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Oil boom goes bust, Oklahoma protects drillers, squeezes schools

A Newcastle Public Schools bus is seen parked in Newcastle, Oklahoma April 6, 2016. The Newcastle schools are planning to reduce the school week to four days next year as a result of a nearly $1 million budget cut. REUTERS/

By Luc Cohen and Joshua Schneyer

NEWCASTLE, Okla. (Reuters) – After intense lobbying, Oklahoma’s oilmen scored a victory two years ago. State lawmakers voted to keep in place some of lowest taxes on oil and gas production in the United States – a break worth $470 million in fiscal year 2015 alone.

The state’s schools haven’t been so fortunate. In Newcastle, 23 miles from the capital of Oklahoma City, John Cerny recently learned that the school attended by his five-year-old granddaughter, Adelynn, will open just four days a week next year. The Bridge Creek school district will slash spending because of a projected $1.3 billion state budget shortfall next year.

Beth Lawton teaches first grade at Broadmoore Elementary in Moore, a city of 59,000 bordering the capital. In April, she and several colleagues were told their contracts won’t be renewed because of funding cuts. Broadmoore’s class sizes are expected to rise next year as a result.

“I think our lawmakers have failed us, and I don’t understand how little they value education,” Lawton said.

Oklahoma’s school-funding crisis is part of the pain inflicted by falling oil prices on energy-rich states across America that rely on natural-resources taxes to pay their governments’ bills. But the crisis in Oklahoma is especially dire, exacerbated by a legacy of large tax breaks bestowed upon oil companies.

Before the recent 60 percent decline in oil prices, a drilling bonanza minted millionaires and billionaires in Oklahoma. The boom turned sleepy Oklahoma City into a thriving hub for drillers like Devon Energy, Chesapeake Energy and Continental Resources – the troika that lobbied hardest for the tax-break extension. The rebuilt downtown hosts top notch dining, hotels, arts venues, and a top NBA basketball team.

But as private oil wealth created these emblems of prosperity, public services have come under severe strain. In contrast to other energy states, Oklahoma didn’t fill state coffers during flush years.

Oklahoma taxed new oil and gas production from its prolific horizontal wells – the big money-makers of the fracking industry – at rates as low as 1 percent throughout the shale boom. In North Dakota’s giant Bakken oilfield, the going rate was 11.5 percent.

MISSED OPPORTUNITY?

The state actually began cutting back on funding for Oklahoma school children before the bust, and education funding is likely to contract much further, said Ryan Owens, a co-director at the Cooperative Council for Oklahoma School Administration, a professional association of educators.

“Oil was $100 a barrel, and we still had less money per student,” Owens said. “We had an opportunity and we missed it.”

Shale regions are hurting across the country. Since 2014, the U.S. energy industry has shed more than 100,000 jobs. But during the drilling spree of 2008 to 2014, oil-rich states like North Dakota and Texas saw a sharp rise in oil-and-gas tax revenue and salted away a chunk of it for education. Over the same period, Oklahoma’s oil and gas production tax revenue slid 32 percent, in spite of soaring oil prices and a doubling of oil output.

“The state legislature can’t help when oil and natural gas falls,” said David Morrow, the Bridge Creek schools superintendent. “What has got the state of Oklahoma, in my opinion, is everything we gave away.”

Oklahoma lawmakers voted on Thursday to eliminate a separate subsidy for the worst-performing wells in order to help plug the budget gap. While barely utilized during the boom years, the cost of that tax credit grew to more than $130 million in 2015, as sinking prices made more wells unprofitable.

Overall, Oklahoma’s $3 billion education budget has been cut by $58 million since January. Though next year’s funding remains uncertain, the state’s projected 18 percent budget deficit has schools preparing for the worst.

Across the state, at least 100 Oklahoma school districts are considering shorter weeks or school years, and 1,000 school jobs are at risk, according to the Cooperative Council.

A SMILING BOY

Among the hardship measures being implemented, according to recent school surveys: bigger class sizes, teacher pay cuts and hiring freezes, cutbacks in arts, athletics and foreign language instruction, fewer offerings for special needs and gifted students, and a moratorium on field trips.

The Oklahoma oil industry is publicizing the role energy taxes play in helping fund schools. In March, a poster in the lobby of driller Continental Resources’ headquarters featured a smiling boy and read, “Oklahoma oil & gas produces my education.”

Kristin Thomas, a spokeswoman for Continental, said the industry and its employees are the state’s largest bloc of taxpayers, while drillers pay billions more in royalties to landowners. She said tax breaks for other industries, such as wind energy, have hurt education funding.

“We don’t have a revenue problem in Oklahoma,” Thomas said. “We have a spending problem.”

The wind industry received tax credits and exemptions worth $306 million from 2004 to 2015, the Oklahoma Tax Commission said. State revenue data reviewed by Reuters show the horizontal-drilling tax breaks topped $1 billion between fiscal years 2012 and 2015 alone.

Oklahoma’s education spending per pupil fell by 24 percent between 2008 and 2016, the biggest drop in the country, according to the Center on Budget and Policy Priorities, a Washington D.C. group that tracks budget and tax issues on behalf of low-income people.

In North Dakota, where recent budget cuts have been less severe, spending per pupil grew 26 percent over the same period, the biggest gain in the country.

