Fact-Checking Higher Energy Tax Claims

Pennsylvania’s natural gas industry – and the tens of thousands of local workers across hundreds of small- and medium-sized regional businesses and building trades unions – is facing historic financial challenges, forcing dozens of energy and supply chain companies to dramatically reduce investments, close their doors, enter bankruptcy and lay off tens of thousands of hardworking men and women.

Yet some in Harrisburg continue to obsess over passing even higher energy taxes, which – as MSC President Dave Spigelmyer reinforced in a recent Post-Gazette op-ed – “would make it more difficult for Pennsylvania to grow shale-related small businesses, building trades and manufacturing jobs” and only exacerbate the already grim industry economic and job outlook.

These same individuals refuse to even acknowledge this deep and painful slowdown, which impacts countless Pennsylvania families and is leaving other energy-producing states that have severance taxes with deep budget shortfalls.

Gov. Tom Wolf, for example, recently said that the energy industry is “showing no signs of slowing down.”

As it’s likely the Governor will once again call for even higher energy taxes in next week’s budget address, consider these facts:

CLAIMS

FACT

  • Wolf: “The industry is showing no signs of slowing down.” (Release, 8/7/15)
  • Wolf aide John Hanger: “Natural gas prices are at rock bottom levels. There’s only one place for it to go and that’s up.” (Post-Gazette, 3/24/15)
  • Wolf: “Natural gas prices are expected to improve significantly by the time the severance tax takes effect next year.” (Release, 5/18/15)
  • Hanger: “Prices are unsustainably low now and will go back up.” (PennLive, 1/25/16)

AlixPartners Study: “Energy Industry to Face a $100 billion-plus Cash-flow Gap in 2016”

  • “The global oil and gas industry is in the midst of one of the severest downturns in 30 years”;
  • Starting in late 2014 and continuing throughout 2015, upstream companies reduced dividends, cut or eliminated share buybacks, implemented supplier rate reductions, reduced capital spending by 20 to 40% and imposed staff reductions—or at least hiring and salary freezes;
  • Drilling activity in the U.S. declined by more than 50% in the past 12 months. (Release, 1/13/16)

Rig Count Hits Lowest Level Since 2010: Pa. lost five drilling rigs over the month of January as the squeeze in oil and gas prices has led to cutbacks in the Marcellus Shale … Overall, there were 590 onshore rigs working across the U.S. … the lowest number of rigs working in the domestic oil and gas industries since April 2010. (Pittsburgh Business Times, 2/1/16)

Wolfe Research: As many as a third of American oil-and-gas producers could tip toward bankruptcy and restructuring by mid-2017. … North American oil and gas producers are losing nearly $2 billion every week at current prices. (WSJ, 1/11/16)

Haynes & Boone: 42 U.S. energy companies went bankrupt last year, owing more than $17 billion … More pain will come … Bankruptcies are accelerating. (Bloomberg News, 1/19/16)

Wood Mackenzie: “The impact of lower oil prices on company plans has been brutal. What began in late-2014 as a haircut to discretionary spend on exploration and pre-development projects has become a full surgical operation to cut out all non-essential operational and capital expenditure.”

  • U.S. $380 billion of total project capex deferred (real terms), from the 68 projects;
  • Of the $380 billion capex, delayed spend from the 68 projects from 2016 to 2020 totals US$170 billion (Release, 1/14/16)

DNV GL Study: “The industry has taken painful short-term cost-cutting measures by reducing the capex and headcount and squeezing the supply chain.” (Release, 1/25/16)

Fitch Ratings: “Weak Gas Price Realizations Challenge Marcellus Economics

  • Weak realized natural gas prices related to the ongoing supply glut from the prolific Marcellus shale play may inhibit further production growth;
  • Several key Marcellus producers appear to be lowering 2016 production growth expectations relative to historical rates, driven by the impact of sustained low prices on economics;
  • At current economics, continued growth could heighten financial risk and limit future value creation, and supports producers move to slow production growth in 2016. (Release, 11/2/15)

Baker Hughes: “The oil and natural gas commodity price rout is showing no signs of abating.”

  • “Our 2015 results are reflective of an extremely difficult and increasingly challenging year for the industry … Since the fourth quarter of 2014, the global rig count has declined 46% as our customers adjusted their spending to align with declining commodity prices.”
  • “Looking ahead, we are forecasting rig activity worldwide to continue to decline throughout 2016.”
  • “At current commodity prices, the global rig count could decline as much as 30% in 2016, as our customers’ challenges of maximizing production, lowering their overall costs and protecting cash flows are now more acute.” (Natural Gas Intelligence, 1/28/16)

IHS:  The companies are doing the best they can to survive as long as they can … We don’t see a quick out.”

  • It’s not even the big producers that will be affected most, but the numerous companies that do business with them, such as drilling contractors and equipment suppliers. (AP, 1/12/16)

Oppenheimer & Co. Inc.: As many as half of the independent drilling companies working in U.S. shale fields could go bankrupt before prices stabilize. (AP, 1/12/16)

Moody’s Research:  Excess supply will continue to drag on commodity prices in 2016 in the global oil markets and the U.S. natural gas market.

  • Low commodity prices have led to a deterioration in cash flows and liquidity, straining the already limited financial flexibility of speculative-grade oil and gas companies;
  • Moody’s expects upstream capital spending to drop by at least 20%-25%, leaving the oilfield services and drilling industry the most stressed sector in 2016. (Release, 1/4/16)

U.S. Bank: Expect a fresh round of layoffs, production cuts and bankruptcies in the oil and gas business in early 2016. (USA Today, 1/8/16)