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. Some are already idling drilling rigs and stowing excess supplies in rail cars, while pipeline operators are reversing flows to transport crude to underused storage sites. 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.