Tax revenue on oil production helped North Dakota stash away more than $3.2 billion in an investment fund, in addition to $614 million set aside exclusively for schools. In Oklahoma, Governor Mary Fallin recently used the state’s $300 million rainy day fund for a $50 million “one-time fix” for public schools. Fallin declined an interview request. A spokesman said the tax breaks were created by her predecessors.

A large portion of the tax on oil and gas production is funneled into Oklahoma’s General Revenue Fund, which provides schools with around half their funding. Many school districts also receive oil-production tax money directly, based on output in their counties.

“HAPPY TO KEEP THIS AT ZERO”

In 1994, Oklahoma began taxing new output from horizontal wells at just 1 percent, compared to 7 percent for conventional vertical wells. When the so-called incentive rates were first enacted, they were meant to be temporary support for what was then a nascent drilling technology.

Horizontal wells have bores that extend lengthwise into reservoirs of oil and gas trapped in porous shale rock. The fossil fuels are typically unleashed by the process known as hydraulic fracturing, or fracking – blasting the rock with a mixture of water and chemicals. Horizontal fracking wells have become central to the recent shale oil and gas boom in Oklahoma and around the United States.

Over the years, Oklahoma’s lawmakers repeatedly extended the tax breaks on horizontal wells, even as the technology became common and far more productive, oil prices rose and output surged.

State tax regimes are often complex. In Oklahoma, horizontal wells were taxed at a discounted rate in their first years but subject to the nominal 7 percent rate after several years of production. The incentive rates were set to expire in 2015, a scenario that would have made all wells subject to 7 percent taxes through their lifespan.

But the biggest drillers were keen to protect the reprieve from the higher rates: Horizontal wells often pump out their bounty quickly, generating their highest production by far during their first few years.

So in 2014, the three big drillers made a lobbying push for lawmakers to make permanent the favorable tax treatment on early production.

They had to fend off warnings about falling state energy tax revenues from critics of the breaks, such as Tulsa billionaire George Kaiser.

Kaiser, whose interests include drilling, banking and philanthropy, urged lawmakers to let the tax breaks expire as planned. The benefits mainly went to out-of-state shareholders in oil companies, he told them, while ordinary Oklahomans paid the price through underfunded public services.

Some lawmakers agreed. Mark McCullough was one of the few House Republicans to oppose extending the incentive. Horizontal drilling technology “is now very mature and widely used,” he said during the 2014 debate. “Is it really an incentive anymore? Or are we now getting into something else?”

BIG BREAK

Today, McCullough says, it’s clear that the enduring tax breaks were disastrous for state revenues, but a majority of lawmakers were quick to side with drillers during the boom.

“Oil and gas has a ton of weight, and by darn they wanted their credit,” McCullough told Reuters. “By golly they got their credit.”

To help win over lawmakers, Devon hosted dozens of them in its Oklahoma City skyscraper before the 2014 floor vote. The company had several talking points, according to state legislator Pat Ownbey, who attended the meeting. Among them: Higher taxes would only hurt state revenue, by prompting frackers to abandon Oklahoma for other states.

“While some may think that raising taxes on the oil and gas industry could provide additional funding for education, drilling less wells in the state will end up decreasing total revenue traditionally designated for education in the long-run,” Devon wrote in a later public statement.

On April 29, 2014, three weeks before lawmakers voted to extend tax breaks, Fallin and Oklahoma’s finance secretary, Preston Doerflinger, held a private meeting at the governor’s mansion with Devon’s chairman and the chief executives of Chesapeake and Continental. The topic was oil production taxes, Doerflinger’s spokesman said.

Those same companies were hoping for a 2 percent tax rate on horizontal wells for their first four years in operation, according to local media reports.

The following month, a 2-to-1 majority of Oklahoma lawmakers voted to tax all horizontal and vertical wells at 2 percent for the first three years of production. That’s when horizontal wells yield the most oil – and the most potential tax. After three years, output from a typical horizontal oil well in the state has declined by 86 to 89 percent from peak levels, according to industry consultant Drillinginfo.

Drillers cheered the outcome, which was similar to their own proposal. For the first time, the vote would make the tax breaks permanent. Though it lifted the tax burden from 1 percent to 2 percent during a well’s early years, oil companies were now guaranteed some of the most driller-friendly rates in the country.

Chesapeake declined to comment for this story. Devon referred Reuters to an industry trade group, the Oklahoma Independent Petroleum Association.

“I PAY MY TAXES”

Its president, Mike Terry, said the low production taxes kept Oklahoma competitive and have helped make it “the most resilient in the nation at weathering the downturn in oil prices.” The number of rigs exploring for oil and gas in Oklahoma has fallen by 59 percent since late 2014, compared with a decline of 66 percent nationwide, he said.

The legislative record shows that oil companies found a sympathetic audience at the capitol.

“I find it odd that we’re thinking about castigating our number one industry instead of getting down and thanking them,” state representative Leslie Osborn said during a legislative debate before the vote. “I would have been happy to keep this at zero percent.”

Osborn’s district includes Oklahoma City, which in March announced plans to lay off 208 teachers and in April said it would fire 92 school administrators. The steps will save about $13 million a year.

Osborn didn’t respond to requests for comment about the school cuts.

Over Oklahoma’s boom period, energy production tax revenues fell instead of rising. The opposite happened in North Dakota and Texas, which saw big increases in revenue. In 2014, Oklahoma’s take was $860 million, down from a $1.3 billion peak in 2008.

That’s partly because over time, more and more of Oklahoma’s production came from horizontal wells, taxed at the far lower rate.

