Editorial: Wasted deregulation

For a market to function effectively it needs defined parameters. Parameters, of course, are different from regulations. Parameters are the bounds in which market activity reasonably can be expected to occur. Participants are more willing to be active when they not only know where these bounds lie but have reasonable assurance of their permanence. Regulations, by contrast, set artificial boundaries within the parameters; some fit and proper, others less so.

The ongoing coronavirus pandemic (COVID-19) has shaken industry’s ability to discern market parameters. The effects of this are visible in a variety of ways.

Oil and gas pricing now sits at the crossroads of a gradual increase in supplies—on the part of both the Organization of Petroleum Exporting Countries and its partners and individual US producers—and worries that failure to control the virus’s spread in countries like the US, India, and Brazil will lead to a return of the demand destruction seen in March and April.

Global exploration and production project sanctioning is expected to fall 75% in 2020, according to Rystad Energy. In a separate analysis, Rystad projected that the oilfield service market is unlikely to rebound to 2019 levels until 2023. The consultant also noted, however, that as much as 40% of lost revenue could be replaced by repurposing oil and gas activities toward renewables.

Amidst the chaos, however, there are also signs of renewed vigor. New US fracturing operations bottomed out in June 2020 at 325 wells but are expected to rebound to more than 400 in July, driven by renewed Permian activity. Though this would be their first time above 400 since April 2020, the number of new jobs is still well below the 1,479 executed in July 2019. In the meantime, producers have been increasing production by drawing upon their drilled but uncompleted well inventory, which shrank by almost 600 year-on-year between June 2019 and June 2020 to 7,659 according to the US Energy Information Administration.

The US industry is doing what it can in hopes the current market recovery continues. But nothing it has done or can do will stem the tide if a second round of large-scale economic shutdowns occurs. The industry needs to know that it will have markets into which to sell its wares and a workforce able to meet that demand. As COVID-19 continues to run unchecked through much of the country, neither of these is certain.

Stable leadership

Market motion gives participants an opportunity to make money. But too much uncertainty makes them unwilling to spend it. The people who thrive on uncertainty include speculators and conmen. The folks who need stability to plan include investors and corporations.

“The Noble acquisition is a sign of the times,” said Mike Wirth, chairman and chief executive officer of Chevron, at Texas Oil and Gas Association’s virtual summit July 21. “The industry is feeling pressure of [the] pandemic, yet at the same time looking to meet the challenges of the future; looking to do it better,” he said, adding that “the near term is likely to be a bit uneven until the economy finds a firm footing.”

Finding such a footing isn’t going to happen as a result of wishful thinking or inaction. It will require execution of an actual plan.

The Trump Administration has made good on its promise to remove regulations seen as unduly burdensome to the oil and gas industry. But the effects of its failure so far to take the actions necessary to reign in the spread of COVID-19 will dwarf any benefits the industry might enjoy as a result of deregulation.

The good news is the US doesn’t have to figure out how to stop the virus’s spread from scratch. Numerous templates exist from a variety of countries that have effectively curbed its growth. But the time for action is now. And the words “lead or get out of the way” have rarely been more urgent.