The global coronavirus pandemic--a true black swan event--has altered the course of the entire oil and gas industry, and not even the mighty US shale industry will emerge unscathed. Employment in the oil and gas industry in the United States has already dropped off considerably in the months following the coronavirus, exacerbated by Russia and Saudi Arabia’s oil price war that saw millions of extra barrels of oil flood into the market, including into the United States.
The combination of those two events put remarkable pressure on the shale industry in the United States. And the industry is unlikely to return to normal in the near future--or ever, perhaps.
Oil Workers, the Backbone of U.S. Shale
According to the U.S. Bureau of Labor Statics Current Employment Statistics published last month, support activities for oil and gas operations fell by 20% between February and May.
In Texas, the heart of the US shale industry, oil and gas production jobs could fall to a 15-year low in the coming months, according to the Texas Alliance of Energy Producers as cited by the Houston Chronicle.
And those jobs may never return.
Drilling and oilfield service companies were hit especially hard. In June, Texas employed 162,350 workers in this field. This is about half of what it was in December 2014. From February to June, Texas shed 46,100 jobs in production and oilfield services.
More Pain to Come
Some industry experts see even more job cuts on the horizon, as oil demand isn’t expected to snap back anytime soon. Indeed, in the United States, reports of an increased number of new coronavirus cases have the market spooked, and some government officials at state and local levels are rethinking their plans to reopen--a necessary element in any oil demand recovery.
Ramanan Krishnamoorti, professor of Petroleum Engineering at the University of Houston’s Cullen College of Engineering, sees the industry “in big trouble,” according to Houston’s abc13.
“You’re going to see a lot of bankruptcies, a lot of furloughs, more than furloughs. You’re going to see layoffs. You’re going to see people leave this entire industry because there aren’t going to be jobs.”
Indeed, Schlumberger slashed 25% of its workforce. Halliburton shed more than 5,000 workers in Texas alone, and many companies have filed for bankruptcy within the last couple of months.
Krishnamoorti also sees big oil companies snapping up smaller ones. Case in point, Chevron’s takeover of Noble Energy. His outlook? The industry will snap back, but not for years.
Krishnamoorti is not alone. The demand for jet fuel just hasn’t snapped a back like gasoline, and it isn’t going to for years. Jet fuel demand recovery is expected to drag on for years, possibly until 2023, Bank of America suggests.
The length of the demand recovery is expected to pose a grave challenge for the U.S. shale industry. When the industry does snap back down the road--and most analysts agree that it will come back--it may look quite different.
Welcome to the New $40 Per Barrel World
Some of the takeaways from the last oil price crisis were mergers and acquisitions, weaker shale companies going under, and the remaining shale companies finding unique ways to improve efficiency and, arguably, better cost discipline.
Some have said that there are few gains left to be made, with most of the less desirable shale companies and inefficiencies within the shale industry going the way of the dinosaur the last go around. In other words, some suggest that the belt is already as tight as it will get.
But changes are still afoot because changes must be made.
While oil and gas companies have seriously chopped its workforce, shale--like it did last time around--will find a way to do more with less.
Necessity being the mother of invention, U.S. shale is already finding ways to keep production up with a reduced workforce and less capital. They are already making the transition to $40 oil.
This can be seen with the Baker Hughes rig count and with Primary Vision’s Frac Spread Count. While the EIA is showing that U.S. production has sunk 2 million barrels per day on average over the last couple of months, rigs and frac spreads have fallen more sharply than what the current production levels would merit.
The New U.S. Shale Industry
U.S. shale will still likely emerge from this protracted low-priced environment with some battle scars. When rigs are idled for a long period of time, they are more likely to be idled forever. According to Clay Bretches, executive vice president at Apache Corp, “When you shut in wells, especially for a long period of time, you have a lot of surprises. Some of them are good and some of them are bad,” Bloomberg reported back in May.
One of those surprises is finding out that there is reservoir damage due to prolonged idling. Some smaller businesses that do not have the capital to make necessary changes will go under. Some necessary workers will be lost to other industries forever.
Nothing would make OPEC and Russia happier than to put U.S. shale on the backfoot. But just because U.S. shale may emerge from these difficult times with battle wounds doesn’t mean OPEC should count it out.
U.S. shale has proved fantastically resilient in the past to any downturn, even long ones. It may look different, yes indeed. Perhaps smaller, as some analysts say. But a few years down the road, and U.S. shale will still be a force that OPEC must reckon with.
By Julianne Geiger for Oilprice.com
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