To be sure, lower natural gas prices also explain part of Oklahoma’s revenue crunch. Between 2008 and 2014, gas prices fell by around 50 percent, even as oil prices frequently topped the $100 a barrel mark.

Still, the tax breaks alone cost Oklahoma around $800 million over the same period, according to the Oklahoma Policy Institute, a Tulsa think tank that draws some of its funding from Kaiser.

Driller tax breaks have taken a toll in some other states. Louisiana exempts horizontal wells from tax for up to two years if drilling costs aren’t recouped first. The state’s Legislative Auditor said the breaks cost $1.1 billion from 2010 to 2014. But Louisiana hasn’t cut school funding as sharply as Oklahoma has. Per pupil spending is down 1.4 percent since 2008.

In Inola, Oklahoma, 30 miles east of Tulsa, 37-year-old machinist Jack Foster has four young sons enrolled in public school, where four-day weeks are already in effect. The family is unhappy about the cost cuts, and has to make alternative plans for the boys once a week.

“I pay my taxes,” said Foster. “I want my kids to have a good education.”

(Edited by Michael Williams)

U.S. crude hits six-month high after IEA sees tighter supply

A natural gas flare on an oil well pad burns as the sun sets outside Watford City,

By Sarah McFarlane

LONDON (Reuters) – U.S. oil prices hit a six-month high on Thursday, supported by data from the International Energy Agency (IEA) showing tightening supply, in addition to a surprise drop in U.S. crude inventories.

West Texas Intermediate (WTI) U.S. crude futures <CLc1> were 58 cents higher at $46.81 at 1213 GMT, having earlier peaked at $46.92, their highest since Nov. 4.

Brent crude futures <LCOc1> were trading at $48.00 per barrel, up 40 cents from their last settlement and near a six-month high of $48.50 hit at the end of April.

“The catalyst for the rally today seems to have been the IEA report where they have said production is going to fall faster and demand is going to rise more strongly than we previously thought,” Tom Pugh, commodities economist at Capital Economics said.

The IEA on Thursday raised its 2016 global oil demand growth forecast to 1.2 million barrels per day (bpd) from its April forecast of 1.16 million.

It also noted that output from Nigeria, Libya and Venezuela is down 450,000 bpd from a year ago.

Analysts said that while the IEA data was helping to support prices, the gradual return of Canadian oil sands output and the expectation that prices are nearing levels that could trigger the return of some U.S. production might cap gains.

“The only thing that could throw a spanner in the works to prevent oil from rallying further would be the (U.S.) production,” said Ole Hansen, head of commodities research at Saxo Bank.

Traders said an expected increase in Canadian oil sands output following disruptions to over 1 million barrels of daily production capacity due to a wildfire was weighing on markets.

The U.S. Energy Information Administration (EIA) said on Wednesday that U.S. crude inventories fell by 3.4 million barrels to 540 million barrels last week, surprising analysts who had expected an increase of 714,000 barrels.

“With (refinery) runs recovering and production dropping, U.S. (crude) stocks should begin drawing steadily from now,” consultancy Energy Aspects said on Thursday.

“We estimate that North American inventories can fall by as much as 12 million barrels across May and June,” it said.

Kuwait’s acting oil minister said that recent price rises were fundamentally justified.

“Based on the decrease in production that has been shown in the last three weeks, I assume fundamentally the price represents the fall of production,” Kuwait’s Anas al-Saleh told Reuters on Thursday.

He also said that the Organization of the Petroleum Exporting Countries (OPEC), of which Kuwait is a member, would not seek price supporting market intervention during its next scheduled meeting on June 2, and instead it would focus on dialogue between its members.

At an April meeting, rivals Saudi Arabia and Iran could not agree on deal terms, triggering criticism that the producers’ cartel had lost its ability to act.

(Additional reporting by Henning Gloystein in Singapore and Osamu Tsukimori in Tokyo; editing by William Hardy and David Evans)

Insurers shun risk as oil-linked quakes soar in Oklahoma

Oil Pump in Oklahoma

By Luc Cohen

OKLAHOMA CITY (Reuters) – As the number of earthquakes in Oklahoma exploded into the hundreds in the last few years, nearly a dozen insurance companies moved to limit their exposure, often at the expense of homeowners, a Reuters examination has found.

Nearly 3,000 pages of documents from the Oklahoma Insurance Commission reviewed by Reuters show that insurers and the reinsurers who cover them grew increasingly concerned about exposure to earthquake risks because of heightened frequency of seismic activity, which scientists link to disposal of saltwater that is a byproduct of oil and gas production.

Even as they insured more and more properties against earthquakes in the past two years, six insurers hiked premiums by as much as 260 percent and three increased deductibles. Three companies stopped writing new earthquake insurance altogether, state regulatory filings obtained by Reuters show. Several insurers took more than one of those steps.

In addition, the insurers would consider suing oil and gas companies for reimbursement in instances where they would have to pay damages to homeowners, according to several sources, including two insurance company officials.

So far Oklahoma’s biggest earthquake was a 5.6 magnitude temblor in Prague in 2011 that buckled road pavement and damaged dozens of homes.

However, the push to limit earthquake exposure reflects insurers’ fear that the surge in small quakes is a portent of a ‘big one’ in coming years, given the relationship between the magnitude and a total number of earthquakes in a certain area.

The filings show many insurers explicitly stated they were concerned about exposure to earthquake risk. In late March, the U.S. Geological Survey (USGS) warned that 7 million Americans were at risk of so-called induced seismicity.

