A price collapse that sunk May oil prices well below the $0 mark on Monday was a rude awakening to a glut that's straining storage capacity and has the potential to halt much of Louisiana's oil production.
Benchmark U.S. crude oil fell $55.90, or more than 300%, to settle at negative $37.63 a barrel Monday. The drop into negative territory was chalked up to technical reasons — the May delivery contract is close to expiring so it was seeing less trading volume, which can exacerbate swings.
"For the last few barrels in the May contract, they literally had to pay somebody to take the oil but it didn't impact a huge volume of oil," said Eric Smith, associate director of the Tulane Energy Institute.
U.S. crude oil for June delivery shows a more ”normal” price, he said. The June price fell 14.8% to $21.32 per barrel, as factories and automobiles around the world remain idled. Demand for oil has collapsed so much due to the coronavirus pandemic that facilities for storing crude are nearly full.
“Many of our members are being told they cannot deliver crude in May due to storage constraints, and as a result have begun planning to shut in 100% of their Louisiana production,” said Gifford Briggs, president of the Louisiana Oil and Gas Association. “It’s an absolute worst-case scenario."
The breakeven price for producers is about $37 per barrel, he said.
A negative price for May contract oil hit on Monday is unprecedented, and the price has not dropped to single digits since 1973.
Big oil producers have announced cutbacks in production in hopes of better balancing supplies with demand, but many analysts say it’s not enough and wells are going to get shut down.
With that in mind, Ray Lasseigne, owner of TMR Exploration in Bossier City, is weighing his options for about 200 oil and natural gas wells across Louisiana and Texas.
"If you start shutting in your wells then you have zero income ….," he said. "Bankruptcy is an option, but I don't want do that," Lasseigne said. "We're being closed in on from all directions. Our income has dropped 80%, but my expenses are still at 100%, so you're at a loss immediately."
In January, the company was getting about $60 per barrel of oil on the market, but that's since dropped to about $10 per barrel.
Lasseigne remembers cashing in a life insurance policy during the oil bust in the 1980s to stay afloat, but this year has been "much worse," he said.
In Texas, some of the company's wells are slated to be shut in because crude oil purchasers canceled contracts and there's nowhere to sell or store the excess oil. In some cases, it can cost about $100,000 to plug and abandon an oil and gas well.
The company has about 30 employees across the state and is tapping the federal Paycheck Protection Program to keep employees working for at least two months.
"If I laid off my employees, it would be difficult to get them back …." he said. "It takes about a year to train a new person."
Oil prices were expected to get a boost after OPEC and other major oil-producing countries, such as Russia, agreed to cut production by nearly 10 million barrels per day, about a tenth of global supply, starting on May 1. But industry analysts question whether those cuts will move the needle.
“It’s probably going to get worse before it gets better; it's not going be enough,” said David Dismukes, executive director of the LSU Center for Energy Studies. He said a wave of wells being shut in is expected, but there's an even more difficult scenario for the Louisiana economy.
“The more scary scenario is when the refineries stop running around here," Dismukes said.
Both ExxonMobil and Chalmette Refinery deferred comment to trade organizations. Placid Refinery did not respond.
"The entire supply chain is backed up and the only remedy is to increase consumption, which can only happen when people return safely to work and begin to drive the economy," said Tyler Gray, president of the Louisiana Mid-Continent Oil and Gas Association.
"Refiners all across the Gulf Coast have reduced production of fuels as a result of the demand," he said.
At least two ideas have been floated this year for relieving some of the pressure on the oil industry. One proposal that didn't make it through the federal coronavirus relief package was to purchase $3 billion worth of oil for the nation's Strategic Petroleum Reserve, which has an additional 77 million barrels of capacity available in Louisiana and Texas. Instead, in mid-April the federal government was negotiating to allow oil companies to rent about 23 million barrels of crude oil storage in the reserve for deliveries in May and June.
Statewide Louisiana lost 1,100 jobs in mining and logging, which includes the oil and gas sector, over the past 12 months through March, a decline of 2.9% to 35,600 jobs.
About 450 members of the Louisiana Oil and Gas Association surveyed in recent weeks estimated that about half of the wells in the state could be shut in as a result of the economic downturn. That was when oil was hovering around $20 per barrel.
There are 33,650 oil and gas wells operating in Louisiana. There are only 41 oil and gas rigs actively drilling for oil and natural gas across the state, including 24 on land and the remainder in the Gulf of Mexico, according to Baker Hughes data as of April 17.
Now the situation is more dire.
"Companies can't produce wells at this low cost; those wells might be lost forever," Briggs said. "We're going to need survival measures."
The trade organization has lobbied for long-sought severance tax and royalty payment relief during the crisis and is pushing to loosen restrictions of businesses to restart the economy.
Some companies may eventually lose leases to produce oil on properties due to contract requirements, Briggs said.
On the flip side, natural gas prices increased more than 10% to roughly $2 on Monday. That's good news for companies like Goodrich Petroleum Corp., which has leases in the natural gas-rich Haynesville Shale in northwest Louisiana.
"We're about 99% natural gas so the drop in crude oil sets us up better because as oil wells get shut in that means less natural gas (as a byproduct)," said Robert Turnham Jr., president of Goodrich Petroleum.
The company has about 50 employees and generated about $120 million in revenue last year. The bulk of its leases are in Louisiana.
A survey of Louisiana oil and gas business found more than 23,000 jobs in the industry are at immediate risk because of the back-to-back blows…