Oil sector waits for bailout from Trump
AID STRUGGLE: ‘Icky politics,’ ‘head fakes’ gum efforts to include industry in stimulus
WASHINGTON — President Donald Trump has been an unabashed booster of the energy sector, pledging last month when crude prices crashed into negative territory for the first time in history to “never let the great U.S. Oil & Gas Industry down.”
But the president has struggled to get aid to an industry suffering under an unprecedented drop in energy demand due to the coronavirus pandemic, threatening Texas and other states where the drilling of crude pumps hundreds of millions of dollars a day into local economies.
Dan Eberhart, a Republican donor who runs an oil field service company that operates across Texas and other U.S. shale fields, said companies like his have watched their work dry up, predicting a coming “rash of bankruptcies.” But while the administration has eagerly reached out to him and other executives about financial support, so far, they have little to show for it.
“They have meetings. They have us in, but then when it comes time they really haven’t come through,” he said. “There’s been a bunch of head fakes and they’ve thrown some crumbs. It feels like the oil and gas industry keeps getting patted on the head by the administration at this point.”
Trump won an early victory when he worked with Saudi Arabia, Russia and other members the OPEC+ group to win a 10 million barrel per day cut in crude production. But the president has faced partisan opposition in Congress and concern from economic policymakers about investing taxpayer money into heavily indebted companies unlikely to survive the downturn.
As a result, he has struggled find allies in Washington to aid an industry that includes some of his most loyal supporters.
Risky business
A case in point is Trump’s announcement earlier this month of the expansion of an emergency Federal Reserve program designed to offer hundreds of billions of dollars in bridge loans to companies struggling during the coronavirus — called the Main Street program.
Under the new rules, the revenue limits on companies to participate doubled to $5 billion — enough to allow all but the largest publicly traded oil companies to participate. The Independent Petroleum Association of America heralded the announcement as, “a clear signal to IPAA members that the administration is willing to address some of our recommendations.”
But when executives perused the fine print, they realized that their companies might technically qualify, but getting loans through Main Street would be difficult, if not impossible, said Rachael Lichman, an energy finance attorney at the Houston law firm Baker Botts.
To qualify for a loan, companies would need to find a bank willing to finance 15 percent of whatever loan they could secure from the Federal Reserve — not easy when many banks, burned in the last oil bust, are unwilling to lend to energy companies. Limits on corporate debt and special rules for companies backed by private equity firms, which is common among smaller producers, would also make it difficult for many oil companies to qualify.
“They tried to expand the subset of borrowers but in some ways, they contracted it,” Lichman said.
The latest iteration of the Main Street program is still under development, leaving time for changes that could ease oil companies’ access to loans.
But historically, the Federal Reserve has avoided extending loans to companies at risk of default, even in times of emergency. Rather, it seeks to provide a source of capital to financially sound companies when banks simply stop lending.
“From what we’re hearing, the Fed and Treasury are extremely wary to broaden it too much to prop up companies that are highly (indebted) and not likely to survive in the long run,” said one oil lobbyist, who requested anonymity to discuss confidential conversations with the administration.
The Federal Reserve declined to comment. The Treasury Department, which is leading the administration’s economic response to the pandemic , did not respond to a request for comment.
Grim picture
With so much of the U.S. economy shut down, however, the White House is coming under increasing pressure from members of its own party who represent oil states.
A group of 60 Republican congressmen Monday wrote to Treasury Secretary Steve Mnuchin and Federal Reserve Chairman Jerome Powell asking they ensure oil companies are given access to federal funding. Rep. Dan Crenshaw,
R-Houston, said the government must do its due diligence, but “we have to err on the side of putting capital in the market.”
“The goal is to inject cash into an economy we purposely destroyed,” he said. “The normal framework of bailouts does not apply here.”
Within the Trump administration, efforts are ongoing to help the industry, but there is also a sense that the oil market will eventually correct itself, as it has so many times before. U.S. production, for example, has fallen by more than 1 million barrels a day since the middle of March, giving lift to prices over the past two weeks.
“Drilling rigs get laid down. People get laid off. But when prices come back, and they will come back — we are incredibly agile,” said one senior administration official. “We can grease up those rigs and those crews that got laid off during this horrendous situation will come flooding back.”
For now, though, the picture is grim.
Mass layoffs across Texas oil fields have already begun. With crude trading around $25 a barrel, many more job losses are expected, along with a wave of loan defaults and bankruptcies that represent the greatest threat to the Texas economy since the 1980s oil and real estate bust.
Trump’s struggles to deliver aid to the oil industry signal not only the limits of his power as president, but the general resistance in Washington to bailing out an industry that has long gotten rich on oil shortages at the expense of constituents paying high gasoline prices.
The administration has moved to buy crude to store in the Strategic Petroleum Reserve to take the stress off domestic storage, but Democrats in Congress have refused to fund the purchase, forcing the Department of Energy to begin the slow process of leasing the space to oil companies.
So far only 5 million barrels out of 78 million barrels of available capacity have been filled. With domestic storage tanks still filling up, setting the stage for another price collapse, the Department of Energy is now seeking to buy oil for delivery on a future date to offer a lifeline to oil producers.
But getting the funding remains problematic.
“It’s highly unlikely Congress is going to be able to legislate anything (oil ) industry specific, so it leaves the White House limited options,” said a lobbyist for a refining company, who requested anonymity to avoid repercussions from the administration. “They’ve done the best with what they have to work with.”
‘Icky’ politics
The oil sector itself is divided over whether to take government assistance, fearful that it would incite a public backlash against the industry when it is under increasing scrutiny over its contribution to climate change.
At least a couple of oil companies that received funding through Congress’s Payroll Protection Program, which pays smaller businesses not to lay off their employees, are preparing to return the money out of concern for their public image, said the oil lobbyist.
Between its history of large spills and contribution to climate change, rescuing oil and gas companies poses a very different political calculus than the airline industry, which received a $25 billion bailout from Congress last month. Oil companies seeking assistance understand that, with the presidential election coming, offering taxpayer money to a historically unpopular industry poses a risk for Trump.
“They’re a friend of the industry but the politics of it are just icky,” said Eberhard, the oil field services executive. “There’s a fear oil is going to spike and helping the oil and gas industry six months before it spikes wouldn’t look good.”