Oil sector facing unprecedented crisis
Historic drop in demand, price war create a ‘perfect storm’ many firms won’t weather
WASHINGTON — The coronavirus pandemic has caused an unprecedented decline in oil demand, setting off a chain reaction that is threatening to bring much of the world’s oil sector to collapse.
As stay-at-home orders go out around the globe in a bid to slow the spread of the virus, gasoline stations are left with few if any customers, jet planes sit idle on runways and truckers watch their routes cut. In response, refineries, like those that line the Texas Gulf Coast, are slashing their output, which means the crude oil they would have turned into fuel is going into storage tanks.
Only at the current rate of production, those tanks could be full by the end of April, prompting some pipeline companies to begin asking oil and gas producers in West Texas — the center of the U.S. oil boom — to cut production because they are running out of places to send the crude.
That left Abilene oil man Cactus Schroeder, the owner of Chisolm Exploration, little choice but to call off his drilling projects and start
contemplating when he might shut down those wells already in production.
“I was getting ready to drill a well southwest of Abilene, and I called my partners and said no way, after we heard oil was going into the single digits in May,” he said. “Somewhere between 50 and 60 people were going to be working on that well and that’s just one well. And when everyone else shuts down they don’t have anyone else to go work for. They’re on their hands.”
Oil prices jumped 12 percent in New York to $28.34 a barrel Friday on the hope that President Donald Trump’s overtures to Saudi Arabia and Russia would end the price war flooding the market with crude and lead to production cuts of 10 to 15 million barrels a day. On Saturday, however, a meeting planned for Monday between OPEC, Russia other producers was delayed after tensions between Saudi Arabia and Russia flared anew.
Oil prices, which recently plunged as low as $20 a barrel, have fallen nearly 40 percent since the beginning of March and more than 50 percent since the beginning of the year. The ramifications for Houston, considered the oil capital of the world, and the wider Texas economy are profound.
More than 200,000 people across Texas are employed in the oil sector itself, not to mention the nearly 1 million workers in the state’s manufacturing sector, much of which is devoted to making parts and equipment for the oil and gas industry.
Over the month of April, analysts are projecting global oil demand will drop from 20 to 30 million barrels per day, a 30 percent decline that is unlike almost anything in the history of the oil industry. For context, during the 2008 financial crisis, when the world’s financial institutions came close to collapsing, oil demand declined 2 percent.
Nothing like this
Daniel Yergin, the oil historian whose annual CERAWeek by IHS Markit conference in Houston draws CEOs, sheikhs and oil tycoons from around the globe, said the only comparable period was the early 1930s, when the discovery of massive oil fields in East Texas, combined with the Great Depression, caused a collapse in prices that had never been repeated — until now.
When storage tanks hit capacity, analysts say, oil prices in many markets could go negative, a terrifying scenario for oil companies that is already beginning. Last week an obscure grade of crude produced in Wyoming was selling for negative 19 cents a barrel, meaning producers had to pay someone to take their oil.
In the Permian Basin, some grades of oil were trading below $6 a barrel.
“There has never been anything like this. Basically, most of the world is standing still,” Yergin said. “And when the world stands still, it uses a lot less oil.”
Only weeks into the crisis, many within the oil industry have started cutting staff, with oil field services giant Halliburton furloughing 3,500 workers, pipe maker Tenaris laying off 900 workers across the country and Apache Corp. laying off 85 workers in Midland.
Mike Cahill of Houston was laid off last month from his job as a recruiter for Houston-based U.S. Well Services, along with 200 other workers. Now he’s trying to file for unemployment benefits but can’t get through the state’s website or phone lines, which are backed up with hundreds of thousands of Texans trying to do the same.
“The bottom fell out,” said Cahill. “It all hit us as a perfect storm.”
Triumph Fabrication in San Antonio,
which makes equipment for oil wells and pipelines, is considering layoffs after the crash in oil prices lost the company an almost $800,000 deal with a local pipeline company, said Joseph Dorn, Triumph’s president of sales. The company has enough work to last it only through Wednesday; if no other contracts materialize, it might have to let go at least some of its 25 workers.
“That would have gotten us down the road three months,” he said. “(The pipeline company) said they were going to do it themselves.”
And this is just the beginning, economists say.
Seeking a truce
The combination of coronavirus-related shutdowns and the oil price collapse is expected to result in the loss of at least 150,000 jobs — about 1 in 20 — in the Houston area this year, said Patrick Jankowski, economist for the Greater Houston Partnership, an economic development group.
“What we are seeing is energy prices are trading lower than they were in the lowest point of the energy downturn (of the 1980s),” Jankowski said. “This is going to be somewhere between the Great Recession and the oil bust we had in the ’80s.”
In Washington, Trump is scrambling to respond, meeting Friday with CEOs from oil companies including Exxon Mobil and Occidental Petroleum a day after tweeting that he had spoken with Saudi Crown Prince Mohammed bin Salman about repairing the breach with Russia that spurred the crash in global energy markets.
The severe drop in oil prices even prompted Ryan Sitton, a member of the Texas Railroad Commission, to call on the commission to set limits on production in Texas, something the oil and gas regulator has not done since the 1970s.
“Right now, as a globe, we have a common enemy and it’s COVID-19,” Sitton said last weekend. “We’ve got to do things that we’ve never done before because we’re facing a problem that we’ve never faced before.”
The great unknown, which is causing so much panic, is how long this downturn in demand will last.
In typical times, a collapse in oil prices would result in a corresponding rise in demand, as businesses and consumers take advantage of lower energy prices, to run more trucks or take that extra drive to the beach. In time, oil prices rise.
But with much of the world stuck at home, that same rebound is unlikely to happen this time, said Pearce Hammond Jr., a senior research analyst at Simmons Energy, an investment bank in Houston.
“As we get past the virus and people start moving around again, (demand) should come back up, but how quickly? How soon are people going to get back on planes?” he said. “The (oil) system has never had to deal with a stop like this before.”
For now, expectations are that oil demand will continue to decline until governments start to loosen social distancing measures. When that will come is anybody’s guess, but the belief is it will happen in the next few months.
Dire situation
For instance, Yergin said he was hopeful May’s oil figures would not be as bad as April and predicted that by January 2021, U.S. oil demand would be down 3 million barrels per day, year-over-year.
But for now, the situation in U.S. oil fields is dire, with some oil companies in the Permian Basin not only struggling to find open pipelines but also trucking companies able to take crude to refineries, said Larry Oldham, a Midland oil veteran who sold his firm, Parallel Petroleum, in 2009.
“You can’t move (oil) unless you truck it and you can find a market for it, and now even some of the companies that are trucking are saying their storage is full,” he said. “I’ve never seen anything like this, not it in my career, and I’ve been in the business since 1975.”
With expectations that crude prices won’t rebound for a while, companies face tough questions from investors in the months ahead.
Lutz Kilian, a senior economic policy adviser at the Federal Reserve Bank of Dallas, said that as long as crude stays below $30 a barrel, most companies will be unable to attract capital to continue operating, eventually forcing many to declare bankruptcy.
That should mean plenty of work for people like Drew McManigle, who advises energy companies during bankruptcy proceedings.
Only the strong survive
McManigle got into the business after his family’s own oil company in Odessa declared bankruptcy during the 1980s oil crash. And while he likes to talk about the oil industry being one of “optimists,” he admits that this crisis could be the end for many of them.
“I can promise you that banks and private equity firms are looking at their balance sheets right now,” he said. “There will still be an energy industry, but it will look very different. There will only be the oil majors and a few well-capitalized and well-run independents.”