The warning further heightened insurers’ and reinsurers’ concerns, Oklahoma Insurance Commissioner John Doak said.

Because earthquakes were rare in Oklahoma before shale oil and gas production soared in the past decade, very few residents carried earthquake insurance back then.

OIL, WATER AND QUAKES

That has changed as the number of quakes of magnitude 3.0 and higher recorded in the state soared from a handful in 2008 to 103 in 2013 and 890 last year, according to USGS. The value of coverage, usually offered as an add-on to standard homeowners’ policy, also spiked to $19 million in 2015 from less than $5 million in 2009, according to the Insurance Information Institute, a trade group.

Scientists link the quakes to the injection of wastewater generated from the oil and gas production process deep underground. Volumes of so-called “produced water” have ballooned as horizontal drilling and hydraulic fracturing, or fracking, boosted output in Oklahoma.

Monthly injection volumes in Oklahoma doubled between 1997 and 2013, according to a 2015 Stanford University study.

The Oklahoma Oil & Gas Association has said state regulators’ efforts to work with producers to limit the amount of wastewater injected would reduce seismicity.

So far, relatively few homeowners have filed claims, in part because the damages were not big enough to exceed the deductibles. Some who did say they had trouble getting compensation.

Julie Allison said the cumulative effects of the 39 earthquakes of magnitude 3.0 and above that had struck within two miles of her home in Edmond, Oklahoma, had caused $70,000-80,000 in damages, but Farmers Insurance denied her claim in April.

“They did not deny that we had damage,” Allison said. The insurance company, however, blamed it on ground erosion and settlement, she said.

Farmers said it relied on outside engineering experts for the assessment and that the Allisons have accepted the company’s offer to pay for a second opinion by an expert of their choice.

HIGHER EXPOSURE

For some insurers and reinsurers the risks have proven too big. Responding to the pull-back and premium hikes Oklahoma’s Insurance Commission has scheduled a “fact-finding hearing” in late May, Doak said.

Travelers Insurance Company , the sixth-largest provider of earthquake insurance in the state, stopped allowing existing policyholders to add earthquake coverage in November 2014. In a filing, it said it was making the change “to manage our exposure to earthquake in the state.”

The Hartford stopped writing earthquake insurance in Oklahoma in late 2014. Oklahoma Farm Bureau Mutual Insurance Company removed earthquake coverage from their existing homeowner policies in February 2011, filings show.

The Oklahoma Farm Bureau said it made a “business decision” to remove coverage in 2010. Travelers declined to comment beyond its filing. Hartford declined to comment.

Other companies raised deductibles or premiums. Andrew Walter, manager of underwriting research and development at Country Mutual Insurance Company, which raised its deductible last year, said the step aimed to “protect our financial strength in case of a large scale earthquake in the state.”

Others that hiked premiums include Chubb Ltd <CB.N>, which said it kept providing coverage to existing and new customers, but would not discuss premium rates, and EMCASCO Insurance Company <EMCI.O>, which did not respond to requests for comment.

Risk modelers fear that insurers are too exposed in the event of a “big one,” even though claims have been few thus far.

If they do end up with substantial claims for a large quake, insurers could sue the oil companies for reimbursement. At the Oklahoma insurance regulator’s request, several insurance companies clarified last fall that they did cover man-made quakes, which provided an incentive to try to recoup payouts from oil and gas companies.

Two insurers – the United Servicemembers Automobile Association and Palomar Specialty – said they could consider such action.

(Additional reporting by Liz Hampton and Terry Wade in Houston; Editing by David Gaffen and Tomasz Janowski)

Canadian oilfield workers readying return after wildfire

Burned out homes from Canadian Wildfire

By Nia Williams and Ernest Scheyder

CALGARY/LAC LA BICHE, Alberta (Reuters) – Workers for one of the largest oil sands companies affected by a wildfire in northern Canada will begin returning to the shuttered facilities on Thursday, a union official said, the latest indication the key petroleum production area was slowly coming back online.

Meanwhile, also on Wednesday, the premier of the province of Alberta and the head of the Canadian Red Cross announced that residents of Fort McMurray, the oil-boom town that was evacuated last week because of the fire, would be offered direct financial aid.

In Ottawa, Prime Minister Justin Trudeau established an ad hoc cabinet committee to coordinate federal relief efforts. Trudeau will tour the fire zone on Friday.

Ken Smith, president of Unifor Local 707, the union that represents 3,400 Suncor Energy Inc workers, said the company would start to fly employees back to its oil sands base plant from Thursday.

“It will take a few days to get the plant up and in condition to start handling feed,” Smith said.

Facilities north of Fort McMurray that had been shuttered largely because of heavy smoke rather than fire were likely to come back on line first, in a matter of days in many cases.

Roughly 1 million barrels per day (bpd) of output were shut down during the fire, about half of the oil sands’ usual daily production.

Late Wednesday, Enbridge Inc said it had restarted its 550,000 bpd Line 18 pipeline, which carries crude from the company’s Cheecham terminal 380 kilometers (236 miles) south to the regional crude trading hub of Edmonton.

Enbridge also said crews were on site at its facilities in the Fort McMurray region and confirmed its terminals were not damaged by the wildfire.

Royal Dutch Shell Plc was the first company to resume operations in the area, restarting its Albian Sands mines at a reduced rate. The facility can produce up to 255,000 bpd.

