The oil and gas industry is on the mend
Although his office is still collecting the data on job loss in Utah’s oil and gas industry, Rob Simmons expects unemployement rates to land upwards of 15 percent. As the executive director of the Government’s Office of Energy Development and the energy advisor to Governor Gary Herbert, Simmons says, “when you lose those high paying jobs, that ripples all the way throughout the whole economy.” And rural communities feel it the most.
The oil industry had enough to deal with when local governments asked people to stay at home and demand for products like gas and jet fuel plummeted. Simultaneously, as demand plummeted, the Organization of Petroleum Exporting Countries, or OPEC, flooded the market with product.
“You were seeing, for example, oil tankers just parked off the coast that were being used to store crude,” said Rikki Hrenko-Browning, president of the Utah Petroleum Association. “We saw the same thing with trains, you’d have entire trains just used as storage.”
Utah’s regional petroleum district, which includes Idaho, Wyoming, Colorado, and Montana, saw a 43 percent decline in demand for motor fuel at the pandemic’s peak in spring, compared to a 40 percent drop nationwide. Jet fuel demand, Hrenko-Browning said, “fell off a cliff,” with national demand dropping around 61 percent, but regionally dropping 84 percent.
Diesel fuel didn’t suffer half as much, dropping around 20 percent nationally and only 16 percent regionally. Hrenko-Browning says that makes sense considering the positive effect the pandemic had on ecommerce, which saw an increase of 30 percent around the same time. “All those things have to be delivered, and they’re all using diesel fuel to do so,” she said.
When will the oil industry reach pre-pandemic levels?
Despite the difficulties of the spring and summer, Utah’s oil industry seems to be on the mend. According to Simmons, demand for diesel and gasoline has reached around 90 percent of pre-COVID levels, and while jet fuel demand is still low, a report from the US Energy Information Administration found that jet fuel demand in the US is recovering faster than in most international markets.
Another report from the EIA predicts that in the third quarter of 2021 the oil and gas market will become more balanced―if not fully recovered. McKinsey & Company is less optimistic, suggesting prices may not reach pre-COVID levels until 2022 or 2024. “It’s really challenging to put a date on when we’re going to be back to pre-pandemic levels,” Hrenko-Browning says. “It really, in my personal opinion, depends a lot on infection rates and individual government’s decisions to move back into lockdowns or not.”
Hrenko-Browning says it’s a balancing act as the US tries to eat away at its stockpiles of product while slowly bringing production online. If they let demand outstrip supply for too long, she says, that could bring about a different kind of energy crisis. It’s also important to remember that the industry has already had to make some choices that will continue to have long-term effects post-pandemic, such as the shutting of 4,100 wells nationwide.
“When you make the decision to shut-in a well, it’s a big decision. It’s not like you flip a switch and go back and turn it on,” Hrenko-Browning says. “It takes a lot of capital to do so, and you need to have some confidence in the stability of pricing that it’s going to be economical to do so.”
And depending on the age of the well, some of the wells that have been shut in during the pandemic may never be opened again.
How will we compete in an uncertain international market?
When OPEC flooded the market in spring it was interpreted as a move to capture more market share, Hrenko-Browning says. It didn’t work. But that dosn’t mean it’s not geopolitically advantageous to be less dependent on foreign oil. Unfortunately, for coastal states such as California or Texas that isn’t always an option.
“The US has done just a phenomenal job of really leading production, which was something that was typically in OPEC’s court, and it’s been an interesting battle to watch,” Hrenko-Browning says. “OPEC would like to take back market share, but their economies also require a certain oil price to maintain stability. So there’s kind of been a tug-of-war trying to take back market share from the US without driving oil prices so low that it hurts them as well.”
The struggle to capture market share is one that won’t be going away soon, but Utah, at least, is in a pretty good position. Hrenko-Browning explains that Utah is pretty interdependent in the Rocky Mountain region, with 84 percent of oil and 78 percent of gas produced staying in-state, insulating it at least slightly from large fluctuations in import-export prices.
Utah’s oil and gas industry is recovering, and will likely continue to recover. To help that along, the Governor’s Office of Economic Development recently received a $5 million grant allocation for Utah’s new oil, mining, and gas grant program.
According to Kori Ann Edwards, managing director in the Governor’s Office of Economic Development, businesses in the oil, gas, and mining industry could begin applying for relief September 15. In order to qualify, businesses will need to show that they have experienced revenue decline related to the pandemic, that they have employees physically in Utah, they need to have fewer than 250 full-time equivalent Utah employees, and they have to provide a statement that money will be used to benefit the Utah state economy.
Edwards says energy is one of Gov. Herbert’s top priorities when it comes to Utah’s economy, and Simmons says he feels Utah’s government was swift in responding to the oil and gas industry’s needs. “There’s a high priority on the economic growth and development of this industry sector,” Edwards says. “The office of energy development has been working closely with the Utah Petroleum Association and the Utah Mining Association to set up that program.”
Utah’s oil and gas industry has also been heavily investing in technology and infrastructure long before the pandemic hit, according to Simmons. He suggested those investments will likely become even more important as the industry recovers and looks to the future. “Our Utah refineries have voluntarily, with some assistance [and incentives] from the state of Utah, invested $30-40 million,” Simmons says. “They’ve invested in upgrading their facilities so they can produce cleaner tier-3 fuels. And these fuels, when you combine them with tier-3 vehicles, [result in a] 70-80 percent reduction in emissions.”
Along with refineries, production facilities in the Uinta Basin have made investments to produce fewer emissions and upgrade the oil produced. Utah’s unique, waxy, crude oil currently is transported by trucks but plans have been announced for the creation of a Uinta Basin railway that would make crude oil product transportation more economically viable and help to reduce associated emissions.
Overall, Simmons said he’s been “extremely impressed” with the response of Utah’s oil and gas industry to the unprecedented challenges brought on by the pandemic. “Reducing these transportation costs and improving environmental attributes are something [the oil and gas industry has] already been investing in. And I think you’ll see these investments accelerate,” he says. “I think the oil and gas industry is looking at ways to be more competitive, and also provide cleaner fuels, so I think they’re on the right path.”