US readies lending program for oil companies

President Donald Trump's administration is close to rolling out new lending facilities to help oil and gas companies struggling from a collapse in prices brought on by Covid-19.

The program, which is still under development, would primarily consist of the US Treasury Department offering "bridge loans to help the industry through this pandemic" and the US Federal Reserve offering emergency lending under the so-called "section 13(3)" program, according to remarks from US energy secretary Dan Brouillette that were shared with Argus.

Those loans could benefit smaller producers now getting less than $10/bl for many physical grades and facing the threat of further revenue losses from shutting-in wells, as spare storage runs out. Brouillette said the lending facilities were not meant for "big players" in the sector that have other sources of capital.

But the loans are likely to fuel criticism that the Trump administration is giving a "bail out" to the oil sector and prioritizing it above other businesses that are also struggling. Oil companies were at the "edge of a financial cliff" long before the pandemic, liberal think tank the Center for American Progress said today.

Trump on 21 April said he was ordering Brouillette and US treasury secretary Steven Mnuchin to come up with a plan to "make funds available" to the oil and gas sector, setting off the efforts to structure the program. The lending facilities plan has not yet been finalized, but Brouillette said in comments to oil and gas producers yesterday he hoped it could move forward within the next day or two.

"We want these programs to be as robust in possible so that we can have this entire industry take advantage of them," Brouillette said.

The Energy Department did not immediately respond to a request for comment.

Mnuchin: No bail outs

Mnuchin and US Federal Reserve chairman Jerome Powell have been discussing the proposal, Brouillette said, but Mnuchin has not made a final decision. The US Treasury Department and the Federal Reserve did not respond to a request for comment, but Mnuchin has denied the claim that the administration wants to bail out the oil industry.

"Let me be clear, the president has said no bail outs to any companies, whether that was airlines or oil companies," Mnuchin said earlier this week in a televised interview. "We will consider, again, loans to companies in a proper scenario with strategic importance, but no bail outs."

Small and medium-sized producers say they have been frustrated with their ability to obtain loans under last month's $2.2 trillion coronavirus rescue package, named the CARES Act. The industry says it struggles to qualify under existing lending programs, such as requirements in some programs for companies to have investment-grade credit ratings.

"Our main concern has been that there is fair access to the federal lending resources that have been available both by the Fed and the CARES Act," Independent Petroleum Association of America executive vice president Lee Fuller said.

The administration's tentative plan to support the oil industry would also ask US regulators not to put "undue pressure on banks to start calling in" loans to oil producers and service companies. Oil producers often use their reserves as collateral for loans, but the value of that collateral has dropped alongside the collapse in oil prices. That has fueled concern that banks will seek more equity from borrowers.

"Now is not the time to be asking borrowers in the energy industry for additional equity," Brouillette said.

Oil state lawmakers have been urging the administration to create lending programs for the oil industry and revise loan eligibility requirements. US senator Kevin Cramer (R-North Dakota) said yesterday that producers needed support as a result of a "lethal combination" of Covid-19 and an oil price war.

By Chris Knight