Syncrude, controlled by Suncor, restarted power generation at its oil sands mine in Aurora, north of the city, on Tuesday as it began planning to resume operations. The site has a total capacity of around 315,000 bpd.

Dozens of repair trucks and other vehicles headed for the oil fields on Wednesday, driving north along the main highway into the area, a Reuters eyewitness said. Some were towing heavy equipment.

Still, some projects to the south and east of Fort McMurray remained unreachable as the fire threat persisted.

The town remained shut to residents.

“The area is still very … dangerous with some hot spots still throughout the city and areas of concern,” said Kevin Kunetzki of the Royal Canadian Mounted Police.

Around 300 RCMP members are patrolling the town and have found 100 homes showing signs of break-ins. This could be a result of concerned residents trying to check on neighbors, rather than burglars, he told a news conference in Edmonton.

The size of the fire was little changed on Wednesday at roughly 229,000 hectares (566,000 acres) and moving away from the community.

There are 700 firefighters, 32 helicopters, 13 air tankers and 83 pieces of heavy equipment units working on the Fort McMurray fire, the government said.

Alberta is making cash available immediately to the 90,000 evacuees from the fire zone. The funds, C$1,250 per adult and C$500 per child, would be distributed by debit cards beginning immediately to evacuees in Edmonton, Calgary and Lac La Biche.

Canadian Red Cross Chief Executive Conrad Sauve said his agency was making C$50 million in funds available to the relief effort now, out of C$67 million that had been raised so far. The money will be distributed as electronic funds transfers of C$600 for each adult and C$300 for each child, he said.

“This is the most important cash transfer we have done in our history and the fastest one,” he told a news conference with Alberta premier Rachel Notley.

The local government council held its first meeting since the evacuations in Edmonton on Thursday. The mood was somber and defiant.

Authorities in Lac la Biche, a small town south of Fort McMurray where many evacuees are staying, opened its fishing season four days early to provide temporary residents “with a well-deserved family recreational opportunity,” a statement said.

(Additional reporting by David Ljunggren in Ottawa, Liz Hampton in Calgary and Allison Martell in Toronto; Writing by Dan Burns in Toronto; Editing by Alan Crosby)

Temporary housing first step for wildfire ravaged Fort McMurray

A charred vehicle and home are pictured in the Beacon Hill neighbourhood of Fort McMurray

By Rod Nickel and Liz Hampton

FORT MCMURRAY/LAC LA BICHE, Alberta (Reuters) – Reconstructing Fort McMurray will be easier than first feared since much of the city’s critical infrastructure remains intact but the once booming oil town will be smaller than before, according to its mayor.

The first priority is getting new temporary housing so companies can resume shuttered oil production.

Fort McMurray Mayor Melissa Blake said the fire is a chance to “right size” the city after the energy slump left it with vacant houses and unemployed workers well before wildfires hit last week.

With 10 percent of the city burned and more than 90,000 residents evacuated, the combination of a glut of prefire homes and quick-build housing are a solution as the government and oil executives try to jump-start rebuilding.

“If I look at what the circumstance gives to us, I think it’s an opportunity to right-size the community,” Blake told Reuters. “I recognize that this horror is probably going to get some people reconsidering what their futures are, whether it’s in the region or not.”

The fire may have been the final push that some residents needed to leave the isolated northern city, but major oil producers need it back on its feet quickly to restart some 1 million barrels per day of shuttered production.

The wildfire, which has spread over 229,000 hectares (566,000 acres), is still burning, though favorable weather overnight was seen helping firefighters.

While many companies have work camps at the site of their oil sands projects around Fort McMurray, workers from across Canada and around the world moved into the city with their families when the sector was booming years ago.

If energy companies can’t house workers and their families quickly, they risk losing them permanently.

The industry will support efforts to rebuild the hospital, pipelines and electrical distribution center, Suncor Inc &lt;SU.TO&gt; Chief Executive Officer Steve Williams said on Tuesday after a meeting of industry and provincial officials.

“FIRST WAVE”

A recovery will be easier due to the city’s largely intact infrastructure and downtown, but people are already fighting over available housing because several major residential neighborhoods were destroyed.

“We’ve got banks, companies, restoration companies, engineering companies all looking for space now. People need to stay somewhere,” said Bill de Silva, construction manager of Liam Construction, one of the city’s biggest builders.

He said the “first wave” is already trying to secure space in hotels, condominiums and apartments undamaged by the fire, but the approval process in the still-evacuated city isn’t easy.

“We’ve got to get there as quickly as we can. We can play a big role but they have to let us in. All the government red tape doesn’t help us now,” de Silva said.

Alberta Premier Rachel Notley said officials need to finish damage assessments, set up a welcome center and transportation plan and secure food and supplies before anyone can start moving back in.

“There are hazardous materials and broken power lines. Basic services, gas, water, waste disposal, healthcare and much more needs to be re-established,” she said.

“The city was surrounded by an ocean of fire only a few days ago but Fort McMurray and the surrounding communities have been saved, and they will be rebuilt.”

The province is already speaking to temporary builders.

“They’ve been asking very general questions about what kind of temporary housing solutions we can provide (and a) rough timeline of how long it would take to be installed,” said Troy Ferguson, CEO of Redrock Group, which builds modular work camps and homes in Alberta.

Marc Roy, who was chief of staff for the U.S. Federal Emergency Management Agency in Louisiana in the aftermath of Hurricane Katrina, sees parallels between the two disasters, including the total destruction of some homes.

Longer term, Roy said, authorities need to allocate resources carefully, because some residents likely will not return.

