Low prices do have silver lining for St. Charles Parish refineries
Low oil prices could lead to the loss of 30,000 jobs throughout Louisiana, according to estimates from researchers at the Dallas Federal Reserve and the University of Nevada in Las Vegas. The impact, however, likely won’t be felt as hard in St. Charles Parish as in other parts of the state.
The current drop in oil price stems from an excess of production throughout the world, similar to the “oil glut” of the early 1980s. At that time, the recession and oil crises of the late 1970s had decreased demand, while new sources of oil were cultivated in the North Sea. Today, the world market is receiving large reserves from new developments in Canada and various oil fracking sites.
“One thing to point out is that most of the [job] losses will be in shale oil production,” said Stephen Brown, the professor of economics at the University of Nevada at Las Vegas, who ran the model.
The model assumes a sustained oil price decrease of 50 percent below that of last year. Future estimates for the price of oil continue being revised downward, making the estimate of 30,000 lost jobs that much more of a reality.
Last July, Brent crude, the global benchmark, was trading for more than $100 per barrel. On Monday, Morgan Stanley gave a best-case scenario of $70 for the average price of a barrel of crude through 2015.
“I think this is a much more sustained development and it’s not going to come back in six months,” James. A. Richardson, professor with the Department of Economics and director of the Public Administration Institute at LSU, said. “Producers would be dancing if they thought oil would get back up to $100 by this July–no one is expecting that.”
Richardson said he expects the current sub-$70 prices to last anywhere from three to 10 years.Direct Impact
Drilling operations will be impacted the most, particularly higher-cost hydraulic fracturing operations, according to Brown. These operations typically require oil be at approximately $70 per barrel in order to maintain a profit.
Though short-term drops likely won’t shut down major operations, sustained prices at low levels could force drillers to halt operations.
“[In Louisiana] you have a lot of small oil and gas producers, where this is their income,” Richardson said. “Not like Exxon where you are a producer but you’re also a maker of gasoline and other petrochemical products…[small Louisiana producers] are going to feel the pinch quickly.”
Corey Faucheux, director of Economic Development and Tourism for St. Charles Parish, said the parish only has five oil and/or gas extraction sites, employing a total of 16 people.
“[Drilling operations] might react by slowing down production, they might react by reducing their investments,” Richardson said.
This has an immediate impact on already famished state coffers. All local governments receive money directly related to how much a well within its parish produces, called a severance tax. A decrease in this revenue, Faucheux said, is something that St. Charles Parish is concerned about. Currently, severance taxes are estimated to account for nearly $1 million in revenue for the parish in the 2015 budget.
At the state level, drops in severance taxes could spell further troubles still for a budget that has already seen cuts across the board.
In St. Charles Parish, Houston Energy LLP has begun the permitting process to drill an oil or gas well in the wetlands near Willowdale. Those plans are still on track, according to company spokesperson Heath Suire.
“[A depressed oil market] could possibly impact the timing, but doesn’t impact whether or not we intend to drill the well,” Suire said.
The Ripple Effect
The effects, however, don’t stop with drilling operations.According to Brown, American petrochemical companies, such as Monsanto and Dow in St. Charles Parish, might face increasing pressure from global competitors. Brown said that petrochemical companies in the U.S. typically make products using natural gas, while the rest of the world relies on an oil-based product called naptha. As the price of naptha drops, global competitors could offer the same products for less than those companies using natural gas.
Brown also said that a “multiplier effect” accounts for some of the potentially lost jobs. This includes industries outside the oil and gas sector that would be affected by a drop in revenues.
“Let’s say, for example, I’m not in the oil industry, but I run a convenience store that everybody in the oil industry stops and buys stuff at,” Brown said.
Brown said that these effects are accounted for in his model—both positive and negative.
A Silver Lining
“We’re going to lose jobs in oil and gas extraction, we’re going to lose jobs in petrochemicals and we’re to lose jobs in oilfield machinery,” Brown said. “[But] it’s a small positive for refining.”
St. Charles Parish is home to three refineries, owned by Motiva, Shell and Valero. Only two of those refineries—Motiva and Valero—are “traditional” refineries that convert crude oil into distillates such as gasoline, according to Faucheux.
“In general, lower oil prices are a benefit to refiners like Valero, since we are in the market every day buying crude oil to process at our plants,” Valero spokesman Bill Day said. “At our nearby Meraux refinery, we are processing increasing amounts of Eagle Ford crude oil from Texas, and we recently completed an expansion of that refinery’s hydrocracker.”
Shell representatives said local sites do not comment on crude prices, but that a company-wide perspective will be offered as part of its 4th quarter earnings announcement on Jan. 29. Faucheux said that Shell is “vertically aligned,” meaning that the company generally processes petroleum that it has also extracted.
“[Shell] could take some short-term losses, but the long-term is that people will use more petroleum products and refiners will be able to increase their margins a little bit and produce a little more product,” Brown said.
Day said that, in addition to rail investments that bring more North American crude to its refinery in St. Charles Parish, it’s also mulling the construction of a new methanol unit.
“Although everyone is keeping a wary eye on what is going on, it’s still too early before we know what the impact will be,” Faucheux said.Next week, the Herald-Guide will focus on the effect the low price of oil has on consumers.
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