
“It’s not economical to drill at the price that it is today, especially on land, and so you will see a cutback,” James Hutchison, chairman of the Louisiana Mid-Continent Oil and Gas Association’s board of directors, said last week at the industry group’s annual meeting. “South Louisiana will be slow. It could be anywhere from six months to two years. Nobody knows. I wish we had a crystal ball and could say, but it will be a tough year.”
Boom and bust
Between 1970 and 1981, Louisiana’s fortunes soared on oil. Over an 11-year span, the state’s per-capita income rocketed up from No. 44 nationwide to No. 31. New office buildings rose along Poydras Street in New Orleans’ Central Business District, and the state’s population grew by almost 16 percent, outpacing the nation.
When the bottom fell out, the state had little to fall back on.
“It was a massive disruption in the state’s economy, because the boom had been so strong in drilling and servicing drilling that when the bust came, it was really, really dramatic,” said Greg Albrecht, the Louisiana Legislature’s chief economist. “It had massive ripple effects throughout the economy. It cut a whole industry — a very important industry — in half.”
This time around, it’s unlikely the slump in prices will cause such economic upheaval, state officials and industry experts agree, because Louisiana’s revenue picture — and its employment — has gotten more diverse in the last three decades. Nearly 42 percent of state proceeds were tied to mineral revenues in the 1980s; now that figure is down to 13 percent.
And while any financial hit to the drilling industry will reduce sales and income taxes, hurting state and local governments, officials in Louisiana’s most oil-dependent parishes, including St. Mary, Lafayette and Terrebonne, so far say they haven’t noticed much difference in the half-year since prices began falling.
Oil closed at $48.24 a barrel on Friday, down more than half from its price of about $110 six months ago.
Friday’s closing price actually represented an increase of 8 percent, the highest single-day percentage jump in almost three years. That came on news from Baker Hughes that 94 fewer rigs were drilling for oil in the U.S. last week, showing the market that drillers were slowing production.
Experts attribute the price slump to high domestic production — largely caused by ramped-up shale drilling — adding to an already strong global supply, all of it made worse by weak demand.
In the coming months, federal forecasters predict oil will continue a slow rise, averaging $58 a barrel in 2015 and $75 in 2016. But the heady days of $110-a-barrel oil, where prices hovered for the past four years, may be gone for a long time, if not for good.
No one really knows, however.
“In the ’80s, these prices went down and they stayed down. I mean, it was for years, literally years, before it started coming back again,” said state Sen. Robert Adley, R-Benton, chairman of the House Appropriations Committee at the time. “I don’t know anybody who really believes you’re going to see this big spike back up again. If the market does what it’s been doing, it’s going to go down and it’s going to hold down for about three months before it starts making its move back up.”
Some observers — including Tulane University finance professor Peter Ricchiuti — think the current slump has more in common with the ’80s bust, which was driven by supply, than it does with the last time oil prices fell sharply, in 2008’s financial crisis.
“There’s two camps: There’s one camp that believes this is like 2008, when prices fell from 140 bucks (a barrel) to 40 in a very short period of time. But that other camp is that we’re heading into 1986 all over again, which was five years of total death and destruction,” Ricchiuti said. “I don’t know which one it is, but I will tell you that the ’08 one, when you look at it, was a demand problem. Nobody needed oil. But the ’86 one was a supply problem. This looks more, in that sense, like ’86 than ’08.”
In the short run, the drop in oil prices is having two primary effects on Louisiana: It’s dramatically slowing drilling for oil in shale formations, especially the Tuscaloosa Marine Shale, which cuts across the state’s midsection. And it’s hurting state revenue.
A recent analysis by Bloomberg New Energy Finance found that drilling in 19 regions in Texas, Oklahoma, Louisiana, Kansas and Arkansas was no longer profitable with oil prices at $75 a barrel. Among them the Tuscaloosa, where it is still expensive to drill compared to other, more tested plays.
So it came as little surprise Friday when Goodrich Petroleum Corp., an independent oil and gas producer and a major player in the Tuscaloosa field, announced it would scale back by half its plans to spend $200 million drilling wells there in 2015.
The abrupt slowdowns in onshore drilling will bring major job losses among oilfield service providers, though it’s unclear how many will come from Louisiana.
Some firms already have announced thousands of layoffs: At Baker Hughes, 7,000 employees, or about 11 percent of the workforce, have been let go. Another 9,000 have been cut loose from Schlumberger, the No. 1 oil services company. And oilfield giant Halliburton Co., which has more than 80,000 employees worldwide, has said it will cut 1,000 jobs.
“This is really the crappy part of the job, and this is what I hate about this industry, frankly,” Baker Hughes CEO Martin Craighead said in a conference call with analysts last month. “This is the industry, and it’s throwing us another one of these downturns, and we’re going to be good stewards of our business and do the right thing. But these are never decisions that are done mechanically.”
The oil swoon also is doing immediate and serious damage to Louisiana’s already shaky state budget.
Legislators are weighing layoffs and deep budget cuts to rebalance the current year’s budget and to prepare for leaner times next year. Overall, the budget gap is about $1.6 billion, though only about perhaps a quarter of that results from low oil prices.