“Are you building with the hopes that you build a field of dreams and people come to fill it, or are you using your resources as wisely as you possibly can at the moment?” he said. “You just can’t put it back exactly like it was and make that your plan. That does not work.”

One wrinkle may be home insurance policies that do no pay out in full unless homeowners rebuild.

“If a customer chooses not to repair or replace, they will receive the actual cash value of the building at the time of the loss,” said Intact Insurance, Canada’s largest property and casualty insurer, in a statement. Because of the oil downturn, that cash value could be less than owners hope.

Debra Bunston, an Alberta realtor, said the disaster may fill vacant homes or spur sales of homes that are already on the market, “a bit of a silver lining in this horrible cloud of smoke.”

(Additional reporting by Allison Martell and Andrea Hopkins in Toronto and Allison Lampert in Montreal; Editing by Jeffrey Benkoe)

Oil up as Canada, Nigeria problems counter stockpile concern

Pumpjacks and other infrastructure for producing oil dot fields outside of Watford City, North Dakota

y Amanda Cooper

LONDON (Reuters) – Oil rose on Tuesday, boosted by supply disruptions in Canada and elsewhere that have knocked out 2.5 million barrels of daily production and temporarily eclipsed concern over high global inventories and a looming surplus of refined products.

Brent crude futures &lt;LCOc1&gt; were up 39 cents on the day at $44.02 per barrel by 1200 GMT, while U.S. crude futures &lt;CLc1&gt; were virtually flat at $43.38 per barrel.

In spite of output outages from Canada to Nigeria, oil prices are down by more than 2 percent so far this week, hampered by worries that even hefty dents to production will have little effect on the growth of stocks of unwanted crude.

Weekly data on speculative holdings of crude futures has shown investors are cooling a little toward oil.

“We’ve seen the market slump 10 pct from the highs since this (Canada) news came in, which suggests that there are other fish to fry at the moment,” Saxo Bank senior manager Ole Hansen said.

“The big reaction yesterday to the change in Canada gave an indication that the market has become a bit more focused on selling into rallies…”

Oil prices fell on Monday by as much as 3.8 percent at one point, after the wildfire moved away from the oil sounds town of Fort McMurray in the western Canadian province of Alberta.

Outages in Canada, which consultancy Energy Aspects said now totaled 1.6 million barrels per day (bpd), have brought global disruptions to more than 2.5 million bpd since the beginning of the year. This has at least temporarily wiped out a surplus that emerged in mid-2014 and slashed 70 percent off prices before a recovery started early this year.

A series of attacks on Nigeria’s oil infrastructure has pushed its output of crude close to a 22-year low, Reuters data shows, piling pressure on its finances.

“Despite some significant supply disruptions, most notably in Canada, ongoing bearish fundamentals precipitated a modest retracement in prices,” Societe Generale said in a weekly note to clients.

With plenty of crude available, refiners have produced large volumes of gasoline and diesel, threatening to swamp demand despite the coming U.S. summer driving season.

“Crude cannot go up without support from products, and that support is not there at the moment, and more refineries are coming out of turnarounds so there will be more products and tanks are getting full,” said Oystein Berentsen, managing director for crude at Strong Petroleum in Singapore.

(Additional reporting by Henning Gloystein in SINGAPORE; Editing by David Evans and William Hardy)

Shift in Saudi oil thinking deepens OPEC split

OPEC logo is pictured at its headquarters in Vienna

By Dmitry Zhdannikov and Rania El Gamal

LONDON/DUBAI (Reuters) – As OPEC officials gathered this week to formulate a long-term strategy, few in the room expected the discussions would end without a clash. But even the most jaded delegates got more than they had bargained with.

“OPEC is dead,” declared one frustrated official, according to two sources who were present or briefed about the Vienna meeting.

This was far from the first time that OPEC’s demise has been proclaimed in its 56-year history, and the oil exporters’ group itself may yet enjoy a long life in the era of cheap crude.

Saudi Arabia, OPEC’s most powerful member, still maintains that collective action by all producers is the best solution for an oil market that has dived since mid-2014.

But events at Monday’s meeting of OPEC governors suggest that if Saudi Arabia gets its way, then one of the group’s central strategies – of managing global oil prices by regulating supply – will indeed go to the grave.

In a major shift in thinking, Riyadh now believes that targeting prices has become pointless as the weak global market reflects structural changes rather than any temporary trend, according to sources familiar with its views.

OPEC is already split over how to respond to cheap oil. Last month tensions between Saudi Arabia and its arch-rival Iran ruined the first deal in 15 years to freeze crude output and help to lift global prices.

These resurfaced at the long-term strategy meeting of the OPEC governors, officials who report to their countries’ oil ministers.

According to the sources, it was a delegate from a non-Gulf Arab country who pronounced OPEC dead in remarks directed at the Saudi representative as they argued over whether the group should keep targeting prices.

Iran, represented by its governor Hossein Kazempour Ardebili, has been arguing that this is precisely what OPEC was created for and hence “effective production management” should be one of its top long-term goals.

But Saudi governor Mohammed al-Madi said he believed the world has changed so much in the past few years that it has become a futile exercise to try to do so, sources say.

“OPEC should recognize the fact that the market has gone through a structural change, as is evident by the market becoming more competitive rather than monopolistic,” al-Madi told his counterparts inside the meeting, according to sources familiar with the discussions.

