Kevin Cunningham has seen a lot during his nearly forty years in the oil and gas industry. He has lent his expertise to such firms as Pennzoil, El Paso Corporation, and Chesapeake Energy, and has worked for Cabot Oil & Gas in Houston for a dozen years, eleven as its vice president and general counsel. But in his opinion, the industry’s legal leaders are dealing with challenges few could have imagined a short while ago.
Challenge Number 1: Lean Teams
Cunningham notes that even the strongest energy companies are facing the immediate challenge of keeping or creating a lean in-house legal environment and team, which translates into cost reduction and control. His team’s general charge is to manage legal risk, and there’s a direct cost to that.
“Many US shale oil and gas producers are often measured by how well they manage that cost relative to providing first-class legal services to the company,” he says. “I know quite a few peer companies have been reducing staff, and certainly many of the private law firms right now are severely reducing staff.”
And one of Cunningham’s key observations is that he doesn’t believe those cost reductions are short-term.
“I think that this current negative environment in the industry is a washout, and I do not think that oil and gas managers are going to enthusiastically ramp back up in-house legal services in the future,” he observes. “They’ll make a good economic decision, but I think this could have a long-term effect both in-house and with outside firms on how many folks are engaged in an energy practice.”
He draws that conclusion from having experienced previous downturns and low-price environments. “This one is so dramatic that I would expect folks that do have alternative practices and who can make the transition out of energy may do that,” he adds. “If you lose your job, you need work and you’re going to take whatever work you can find. So, there may be a talent drain due to the current industry.”
“Recently, the United States became, for the first time in its history, independent of foreign oil shipments.”
Challenge Number 2: Plunging Prices
He points out that in the past ten to twelve years, a number of oil and gas operators have taken on high debt and are now faced with fixed debt payments and operating cost and plunging revenue. Moreover, traditional financing source for drilling capital have dried up.
“Recently, the United States became, for the first time in its history, independent of foreign oil shipments,” he explains. “The country has produced more oil and gas here than it imported, and actually I think the US was headed towards being a net exporter.”
That represented a huge change because the US had always been dependent on foreign oil.
“There’s been a boom in the economy over the past ten years in the US, and stock markets have soared and, of course, set records in the improvement of America’s economy and quality of life, not to mention national security,” Cunningham remarks. “One big driver has been the increase in production and purchase of North American-produced oil and gas instead of buying from foreign producers.”
Furthermore, he shares, if that concept is applied to the North American oil and gas production, that represents a huge infusion into the economy. But then a flooding of the world market with oil production by Russia and OPEC was followed by the coronavirus pandemic and a drastic reduction of the use of oil and gas.
“It plunged so dramatically, nobody that I know in my forty years of energy industry work would ever have foreseen the precipitous decrease in demand while there was so much supply on the market,” Cunningham says. “It was a perfect storm, if you will, and what happened to North American oil and gas producers was simply that the price went down for the commodity and the debt didn’t go down.”
“It was a perfect storm, if you will, and what happened to North American oil and gas producers was simply that the price went down for the commodity and the debt didn’t go down.”
In his opinion, those high-debt companies will lose market share while strong companies that can increase production as prices increase will step in and absorb that market share.
He predicts that this will eventually result in a more consolidated oil and gas industry, one that is likely more financially healthy. “Cabot has remained strong throughout these crises because we operate a lean organization from top to bottom,” Cunningham explains. “We have relatively low debt, we generate our own capital, and we have seen improvement in natural gas prices.”
But the big question he poses is whether Russia and OPEC will allow surviving North American producers to operate at levels equal to those of the past decade.
“Or are oil and gas producers headed back to the ’70s, ’80s, and early ’90s, when America is dependent on foreign oil sources?” he asks. “What happens when you send so many dollars overseas? A lot of those dollars go to people who don’t particularly like us.”
Challenge Number 3: Going Green
Another challenge in the industry is the green movement, which has led to litigation and ensuing costs, project delays, and outright bans on development of fossil fuels in many areas of the US and around the world.
Cunningham believes that an honest, science-based dialogue is needed between the industry and those who oppose fossil fuels.
“There is, I think, a misunderstanding about how long and how material fossil fuels need to be part of our energy future until the more—and I call it speculative—alternative energy sources prove themselves,” he says. “We’ve seen a lot of windmills go up, we’ve seen a lot of solar panels go up, we certainly have heard about efficient electric vehicles and efficient electric trucks for transport.”
He explains that too often, the dialogue is conducted through the media and that there needs to be a dialogue between the industry and anti-fossil fuel organizations.
“I would call it energy diplomacy, it’s much like what nations do, even warring nations,” Cunningham says. “They maintain their sides aggressively but there are diplomats that sit down at a table and they go, ‘What’s really happening here and how can we work through this together on a fact-based foundation?’ Get the emotion and get the mythology out of it, on both sides. And that’s hard work.”
Buchanan Ingersoll & Rooney is a national law firm with a proven reputation for industry-leading legal, business, regulatory and government relations advice. We represent some of the highest profile companies in the nation, helping them to see around corners to protect, defend and advance their businesses. BIPC.com