Indonesia - Obama Hits US Petroleum

APS Review Oil Market Trends, March 16, 2009

With President Obama bent on having his low-carbon energy strategy end US dependence on foreign oil eventually (see news4ObamaOilJan26-09), his Treasury Secretary Timothy Geithner on March 4 told Congress American oil and gas producing firms should not receive federal subsidies in the form of tax breaks. He said this was because their businesses contributed to global warming.

It was one of the sharpest attacks yet on the petroleum industry by a top Obama aide. It reinforced the White House stance that new US energy policy will focus on promoting renewables like wind and solar power and rely less on traditional fossil fuels like oil as America tackles climate change.

At a Senate Finance Committee hearing on the White House's proposed budget for the 2010 spending year, Geithner said: "We don't believe it makes sense to significantly subsidise the production and use of sources of energy [like oil and gas] that are dramatically going to add to our climate change [problem]. We don't think that's good economic policy and we think changing those incentives is good for the country".

The Obama administration's budget would levy an excise tax on oil and gas produced in the Gulf of Mexico, raising $5.3 bn in revenue from 2011 to 2019. This new 13% tax on all oil and gas output would only affect firms enjoying a loophole which allows them to avoid paying royalties on their energy supplies, as US gas producers have begun to cut back on drilling in an effort to tighten the market (see above).

IOCs Limiting Lay-Offs: As IOCs cut costs amid falling crude oil prices, they are determined not to repeat the mistakes of the 1980s' bust, when mass lay-offs left the petroleum industry ill-prepared for the eventual rebound. With lack of consensus on how long the slump will last giving then a difficult choice, IOCs can lay off workers and risk being under-staffed if prices recover quickly, or bear the cost of employing more workers than needed in what could be a prolonged period of low income.

A few of the big IOCs, such as ExxonMobil and Chevron, have large cash reserves after years of high oil prices, but most smaller ones spent heavily during the boom years and are now scrambling to cut back. Some IOCs have shed staff. ConocoPhillips recently began laying off over 1,000 employees in Alaska and elsewhere. Schlumberger, the world's largest petroleum-services firm, is laying off about 5,000 globally, about 6% of its work force, while Halliburton is cutting an unspecified number of jobs. But so far IOCs have avoided the mass lay-offs seen in the 1980s, when the glut caused Middle East crude to fall below $7/b and tens of thousands lost their jobs.

IOCs are especially keen to hang on to engineers and geologists, who were in short supply during the boom years. ExxonMobil and Chevron continue to move mammoth projects forward. Diana Hoover, an employment lawyer with Houston-based law firm Mayer Brown, was on March 9 quoted as saying: "What you're hearing is caution, and some effort to be optimistic". She said some firms were quietly making cuts, noting: "The vast majority [of energy companies] are going through restructurings even though they may not be as public about them".

The 1980s energy bust decimated the industry's work force, leaving firms without the experience needed when prices rose and work picked up. Most of the lay-off victims left the business for good, while the industry's boom-bust reputation scared away potential recruits. The result: a lost generation of oil workers whose absence has been felt well into the 21st century.

Lawrence Pope, executive VP for administration at Halliburton, says when recruitment and retraining costs are taken into account, lay-offs can actually prove more costly than retaining workers, noting: "Our driving focus here will be to work hard to try to minimise the personnel reductions, as opposed to past practice when that was almost the first thing we did". Schlumberger CEO Andrew Gould says his firm is willing to make sacrifices and hold on to valued staff, adding: "we want to keep our people busy because we don't want to lose them".

IOCs see the recession as an opportunity to cut low-performing workers. But they are reluctant to stop hiring altogether. Gould says Schlumberger is to maintain its contacts on university campuses even as it hires fewer graduates, adding: "They understand economics, but what they hate is when you come to campus, you do a big song and dance, you hire a bunch of people and then you disappear for five years". Devon Energy CEO John Richels says his firm is maintaining the internship programme it developed to recruit new engineers and geologists.