A lull in industrial construction in Louisiana could stretch out several years with some proposed projects likely being postponed or even canceled because of the global economic slowdown and an energy sector slump that could affect producers in the years ahead.
David Dismukes, who runs the LSU Center for Energy Studies, told business owners on a call hosted by the Baton Rouge Area Chamber that the outlook is not bright for energy producers and related industries at least until 2025.
He said a lull in industrial construction that set in last year after the completion of numerous multibillion-dollar projects will continue until there is more demand for crude oil and petrochemical projects following the economic downturn triggered by the coronavirus pandemic.
Dismukes estimates that only about $131 billion may come to fruition out of $195 billion of energy manufacturing and export capital investments that were expected to occur between 2019 and 2029 along the Gulf Coast.
In Louisiana alone, during that same period, only about $82 billion of the $116 billion of projected investment is expected to be completed — a big portion of that tied to proposed liquefied natural gas terminals.
Of the $88 billion in LNG investments anticipated, only about $55 billion in LNG projects might actually happen, Dismukes said, on top of $27.6 billion in other industrial projects expected to continue.
The potential for more than a dozen large-scale LNG projects is much less likely — at least until 2025, he said. Buyers of LNG overseas have already canceled 20 tanker ship loads in June and July. It's expected that 125 tankers from the U.S. might be canceled by the end of the summer.
"There's not enough need for natural gas globally; all the cargoes have slowed down pretty dramatically," Dismukes said. "The incremental (capital) investment in 2022 and 2025, that's probably not going to be the case now. I think you are going to see that a lot of these projects are getting canceled or having problems."
For example, in recent months Shell pulled out of a multibillion-dollar deal to renovate a liquefied natural gas terminal in Calcasieu Parish amid uncertain market conditions, though the company's Dallas-based partner, Energy Transfer, expects to continue the project but at a reduced size. The project already has been granted an extension until December 2025 by federal regulators to be completed.
Separately, an Australian parent company that entered the equivalent of a Chapter 11 bankruptcy and is behind the Magnolia LNG project near Lake Charles canceled a $2.25 million deal to sell the operation to a British business with a significant presence in Lafayette.
One day later, a Delaware-based entity stepped up and bought Magnolia LNG for $2 million. The deal includes the permits, land, engineering plans and a contract for development, in addition to the underlying technology related to the proposed LNG project.
On the petrochemical side of Louisiana's economy, many major chemical companies have promised investors to reduce capital expenditures by double-digits this year.
As for energy producers, crude oil futures briefly fell below $0 several weeks ago as demand for fuels plummeted amid stay-at-home orders across the globe to control the spread of the coronavirus. Storage became an issue for a glut of oil on the market. With some countries agreeing since then to limit oil production and world economies gradually reopening, the price of U.S. benchmark oil has rebounded to about $40 per barrel.
"Things are improving, but we're well below the $55 or $65" needed by U.S. producers, Dismukes said, "and it's going to take an awful long time to get there. It's going to take until 2028 until things get normal."
Crude oil prices are still down 50% compared to the beginning of the year, while oil storage capacity remains high. About 64% of capacity is full along the Gulf Coast district, which includes Louisiana, as of May 22. Only about 44% of capacity was used as of Jan. 24.
Drillers considering starting production again aren't typically looking at new wells but are just turning on wells they've already drilled but had not tapped yet.
"They are just sitting out there, waiting for a drop in supply in the market," Dismukes said.
So far, petrochemical and refinery jobs have had some losses, but not as significant a drop as oil and gas. However, nonresidential construction employment is down 16%, or 3,500 jobs, since January in Louisiana.
Jobs in Louisiana tied to oil and gas extraction have been dropping substantially since 2014 after oil started falling from more than $100 per barrel. There were about 52,000 jobs then, compared with about 33,000 oil and gas jobs at the end of 2019.
Existing debt is the biggest challenge for oil and gas businesses during the current recession. For example, in 2014, Chesapeake Energy had a debt ratio of 38.9%, which grew to 113% by 2016 and was 94.3% in 2019. When a company has more than 100% in debt ratio, it owes more than the business is worth.
After the downturn in 2014, many companies were able to renegotiate service contracts, but that's not likely the case this time around.
Natural gas production across the U.S. fell more due to the coronavirus pandemic than during the 2014 oil price crash, a difference between 8% and 5%, respectively. Natural gas prices are down 30% compared with January.
The situation doesn't bode well for unconventional plays such as the Tuscaloosa Marine Shale, which cuts across Louisiana. That's because when drillers have limited resources, they are more likely to stick to wells in historically productive, cheaper-to-produce regions, such as the Permian Basin in Texas.
"For Tuscaloosa, you need to 'de-risk' that play. Until we get the churn and (production) momentum going, it's a chicken and the egg," Dismukes said.
Acadiana Business Today Yearslong lull looms for Louisiana's energy sectors hit by economic slowdown, energy slump
A lull in industrial construction in Louisiana could stretch out several years with some proposed projects likely being postponed or even canc…
Ragin' CrossFit will soon become Ragin' Fitness Co. as the owner attempts to distance himself from the controversial comments made over the we…
Months before the pandemic halted the downtown bar scene, a late-night dive for burgers and fries had begun serving customers in a modest outd…
Parish, Well serial number, well name, permit date, field name, operator, location
Farmers across Louisiana can continue using products that contain dicamba, a benzoic acid used as an herbicide, despite a recent court ruling …