U.S. Weighs Paying Drillers to Leave Oil in Ground Amid Glut
The Energy Department drafts a plan to compensate companies for sitting on as much as 365 million barrels worth of oil reserves
(Bloomberg) -- The Trump administration is considering paying U.S. oil producers to leave crude in the ground to help alleviate a glut that has caused prices to plummet and pushed some drillers into bankruptcy.
The Energy Department has drafted a plan to compensate companies for sitting on as much as 365 million barrels worth of oil reserves by effectively making that untapped crude part of the U.S. government’s emergency stockpile, said senior administration officials, who asked not to be identified describing deliberations prior to a decision and announcement.
West Texas Intermediate crude oil futures for May rose about 20 cents to $20.42 a barrel on the news. Earlier Wednesday, crude futures settled below $20 a barrel for the first time in 18 years.
Federal law already gives the Energy Department authority to set aside as much as 1 billion barrels of oil for emergencies -- without dictating where they should go. That creates a legal opening for storing crude outside the government’s existing reserve and even blocking its extraction in the first place. In this case, the government would essentially buy the oil locked underground but ask producers to hold off on extracting or delivering it.
The keep-it-in-the-ground plan would require billions of dollars in appropriations from Congress -- and the administration just recently lost a bid in Congress to spend $3 billion buying oil for the government’s strategic reserve. A deal like this could be unprecedented and reflects a Trump administration push to help domestic drillers battered by a surge of oil production and a collapse of demand tied to the coronavirus.
Analysts, including experts at Wood Mackenzie and IHS Markit, expect storage tanks to fill by summer, if not sooner. Whenever that happens, oil producers with no place to put their crude would be forced to halt production and lay off workers.
President Donald Trump on April 3 asked his energy secretary to “check out other areas where you can store oil,” and look for places “bigger than what we have now.”
The Energy Department is discussing other ideas, including stashing oil in floating tankers, unused refinery storage tanks and underground salt caverns, the officials said. But those approaches might take too long to help as U.S. crude inventories build toward a crisis point.
The quicker solution would be to effectively reward drillers for taking a timeout. Under the approach being developed by the Energy Department, the agency would contract with companies to buy proven oil reserves but delay production of them for several years, if not indefinitely. When that crude is finally extracted and sold, the proceeds would go to the Treasury. Companies would be selected through an auction, with the government picking the lowest-price bidders.
Energy Department officials developed the plan after affirming they had legal authority for the move and studying alternatives.
Senior administration officials said the effort would benefit independent oil companies across the U.S., and it would be focused on sites that are either producing today or those with infrastructure in place so they could quickly yield oil.
The Energy Department already moved to sop up some excess crude by renting out space in the U.S. Strategic Petroleum Reserve for private storage. The agency said Tuesday it is in negotiations with nine companies to store some 23 million barrels of crude in the underground salt caverns that make up the emergency stockpile. And it expects to offer more space in the reserve in coming weeks.
An earlier administration bid to spend $3 billion buying U.S. oil for the strategic reserve was blocked in Congress, as Democrats sought to offset the purchase with investments on clean energy.
Similar opposition could derail the Trump administration’s new plan too. Democratic leaders have said they oppose anything that smacks of a “big oil bailout.” And though environmentalists have favored a “keep-it-in-the-ground” approach to phasing out fossil fuel production, Trump’s venture is aimed at sustaining the industry -- not ending it.
With some 635 million barrels already socked away inside underground salt caverns in Texas and Louisiana, the government has authority to snap up 365 million more as long as Congress doles out money for the transaction. At current prices it could cost at least $7 billion.
Energy Secretary Dan Brouillette said in an interview on Bloomberg TV this week that he would “be working closely with Congress” on a possible storage expansion -- though he didn’t mention the keep-it-in-the-ground idea.
“It’s something that the Congress should consider,” Brouillette said. “They will of course make the ultimate decision as to whether or not they want to pursue that. But we’re going to make some I think very strong and credible arguments why additional storage capacity is important to the country.”
The government has created comparable programs to help other important sectors, such as New Deal subsidies meant to help farmers after the Great Depression, said Kevin Book, managing director of research firm ClearView Energy Partners. An existing federal conservation initiative now pays people for growing erosion-preventing crops on their land instead of farming or ranching it.
At today’s low prices, the U.S. government could fare well on the deal. Buying 365 million barrels at the current price of $19.87 a barrel -- and selling at the 2019 average price of $57.04 would yield more than $13 billion profit. Even selling at just $30 a barrel could net nearly $4 billion, minus any transport and holding costs.
It’s an idea not lost on Trump, who in an April 3 meeting with oil executives wondered why everyone wasn’t socking away cheap crude to sell later.
“At these prices,” Trump mused, “you would think you’d want to fill up every cavity that we have in this country.”
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