Oil-import quota clash
NM, WEST TEXAS INDEPENDENT OPERATORS PRESS FOR FEDERAL ACTION, BUT TRADE ASSOCIATIONS, LARGE CORPORATE PRODUCERS GENERALLY OPPOSED
Independent oil producers in New Mexico and West Texas are waging a David and Goliath battle to impose import quotas on oil from the Organization of Petroleum Exporting Countries.
A new Panhandle Import Reduction Initiative, launched last April by prominent producers in the San Juan Basin in the Four Corners and the Permian Basin in southeastern New Mexico and West Texas, has support from about 600 local operators and related industry businesses. The independent companies involved say it’s time for the U.S. to fight back against the OPEC price war that began two years ago and which now threatens to drive many domestic companies out of business.
But they face a steep uphill battle not only to convince federal officials to enact protectionist measures in today’s globalized free-market economy, but also to unite the industry as a whole behind such action, since many trade associations and large corporate producers oppose it.
Initiative leaders will hold a public rally in Carlsbad on Tuesday to drum up more public support and to put OPEC on notice that it could face restrictions on access to the U.S. if it continues to deliberately overproduce crude for an alreadyflooded market, said Daniel Fine, associate director of the New Mexico Center for Energy Policy at the New Mexico Institute of Mining and Technology, who is working to build the movement.
“This is a warning shot for OPEC that we’re drawing a line in the sand in New Mexico and West Texas,” Fine said. “Unless they agree to freeze overproduction and abandon the strategy of using low prices to shut down Southwest
shale-oil production, they could face import quotas.”
Fine has prepared a “white paper” for action that the movement plans to deliver to the federal government in March, three months after a new U.S. president takes office. The paper’s central tenets will be unveiled at the Carlsbad rally.
Surging world supply and decreasing demand in the sluggish global economy set the stage for a drop in crude prices in 2014. But a decision that year by OPEC to lift all production ceilings for member countries greatly aggravated oversupply, driving prices for U.S. benchmark West Texas Intermediate down from more than $100 per barrel in mid-2014 to about $43 today.
The domestic oil industry slipped into crisis, leading to some 250,000 layoffs nationwide and about 160 oil companies going bankrupt. In New Mexico, about 6,000 people lost their jobs, and between 12,000 and 18,000 if direct and indirect jobs are included.
The state now faces a $589 million budget deficit caused largely by declining oil and gas revenue, and drops in income and gross receipts taxes in the oil-producing zones. A special legislative session is expected in the next few weeks to deal with the financial fallout.
Industry not united
If the movement hopes to garner federal support, it must first break down opposition in its own ranks. Five trade organizations, including the New Mexico Oil and Gas Association and four others in Texas, wrote a letter last May to initiative leaders rejecting import quotas as a violation of free trade that could bring unintended and “unmanageable” consequences.
“It goes against our principles,” said Stephen Robertson, executive vice president of the Permian Basin Petroleum Association. “We’re very much for free trade.”
The industry successfully lobbied last year for the federal government to lift a 40-year ban on exports of U.S. crude. Rather than restrict imports, trade associations should encourage producers to take advantage of foreign markets, Robertson said.
“We fought hard as proponents for lifting the export ban because we want to give our producers opportunities to be in as many markets as they can to get the best value for their product,” Robertson said.
Restricting imports could also hurt domestic refineries, said NMOGA Vice President Wally Drangmeister, because many of them are better designed to process foreign imports of heavy crude, rather than the typical light crude pulled from domestic shale formations.
“Given the configuration and setup of our refineries, it’s often more efficient to import heavier crude that’s refined on the Gulf Coast and export lighter crude to other refineries around the world that are more efficient at that,” Drangmeister said. “The free market is better equipped to handle that type of optimization, rather than the government coming in to control things.”
Initiative leaders, however, say such opposition largely reflects the lopsided impact of OPEC’s price war on small and medium-sized independent producers compared with large corporations that already produce and market their products on a global scale.
“The bigger companies are vertically integrated,” said T. Greg Merrion of the Merrion Oil and Gas Corp. in Farmington. “They not only produce, but refine and distribute oil and gas. If you’re involved in the entire chain, then perhaps you’re not hit as negatively as the independent companies who only produce oil and gas, and sell it at the wellhead.”
Independents hardest hit
The import quota initiative is a grass-roots movement based on support in communities directly affected by bust conditions in the oil industry, Fine said.
“It’s organized by the small and medium-sized companies, who are the ones most damaged by the OPEC price war,” Fine said.
There are about 500 independent producers in New Mexico, about 300 of whom are members of the Independent Producers Association of New Mexico. That trade group has not taken a public position on the import quota initiative.
Protecting the smaller companies is critical, said John Yates Jr. of Yates Petroleum in Artesia, which recently merged with EOG Resources of Texas.
“It’s not in the public’s interest to see a viable industry die on the vine,” Yates said. “The public will end up suffering the pain if Mideastern and Persian Gulf companies gain market share and put us over the barrel again to then speculatively run up prices. It’s in the public’s interest to keep domestic supplies strong and not be slaves to other countries.”
Indeed, initiative leaders say their proposal will put the U.S. back on a path to energy selfsufficiency, which appeared in reach with the U.S. shale-oil revolution until OPEC flooded markets to drive down prices and regain market share in the U.S.
Given OPEC’s cartel control over production to set prices, imposing import quotas is not a free-trade issue, but one of national security, said Tom Cambridge, owner and chairman of Cambridge Production in Amarillo, Texas.
“We have no trade agreements with OPEC countries that we’d be violating,” Cambridge said. “It’s about keeping them from driving U.S. producers out of business.”
The initiative wants to impose quotas on imports of light crude oil from all countries outside of North America to specifically defend the light oil they produce in shale-rock formations. It would not affect imports of conventional, heavy crude, and it would not apply to Canada and Mexico.