“The market has evolved since the 2010-2014 period of high prices and the challenge for OPEC now, as well as for non-OPEC (producers), is to come to grips with recent market developments,” al-Madi said, according to the sources.

ORCHESTRATION

For decades Saudi Arabia had a preferred oil price target and if it didn’t like the prevailing market level, it would try to orchestrate a production cut or increase in OPEC. It would contribute the lion’s share of the adjustment and forgive smaller and poorer members if they failed to comply with the group’s agreement.

Back in 2008, the late King Abdullah named $75 a barrel as the kingdom’s “fair” oil price, most likely after consultations with the long-serving oil minister Ali al-Naimi.

When the Saudis orchestrated the last output cut in 2008 – to support prices during the global economic crisis – oil jumped fairly quickly back above $100 from below $40. Later Riyadh again made known its price preference on a few occasions but in recent years it has effectively stopped sending any signals.

This follows the fundamental changes on oil markets. In the past five years, the development of unconventional oil production from U.S. shale deposits and other sources such as Canadian oil sands has made redundant the idea that crude is a scarce and finite resource. Russia, which is not an OPEC member, has also contributed to the ample global supply.

“NO FREE RIDERS”

Dispensing with price targets represents a massive change in Saudi thinking. This is now being driven largely by 31-year-old Deputy Crown Prince Mohammed bin Salman, who took over as the ultimate decision maker of the country’s energy and economic policies last year.

When oil was viewed as scarce, the kingdom thought it had to maximize its long-term revenues even if that meant pumping fewer barrels and yielding market share to rival producers, according to several sources familiar with the Saudi thinking.

With the importance of oil declining, Riyadh has decided it is wiser to prioritize market share, the sources say. It believes it will be better off producing more at today’s low prices than reducing output, only to sell the oil for even less in the future as global demand ebbs.

On top of this, Riyadh has pressing short-term needs including tackling a budget deficit which hit 367 billion riyals ($97.9 billion) or 15 percent of gross domestic product in 2015.

“The oil industry is, relatively speaking, not a growth industry any more,” said one of the sources familiar with the Saudi views inside the OPEC governors’ meeting.

In the past, low oil prices used to push global demand much higher but today’s rising efficiency of motor vehicles, new technology and environmental policies have put a lid on growth.

Despite record low prices in the past year, demand is not expected to grow by more than 1 million barrels per day in 2016, just one percent of global demand.

One thing is guaranteed: the kingdom will not go back to the old pattern of cutting output any time soon to support prices for the benefit of all producers, Saudi sources say.

“The bottom line is that there will be no free riders any more,” al-Madi said at Monday’s meeting. “Some OPEC members should ‘walk the talk’ first,” he told his colleagues.

Even Riyadh’s rivals doubt it will perform any U-turn. “Saudi Arabia doesn’t give a damn about OPEC any more. They are after U.S. shale, Canadian oil sands and Russia,” a non-Gulf OPEC source said.

(Additional reporting by Alex Lawler; writing by Dmitry Zhdannikov; editing by David Stamp)

U.S. Oil industry bankruptcy wave nears size of telecom bust

Dead sunflowers stand in a field near dormant oil drilling rigs which have been stacked in Dickinson, North Dakota

By Ernest Scheyder and Terry Wade

HOUSTON (Reuters) – The rout in crude prices is snowballing into one of the biggest avalanches in the history of corporate America, with 59 oil and gas companies now bankrupt after this week’s filings for creditor protection by Midstates Petroleum and Ultra Petroleum.

The number of U.S. energy bankruptcies is closing in on the staggering 68 filings seen during the depths of the telecom bust of 2002 and 2003, according to Reuters data, the law firm Haynes &amp; Boone and bankruptcydata.com.

Charles Gibbs, a restructuring partner at Akin Gump in Texas, said the U.S. oil industry is not even halfway through its wave of bankruptcies.

“I think we’ll see more filings in the second quarter than in the first quarter,” he said. Fifteen oil and gas companies filed for bankruptcy in the first quarter.

Some oil producers appear to be holding on, hoping the price of crude stabilizes at a higher level. In February, oil slumped as low as $27 a barrel from peaks above $100 a barrel nearly two years ago. U.S. crude has recovered somewhat, and on Tuesday was trading a little below $44 a barrel. [O/R]

Until recently, banks had been willing to offer leeway to borrowers in the shale sector, but lately some lenders have tightened their purse strings.

A widely predicted wave of mergers in the shale space has yet to materialize as oil price volatility makes valuations difficult, and buyers balk at taking on debt loads until target companies exit bankruptcy.

The telecom and energy boom-and-bust cycles have notable parallels. Pioneering technology brought an influx of investment to each industry, a plethora of new, small companies issued high levels of debt, and a subsequent supply glut sapped pricing just as demand fell sharply.

Neither this crash nor the telecom crack-up in the early 2000s rival the housing and financial bust in 2007-2009 in terms of magnitude and economic impact. But losses for energy investors in the stock and bond markets in the last two years are significant. It remains unclear how long it will take to get through the worst of the declines, and who will be left standing when it is over.

A 60 percent slide in oil prices since mid-2014 erased as much as $1.02 trillion from the valuations of U.S. energy companies, according to the Dow Jones U.S. Oil and Gas Index &lt;.DJUSEN&gt;, which tracks about 80 stocks. This has already surpassed the $882.5 billion peak-to-trough loss in market capitalization from the Dow Jones U.S. Telecommunications Sector Index in the early 2000s.

