‘I’m Just Living a Nightmare’: Oil Industry Braces for Devastation

HOUSTON — Workers at Marathon Petroleum’s refinery in Gallup, N.M., are turning off the valves. Oil companies in West Texas are paying early termination fees to contract employees rather than drill new wells. And in Montana, producers are shutting down wells and slashing salaries and benefits.

“We are worried that the current disorderly market has adversely damaged the industry,” said Ben Luckock, co-head of oil trading at Trafigura, a large exporter of American crude. “In the short term some form of government assistance is likely needed because the price levels we are currently transacting at are unsustainable for U.S. producers.”

The reverberations to other industries could be significant. A decade or two ago, low oil prices would serve to bolster the American economy by reducing energy costs. But the oil industry has become so big and important — it directly and indirectly employs 10 million people — that its problems will deal a blow to many kinds of businesses, including manufacturers that build its equipment, steel companies that make its pipes and banks and hedge funds that lend it money.

President Trump has said that he stands ready to help U.S. oil and gas businesses, a position he reiterated on Tuesday. But the policies he and other administration officials have proposed — imposing tariffs on foreign oil or filling the Strategic Petroleum Reserve — would do so little that their impact would amount to a rounding error.

Simply put, the global oil industry is producing vastly more oil than the world needs — about 30 million barrels a day too much. Even if the federal government started buying oil for the reserve immediately, it could absorb only half a million barrels a day, or less than 2 percent of the excess world production.

Some industry executives had pinned their hopes on the Texas Railroad Commission, asking it to exercise a power it has not used since 1973 to force oil companies in the state to cut production. But the commission, which regulates the industry there, declined to do so at a meeting held by videoconference on Tuesday, with two of its three commissioners saying that they needed more legal advice before making a decision.

The tanker operators, who can make more than $100,000 a day for spot charters of their ships, may be the only ones making money right now.

With 73 employees, Texland Petroleum, a producer in the Permian Basin that has 1,211 wells, is typical of hundreds of independent companies that represent the backbone of the industry, especially in rural areas of Texas, Oklahoma, Louisiana and North Dakota. In business since 1973, it has survived several downturns but always managed to sell its oil at prices that allowed it to at least break even.

That is not true anymore. At least four customers have canceled purchases in recent days. One customer canceled contracts effective May 1 for 2,000 barrels a day, nearly 30 percent of the company’s output.

“It’s a sad time
for our business, that’s for damn sure,” said Jim Wilkes, president of Texland. “The future is very cloudy right now because the pricing is below our production costs.”

Mr. Wilkes has decided to shut all production and end all sales on May 1. Shutting wells is an expensive, laborious process, he explained, with workers obliged to treat well casings with chemicals so they do not corrode once oil stops flowing. And there is no guarantee that a shuttered well can be restarted and be made to pump out as much oil as it did earlier.

Mr. Wilkes said he was not planning to fire anyone, at least not now, because he took a Small Business Administration loan to pay his workers for two months, at which point the loan will be forgiven. But he is not sure what he will do after that.

“April is going to be terrible, but May is going to be impossible,” he said.

Montalban Oil & Gas Operations, a company with 200 wells in Montana, is planning to shut all of its wells in 10 days when its executives expect to run out of storage space. It has slashed its payroll by 25 percent, and its president, Patrick Montalban, and other senior executives have taken a 50 percent pay cut.

Aside from worrying about the future, Mr. Montalban said he had been stocking up on $6 bottles of chardonnay, his drink of choice.

“It’s a bloodbath out there; can you imagine minus $37 a barrel?” he said, referring to the price oil fell to on Monday. “There is something wrong with that market. It’s ridiculous.”

Oil companies generally employ service companies to do their drilling and fracking, and so the downturn is particularly painful for those businesses — Halliburton, Baker Hughes and Schlumberger. Services companies have slashed payrolls and budgets in recent weeks, as have the thousands of smaller contractors that take care of things like cleaning spills, seismic testing and supplying trucks.

Offshore drillers, which had done a brisk business over the last three years, have gone into a tailspin, with delays in investment decisions and canceled rig contracts. Diamond Offshore missed an interest payment on its debts last week and has hired legal and financial advisers for a potential restructuring.

Latshaw Drilling, a company active in Texas and Oklahoma, has laid off 300 of its 500 employees over the last six weeks. It is operating six of its 41 rigs and dropping an additional rig next week. Trent Latshaw, the company president, said he was confident the industry would eventually come back after the virus is tamed.

“If for some reason Latshaw Drilling doesn’t make it through this,” Mr. Latshaw said, “the good Lord has something else planned for me.”

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