Trump faces bitterly divided companies in his bid to save shale

By Kevin Crowley, Rachel Adams-Heard and Jennifer A. Dlouhy on 4/3/2020

HOUSTON (Bloomberg) --In Saudi Arabia, there is one oil company, the state-run behemoth Saudi Aramco. This makes for a fairly simple process to set policy goals when the country negotiates output quotas with rivals.

In the U.S., there are more than 6,000 oil drillers -- everything from tiny wildcatters in the shale patches of Texas and North Dakota to global giants like Exxon Mobil Corp.

That would seem to make formulating a coherent U.S. negotiating stance next to impossible. And yet, President Donald Trump appears to be intent on seeking to broker a dramatic cut in output along with Saudi Arabia and Russia to prop up plunging prices.

The president’s triumphant tweet Thursday that Saudi Arabia and Russia are open to substantial production cuts quickly gave way to fears in some quarters that the U.S. and other non-OPEC producers would have to join them in slashing output to achieve the goal of giving severely depressed prices a boost.

And Trump will likely face a bitterly divided oil industry when he meets with energy executives Friday to discuss the perilous state of world crude markets and the threat to U.S. shale fields.

Oil soared as much as 35% after the presidential tweet, then pared gains after Saudi Arabia and Russia didn’t confirm they had agreed to any cuts. The Saudis called for an urgent meeting of the OPEC+ alliance -- which includes Russia -- to reach a “fair deal” that would restore balance in the markets, state-run Saudi Press Agency reported.

To satisfy Saudi Arabia’s insistence that all share the burden, Trump would have to unify a fractious and discordant group of U.S. companies and states that haven’t faced output restrictions in nearly half a century. That includes some 6,000 shale drillers that, until very recently, were responsible for soaring U.S. production.

Multinationals such as Exxon Mobil Corp. have typically opposed any kind of government intervention, from tariffs to mandated production cuts. With better access to capital and diversification of businesses, they’re more resilient than smaller operators to ride out the rout. Some independent explorers, whose tenacity and technological innovation began the shale-oil revolution, see today’s low crude prices killing the domestic industry and leaving the country dependent on foreign producers in the future.

Those fears are not unfounded. Whiting Petroleum Corp., an independent producer in the Bakken in North Dakota, filed for bankruptcy this week. Underscoring the divide, Scott Sheffield, the outspoken chief executive officer of Pioneer Natural Resources Co., has argued that the majors want to dominate the issue so they can out-muscle smaller rivals in the country’s biggest shale basins, including the Bakken and the Permian, in Texas and New Mexico.

Ryan Sitton, a Texas oil regulator who first proposed the idea of America joining with the Saudis and Russians to reduce output, said it’s “short-sighted” to knock back the idea right off the bat. “Let’s have a conversation and figure out how we bring these different groups together,” he said in an interview on Bloomberg TV.

Sitton later tweeted that he had a “great conversation” with Russian Energy Minister Alexander Novak about cutting 10 million barrels a day of global oil supply and was looking forward to speaking with Saudi Energy Minister Prince Abdulaziz bin Salman.

The prospect of capping U.S. production is a non-starter with many industry heavyweights. The American Petroleum Institute called pro-rationing an “anticompetitive” effort that would only harm U.S. consumers and producers. Exxon, America’s biggest oil company, is “not seeking any federal or state intervention measures in energy markets,” the company said, adding that free markets would resolve any imbalances.

Oil industry lobbyists are warning the administration that a domestic quota-system or coordinated output decrease would send a signal to Saudi Arabia and Russia that they are winning the price war. The approach could hurt efficient, low-cost U.S. oil producers, they argue.

Still, with oil trading near the lowest point in two decades, unusual times mean that usual rules may not apply.

A U.S. production cut “would be difficult but it’s certainly not impossible in these exceptional circumstances,” said James Lucier, managing director of research firm Capital Alpha Partners LLC. “Given the fact that you have the major oil industry CEOs meeting at the White House tomorrow and other independent E&P companies visiting the White House over the weekend, something like this is definitely going to be on the table.”

The issue is not simply big producers versus small ones. Some independent operators in Texas are in favor of output curbs because, in part, they’re running out of storage. Others, such as Trump confidante Harold Hamm, want the U.S. to sanction the Saudis with anti-dumping tariffs.

Technical and legal challenges would abound. Industry representatives have warned the White House that any curbs on field production could amount to trespass on the property rights of landowners, oil companies and royalty owners. While Texas and Oklahoma can install output limits -- called pro-rationing -- other states don’t have these powers. The federal government has strong influence over the Gulf of Mexico, Alaska and parts of New Mexico, where it owns lots of land.

Another option is to limit exports, which were banned for 40 years until 2015. Restricting those would likely be the most effective method of scaling back production, said Katie Bays, co-founder of Washington-based Sandhill Strategy LLC. That, coupled with letting producers use the Strategic Petroleum Reserve as storage, “would functionally seem to work for the next few months to take oil off the water.”

Although Congress lifted the oil export ban in December 2015, the president still has broad authority to reimpose limits. Under federal law, the president can declare a national emergency and impose export licensing requirements for up to a year, with the potential for additional extensions.

For shale oil producers in Texas, the largest oil-producing state, output cuts are coming irrespective of geopolitical concerns. They’ve already slashed spending budgets, employees and rigs. There’s such an overflow of oil that storage capacity is filling up fast. That could lead to producers being forced to shut in wells.

“The question is not will markets come into balance, the question is will it be done in a strategic and thoughtful way, or done in a reactive way once all the storage fills up,” Sitton said.

One of the biggest hurdles may be the reputational damage done to an industry that prides itself on individualism and hostility toward regulation. Many fossil fuel companies have for decades criticized renewable energy for benefiting from government handouts. And, as the financial crisis shows, once government extends a bailout, the public uproar is long-lasting.

“Americans have no sympathy for ‘oil billionaires’ and most of the country benefits from low energy prices,” said Mickey Raney, chief executive officer of Impact Energy Partners LLC, a small oil and gas producer in Oklahoma. “Our industry chose to accept the influx of Wall Street money that funded incompetent teams to drill wells that would never pay out. The management teams made millions in high salaries, stock options and cash bonuses for leading their companies into bankruptcy.”

“Properly managed companies must now find ways to survive in the mess created by ourselves, not by Saudi Arabia or Russia,” Raney said.

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