Governmental Relief for Oil & Gas Industry May Not Be Enough

Oil rig in the horizon over land

The Organization of the Petroleum Exporting Companies Plus (OPEC+), which comprises OPEC member countries and non-OPEC countries—including the United States, Russia, Canada, United Kingdom, Norway, Mexico, Brazil, Malaysia, Australia, Azerbaijan, Kazakhstan, China, India and Columbia—held its meeting on April 12, 2020, and resulted in agreed production cuts through April 2022. This OPEC+ production cut agreement was made to avert what’s being called the Saudi-Russian oil war initiated on March 6, 2020, which flooded the oil market with a surplus of world oil supply exacerbated by the SARS-CoV-2 virus and incidence of COVID-19 and plunged prices below zero for the first time in history.

The anticipated U.S. government purchase of 30 million barrels wasn’t approved by Congress as predicted back in March 2020. Rather, it resulted in an avenue for companies to temporarily store oil production for a per-barrel fee to be incurred by the oil producer awarded by the U.S. Department of Energy (DOE) contract, according to the April 2, 2020, DOE request for proposal. This allows companies to continue producing until that storage reaches the 30 million barrels allowed by the Strategic Petroleum Reserve, which is expected to occur sometime in late-May or June 2020. This only addresses short-term storage concerns, so more U.S. government and world production cuts will be needed to deal with the excess oil supply.

The effect on oil and gas companies in the U.S. is staggering and projected to hit all sectors of the industry, including oil and natural gas producers and midstream and oilfield service companies. Bankruptcies are on the rise and expected to hit record levels in 2021, once hedges fall off, as pricing for commodities is expected to remain uneconomic for many producers in the United States. Without substantial oil and gas stimulus packages by the U.S. government, much of the effect will be on independent oil and gas companies, with the bulk of industry survival residing with the oil majors. 

BKD is here to help you navigate the COVID-19 environment with services that can augment your business needs and assist with asset protection measures and cost recovery strategies. As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. 

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