West Hackberry Strategic Petroleum Reserve

The West Hackberry Strategic Petroleum Reserve is a crude oil storage site in Cameron Parish, which has 21 different storage caverns with total capacity of 220.4 million barrels. 

An oil price war and the coronavirus causing a collapse in the global economy have smacked Louisiana’s oil and gas industry with a devastating one-two punch.

West Texas Intermediate, the U.S. benchmark price, reached $20.25 per barrel on Monday, a price not seen since 1999. The price on Jan. 1 was $61.06, a drop of 66% over the past 90 days compared to today.

The world has so much oil that producers are beginning to worry that they will soon have no place to store it.

No hard information is available yet, but industry sources say oil and gas producers and service companies are canceling contracts and shedding workers as a result.

The most immediate potential solution — to have the federal government buy enough oil to fill the country’s Strategic Petroleum Reserve — would provide only a short-term benefit for some companies.

The overall situation “is an existential threat for companies,” said David Dismukes, executive director of LSU’s Center for Energy Studies. “Nobody is walking out of this unscathed. It is truly sobering.”

The price drop will have major implications for Louisiana, even though the economy has diversified since a mid-1980s oil bust. Today, direct oil and gas sector jobs account for nearly 2% of the state workforce and about 6% of state revenue, said Jim Richardson, an LSU economist.

The fallout will be particularly difficult for oil-dependent Houma and Lafayette, although Lafayette has diversified its economy in recent years.

The layoffs have already begun in Houma, which is particularly dependent on offshore oil and gas production, said Matt Rookard, chief executive officer of the state-funded Terrebonne Economic Authority.

“People are trying to figure out how this will play out,” he said.

The heady days of when oil fetched $100 per barrel ended in Louisiana in 2014 when prices began to fall. By the end of 2019, prices had bounced back enough that the forecast for 2020-2021 looked promising, said Loren Scott, an economist who closely tracks the industry.

But prices began to drop sharply in January as the coronavirus wracked China’s economy, and demand there for oil and gas dried up.

Prices plummeted in March as the coronavirus became a global problem, and Saudi Arabia and Russia both increased production to try to force the other into cutting its output.

“Oil companies have been cutting the heck out of their capital budgets — multibillion-dollar cutbacks,” Scott said. “If a project hasn’t started, they’ll delay it. They’re going to their suppliers and saying they have to cut them. In the short run, it’s not happy for the state of Louisiana.”

The Trump administration has tried to exert its influence with the Saudi Arabian government.

“We’re awash in oil,” said Scott. “This can be corrected with a phone call if Trump can persuade the Saudis to not put all this extra oil on the market. If they reduce their production to the same level before, the price will go back to the $40s.”

U.S. Sen. John Kennedy, a Louisiana Republican, said he participated in a conference call last week with a dozen colleagues from energy-producing states with the Saudi Arabian oil minister.

“It was a rough call,” Kennedy said. “You’ll see bills introduced in the Senate that the Saudis won’t like. They have really put in jeopardy their relationship with the United States.”

Landmen like Mark Miller, owner of Merlin Oil & Gas in Lafayette, are typically the first ones to feel the economic fallout because they lease land that appears promising for drilling.

“Today I see my business and the business of others in complete peril,” Miller said. “There’s no need for new drilling when prices are this low.”

Gifford Briggs, president of the Louisiana Oil and Gas Association, said a recent survey of members indicated that independent drillers and service companies will probably reduce their job force by 60% to 70% in the coming three months.

In January, Louisiana had about 34,000 workers in the oil and gas business, and their spending multiplied throughout the economy.

“As one operator told me, if prices haven’t recovered to $40 by June 1, there will be a blood bath,” Briggs said.

The blood bath would extend to the state’s finances. For every $1 drop in oil over a year, the state loses about $12 million in revenue. State officials were expecting a price of $59 per barrel in 2020.

Oil and gas severance and royalty payments were the fifth-biggest source of state revenue last year, Richardson said.

Briggs and Gray both would like to see the federal government buy the 77 million barrels of oil needed to fill up the Strategic Petroleum Reserve, which serves as a sort of oil bank.

“For a smaller company, it would be a bigger deal,” said Gray, who represents the major oil companies. “For our folks, it would be on a case-by-case basis.”

Kennedy said Energy Secretary Dan Brouillette told him that he believes he can find the money in his budget to buy the oil. At $38 per barrel, the cost would be about $3 billion. Two of the sites are in Louisiana.

Dismukes said the $3 billion might sound like a lot, but it's not given the size of multibillion-dollar investments in oil and gas. Besides, he said, the money would purchase only six days of production in the United States.

Still, Briggs said that would be meaningful to his members, even if the selling price is $20 per barrel.

"It’s better than zero," he said.

Editor's note: This story was changed on March 31, 2020, to delete incorrect information about ExxonMobil's refinery in Baton Rouge.

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Email Tyler Bridges at tbridges@theadvocate.com.