In the debt market, there are also signs that lots of money could be lost this time around, especially in high-yield bonds.

During its boom, U.S. oil and gas companies issued twice as much in bonds as telecom companies did in the latter part of the 1990s through the early 2000s.

Between 1998 and 2002, about $177.1 billion in new bonds were sold in the U.S. telecommunications sector; less than 10 percent were junk bonds. U.S. oil and gas companies sold about $350.7 billion in debt between 2010 and 2014, the peak years of the oil-and-gas boom, with junk bonds making up more than 50 percent of all issuance, according to Thomson Reuters data.

(Reporting by Ernest Scheyder and Terry Wade; Editing by David Gaffen and David Gregorio)

Pirates are switching to kidnapping instead of stealing oil cargo

A machine gun is seen on a sandbag on a boat off the Atlantic coast in Nigeria's Bayelsa state

By Jonathan Saul

LONDON (Reuters) – Pirate gangs in West Africa are switching to kidnapping sailors and demanding ransom rather than stealing oil cargoes as low oil prices have made crude harder to sell and less profitable, shipping officials said on Tuesday.

Attacks in the Gulf of Guinea – a significant source of oil, cocoa and metals for world markets – have become less frequent partly due to improved patrolling but also to lower oil prices, according to an annual report from the U.S. foundation Oceans Beyond Piracy (OBP), which is backed by the shipping industry.

“They have had to move towards a faster model and that faster model is kidnappings,” OBP’s Matthew Walje said, noting that ransom payouts were as high as $400,000 in one incident.

“It only takes a few hours as opposed to several days to conduct the crime itself,” he told Reuters at the report’s launch in London. “Fuel prices have fallen, which cuts into their bottom line.”

OBP said violence had also risen, including mock executions, and last year 23 people were killed by pirates there.

“A lot of people are dying from piracy – nowhere near that number died in the last few years in the Western Indian Ocean (due to Somali piracy),” Giles Noakes, of leading ship industry body BIMCO, told the briefing.

“We are particularly concerned by the issue,” said Noakes, whose association audits the OBP’s annual report.

Last month, Nigeria and Equatorial Guinea agreed to establish combined patrols to bolster security.

Analysts say the pirates have emerged from Nigerian militant groups such as the Movement for the Emancipation of the Niger Delta and OBP’s Walje said a growing problem was the splintered nature of the various gangs operating in West Africa.

“It is more fractured than it would be off Somalia where there were a few major gangs and kingpins operating,” he said.

OBP estimated costs related to piracy and armed robbery in 2015 in the Gulf of Guinea were $719.6 million, 61 percent of which was borne by the industry. The 2014 cost was $983 million, 47 percent of which was borne by the maritime sector, it said.

(Editing by Louise Ireland)

Oil Plows through $45 a barrel; U.S. producers rush to lock in prices

Oil pump jacks are seen next to a strawberry field in Oxnard

y Liz Hampton

HOUSTON (Reuters) – U.S. oil producers pounced on this month’s 20 percent rally in crude futures to the highest level since November, locking in better prices for their oil by selling future output and securing an additional lifeline for the years-long downturn.

The flurry of dealing kicked off when prices pierced $45 per barrel earlier in April. It picked up in recent weeks, allowing producers to continue to pump crude even if prices crash anew.

While it was not clear if oil prices will remain at current levels, it may also be a sign producers are preparing to add rigs and ramp up output.

This week, Pioneer Natural Resources Co;, a major producer in the Permian shale basin of West Texas, said it would add rigs with oil prices above $50 per barrel.

Selling into 2017 tightened the structure of the forward curve, with December 2017’s premium to December 2016; known as a contango, narrowing to $1.30, its tightest since June 2015. That spread had been as wide as $2.15 a barrel just four days earlier.

Open interest in the December 2017; WTI contract was at a record high of 122,533 lots on Friday, up about 20,000 lots from the start of April.

“U.S. producers have been quick to lock in price protection as the market rallies given that the vast number of companies remain significantly under hedged relative to historically normal levels,” said Michael Tran, director of energy strategy at RBC Capital Markets in New York.

It was not clear which companies embarked on the forward selling. In the past a handful of producers such as Anadarko Petroleum; have sporadically hedged in large chunks.

But trade sources pointed to increased activity among financial instruments for the balance of 2016, calendar year 2017 and even 2018.

The uptick in producer hedging activity came as benchmark West Texas Intermediate (WTI) futures finished April up 20 percent for the biggest monthly increase in a year. Prices have rebounded by as much as 80 percent on expectations of falling U.S. production after touching a 12-year low in February.

On Friday, Baker Hughes reported oil drillers removed another 11 from operation the week to April 29, bringing the total oil rig count to 332, its lowest since November 2009.

The calendar 2017 strip week climbed to $49.44 on Thursday, its strongest since early December. In January, it had traded as low as $37.38 a barrel.

To outlast the downturn, many producers like Continental Resources;, are deferring completions on already drilled wells, known as DUCs.

“There are some companies that will hedge at $45 and $50, giving them more incentive to bring those DUCs on line,” said Hakan Carapcioglu, an energy market analyst with Ponderosa Advisors, a Denver-based consultancy.

To be sure, many have questioned the fundamentals backing the recent oil rally, particularly as U.S. crude inventories currently stand at a record 540.6 million barrels, according to the latest data from the Energy Information Administration. [EIA/S]

(Reporting by Liz Hampton; Editing by David Gregorio and Alan Crosby)