US takes steps to recovery

The US oil industry is not yet sprinting toward recovery, but the sector is “definitely on the mend”.

It is heading for record crude production this year, built on strong output from the Permian basin and the Gulf of Mexico.

The rig count for North America has climbed above 1,000 for the first time in three years, having dropped 80% to 404 during the downturn.

Oil firms are wringing costs out of the system and drilling more prolific wells, according to Patrick Jankowski, senior vice president of research for the Greater Houston Partnership (GHP) economic development body.

Mr Jankowski said that the US oil sector was undoubtedly in a better place than a year ago, and that the business community had made a quick recovery from Hurricane Harvey.

But he said the recovery is “taking so much longer than expected”, and suggested US shale’s success could be built on shaky ground.

He also warned about the potential impact of White House protectionist policies.

Starting with the positives, exploration and production firms are looking much healthier, with the likes of Chevron and Exxon Mobil posting profits in 2017.

Overall, half of oil industry companies in Houston are in profit.

Mr Jankowski, who used to write for four Houston business publications, said that might sound underwhelming, but pointed out that all companies were losing money two years ago.

The economist said the days of $26 oil are “behind us” and that business models have been adjusted to allow companies to make money when crude prices are in the $40 range.

He said industry should “thank Opec” for controlling production through the implementation of output quotas from the start of 2017.

He also said it was heartening that US production could increase with a rig count which is still well below its peak of 1,900.

“Our output has doubled in the last 10 years because of fracking and horizontal drilling,” Mr Jankowski said. “We’re smarter about where we’re drilling, so we do not need 2,000 rigs for production to grow in the US.

“We are reaching record production with a WTI crude price in the $60 range – half of what it was during the peak. Production continues to grow. People were counting on oil being in the low $50s by now, but it looks like it will be low $60s, instead.

“It means more sites are economically viable to drill.”

Readers with an interest in the oil sector and crude prices will have seen the term “Permian” feature regularly in news and economic reports.

The Permian Basin is about 250miles wide and 300miles long, stretching across west Texas and south-east New Mexico.

It is a powerhouse of US production, holding the nation’s largest crude oil fields.

Output from the region has consistently tempered Opec’s efforts to raise crude prices.

When oil prices start to go up, US onshore seems to ramp up and stop prices spiralling much higher.

Mr Jankowski said: “The Permian Basin is basically the Texan desert. It’s what you imagine when you think of old Western movies, with cactuses, cowboys and chases on horses. That’s where we’re finding all this oil.

“Back in the Ice Age, Texas was under water. That’s why we’ve got so much sediment deposit. Other places might have one or two layers of strata which can be produced from. With Permian, it’s six to nine layers deep, so you can just go from one to the next.”

Mr Jankowski’s outlook for Permian is positive, but he acknowledges the basin isn’t without its issues.

The Texas University graduate said: “There are discussions out there about pipelines reaching capacity.

“If there’s a bottleneck, then that could mean constraints on pipeline capacity for bringing crude from the Permian Basin to refineries on the Gulf Coast.

“The crude can be shipped by rail or road, but pipelines are cheapest, so that would add to the cost. It wouldn’t be as economic.

“The ability to raise capital could be another problem. In the past, it was easy to raise capital. Companies just had to show they were growing production.

“It didn’t matter whether they could show they were getting any return on their investment.

“But now lenders are insisting on a return, so that might put some constraint on production.”

Labour shortages are also causing anxiety. “When everything went south, people left the industry and went to jobs in construction, for example,” Mr Jankowski said.

“They said, ‘I worked too hard and sweated too much. I’m not going to do that again’.

“In Houston, if you look at exploration and production, oilfield services, the manufacturing of oilfield equipment, the manufacturing of tubular goods, and engineering, those sectors cut 82,000 jobs. That’s one in every four in the industry.

“Those people didn’t wait around for three or four years for the industry to recover. They went and found something else, so that will be a constraint.

“Companies will need to pay more to bring people back.”

Mr Jankowski is also wary of the effect further crude price rises could have.

“It’s a delicate balance. We want oil prices high enough to support extra drilling, but if they’re too high, it’s a drag on economic growth.

“The global economy is doing well, but if we saw WTI go up another $20, it could be a crimp on growth.

“That would be my concern. If oil went above $80, expectations of it getting to $90 would wind people up – not that I’m predicting the price will do that.”

And Mr Jankowski is concerned about the 25% tariff US President Donald Trump recently slapped on steel imports.

“I’m concerned about anything that slows down the flow of global trade,” Mr Jankowski said.

“We export a lot of chemicals from this region and China was talking about tariffs on chemicals.

“We’d find somewhere else to send things but it complicates matters. It’s a concern if you have already agreed a contract for steel imports.

“It raises the cost of doing business and creates uncertainty in the business community.”

Mr Jankowski, who has worked for GHP and its predecessor for about 30 years, also reflected on Hurricane Harvey, which struck Houston in August 2017.

“Hurricane Harvey was here for four days. That’s why the flooding was so bad.

“Chemicals plants were back to pre-Harvey levels by October, but there are still a lot of people living on the second floor of their houses.

“But we are seeing people move back in. This time next year, people should be back in their homes.”