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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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U.S. Oil And Gas Jobs See First Gains In 2 Years

Oil rig

Rising rig counts and an uptick in drilling activity is leading to a rebound in employment in the oil and gas industry, according to recent data.

Payrolls in the oil and gas sector in the United States rose for the month of November, recent U.S. government data shows, the first monthly gain in over two years. Employment in oil and gas extraction and support services rose by 3,300 for the month, rising to 384,300. That comes after the industry lost over 150,000 jobs during the two-and-a-half-year downturn.

While one month’s worth of statistics does not make a trend, the data suggests that the worst is over. The market is passed the low point and even as companies continue to repair balance sheets, oil trading above $50 per barrel is sparking a rebound in drilling activity and hiring. The rig count is already up by more than 200 oil rigs since the middle of last year, posting six consecutive months of gains. U.S. shale output is also rising, up about 300,000 bpd from a last summer, according to preliminary data.

The big question is whether or not spending on drilling will rise substantially this year or simply level off at these low levels. Estimates from market watchers vary. Cowen & Co., a financial services company, surveyed 25 E&Ps and found an average increase in capex by 33 percent this year compared to last. Barclay’s expects a more modest 7 percent growth in capex across a more comprehensive measure of 215 global oil and gas companies. The industry could more aggressively ratchet up spending if oil prices rise. Raymond James says spending could double if oil rises to $65 per barrel in the first quarter.

These bullish estimates are a departure from the rather downbeat assessments prior to the OPEC deal in November. The IEA had repeatedly warned last year that the global oil industry risked a third consecutive year of a contraction in spending in 2017, a development that no longer looks likely. Related: The Next Big Innovation In Oil & Gas: Cloud Computing

Nevertheless, all is not well for oil drillers. The rebound in spending, drilling and hiring could reverse one of the oft-cited “achievements” of the two-year downturn. Across the industry, companies big and small achieved major cost reductions in order to adapt to a lower price environment. Some of that came from real reductions in the cost of operations and more efficient drilling techniques.

But much of the “savings” could prove to be illusory, for two reasons. First, even innovations in drilling could merely front-load production – drilling longer laterals to extract more oil does not mean that there is more oil to be had in a given field, it just means that extraction will happen more quickly. That could boost returns in the near-term, but could also accelerate the decline of production over the long-term. Likewise, companies are also “high-grading,” or focusing on the sweet spots, which causes the data to appear as if the industry is making impressive “efficiency gains” even though they are just drilling the best wells. However, the effects of these dynamics won’t necessarily be visible for quite some time, so for the purposes of 2017, let’s leave that discussion for another day.

Another way that the gains made over the past two years could be fleeting is because the cost reductions could be cyclical. Lower breakeven prices came because oil companies squeezed oilfield service companies. According to Graves & Co., a Houston-based consultant, about three quarters of the 440,131 oil jobs eliminated around the world over the past few years came from oilfield services. Drilling became cheaper because E&Ps demanded lower rates from OFS companies. As drilling picks up, however, costs could rebound as well, especially since recalling some of those lost workers could be more difficult than many believe. One estimate finds that one in four laid off workers have moved on to other industries. Related: Oil Majors Prepare For Mega Tender In Lebanese Levant Basin

“Aggressive cost cutting this downturn has reversed much of the ‘boom town’ employee-related inflation,” Barclay’s analyst David Anderson wrote in a recent research note. “Attrition of qualified labor into less cyclical industries with greater job security, more stable income and better work/life balance could create cost inflation and bottleneck in a sharp recovery.”

The one factor that could prevent such a scenario from occurring is increased automation. More sophisticated drilling rigs are automating rig work, which could lead to 40 percent fewer workers needed to drill a well in the years ahead. That ultimately could mean that even if the industry rebounds, laid off workers won’t need to be called back to the same degree as before the downturn.

Still, increased automation will take time. In the short run, oil companies could struggle to staff up in 2017 as drilling activity grows, which could lead to wage inflation.

By Nick Cunningham of Oilprice.com

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