To help close it, about $300 million may be cut from higher education funding; another $250 million is likely to be removed from health care funding; and up to 15 percent will be lopped off state agency budgets across the board. Gov. Bobby Jindal has said he’ll deliver a plan for cuts to the current year’s budget on Feb. 20; his budget for the upcoming fiscal year will be delivered a week later.
The longer run
Depending on how long the oil glut lasts, the ripples could spread further.
For now, offshore drilling in the deepwater Gulf of Mexico is expected to be impacted only marginally, experts say. That’s because deepwater projects take so long to plan and execute that many large operators simply ride out oil’s ups and downs once they’ve committed.
But if the future remains uncertain, or bleak, decisions on new capital investments could be delayed.
Some of that uncertainty also is taking a bit of the shine off the state’s vaunted industrial expansion, with more than $100 billion in investments planned or in the works.
Most at risk, economists say, are plans to build a handful of expensive terminals capable of turning natural gas into a liquid so it can be exported, facilities that were conceived when the prices of natural gas and oil were much further apart — and whose profitability was predicated on that large split.
Only four liquefied natural gas export projects in the U.S. are under construction, including Sabine Pass Liquefaction and Cameron LNG in Louisiana and one facility apiece in Maryland and Texas. Sabine Pass and Cameron LNG will have a combined cost of $24 billion. They promise a total of 540 jobs and at their peak will employ 7,500 construction workers.
Those four may be among only a handful in the U.S. — among dozens that have been proposed — that wind up getting built, experts predict. That would leave tens of billions of dollars in proposed projects going nowhere. Nine of the 11 LNG projects proposed in Louisiana could be at risk.
The largest planned expansion in the state’s history is also at risk: Sasol’s potentially $22 billion fuel plant.
That project includes an $8.1 billion ethane cracker, which is already underway, and a planned $14 billion gas-to-liquids plant. For the latter to be economical, Sasol head David Constable told the Mail & Guardian in 2013 that oil’s per-barrel price needed to be 16 times higher than natural gas. That means the price of oil would need to remain at $47 per barrel at minimum.
For now, oil is expected to stay above that threshold, if not by much.
In a statement last week, Constable said Sasol will continue to work on the project, although “at a much slower pace.”
Even if the gas-to-liquids plant can still be made profitable, the crash in oil prices could imperil the project. Sasol has said it will work to formulate “a comprehensive plan” to conserve cash in the wake of the drop, which it plans to discuss when the company reports results in March.
While work on Sasol’s gas-to-liquids plant wasn’t due to start for two years, the project is running against the clock.
The state’s agreement with Sasol calls for incentives including $115 million in cash plus $142 million in other subsidies, as long as its ethane cracker is running by 2018 and the proposed gas-to-liquids plant is up by 2021. The company could also be eligible for billions more in local property tax relief.
Despite the recent setbacks, Louisiana Economic Development Secretary Stephen Moret said the state’s boom is still in full flower.
“Whether or not Sasol completes the second phase of its planned project, Louisiana’s manufacturing investment outlook continues to be outstanding,” he said.
Even without Sasol and some of the liquefied natural gas projects, Moret estimates that, when it’s all tallied up, more than $62 billion in manufacturing investments will be made during Jindal’s eight-year tenure, which ends in January 2016. Because projects like Sasol’s second phase were still a ways off, delays “will have a very limited job impact in the short term,” Moret said.
“We expect the vast majority of previously announced manufacturing projects to proceed even at the current oil price level, and we expect several more major announcements later this year,” he said. “We have been very conservative in reporting project totals (in terms of total capital investment and jobs) because we know things can change from time to time with companies due to market fluctuations.”
A silver lining?
If there is a silver lining in the downturn, it’s the extra money many Louisianians have in their pockets due to low prices at the pump.
Federal forecasts predict the typical American household — including those in Louisiana, of course — will save $750 on gas this year, with prices at less than $2 a gallon, $1.30 less than they were a year ago. Prices are expected to remain steady before creeping up to an average of $2.72 a gallon next year.
That has helped push U.S. consumer confidence to its highest level in seven years this month, according to a recent report from the Conference Board, a private research group.
A little extra cash also may bolster local tourism, hospitality officials say, because New Orleans attracts a large number of overnight visitors from areas within driving distance.
If the recent economic news has been sobering, it would have been foolish to count on all of the tens of billions of dollars in new projects to come to fruition, said Stephen Toups, senior vice president at Turner Industries, a large Baton Rouge construction firm that is involved in building some of the projects.
“We’re very used to seeing cycles where people will introduce something, then they announce it,” Toups said. “Just because it’s announced doesn’t mean it’s going to get built. That’s nothing new to us and those that are close to the industry, because they have to research it. Sometimes these projects go; sometimes they don’t.”
Toups says he’s “cautiously optimistic” that oil’s downturn won’t prove catastrophic for Louisiana this time.
“The price of oil at this point is certainly not keeping us up,” he said.
Editor’s note: This story was updated Feb. 2 to correct the amount by which projected revenues from oil royalties and severance taxes in next year’s budget have fallen, and the percentage of next year’s budget shortfall that is attributable to those lower oil revenues.
Follow Richard Thompson on Twitter, @rthompsonMSY.