Shutdown begins of Texas oil
PRODUCTION: Workers fear for companies’ future
A couple of hours after sunup Wednesday, Kyle McGraw climbed into his hail-beaten Chevy Suburban to make the two-hour drive from Midland to a small oil field he and his sons bought just seven weeks ago.
As he drove across the broad expanse of West Texas with his two sons, McGraw, 60, said he couldn’t help but feel nostalgic, recalling how his own father had drilled his first well not far from where they were headed. But this trip was not meant for drilling wells; McGraw would begin shutting them down.
“Talk about changing your way of thinking. All my career has been about how do you make more, and now I’m saying we better shut in,” McGraw, the president of Trinidad Energy, said. “This boom we’ve been on for the past seven years is fast evaporating.”
The mass shutdown of Texas oil
fields has begun after an unprecedented crash that last week drove crude prices into negative territory for the first time in history. From the Permian Basin in the west to the Eagle Ford in the south, drilling rigs are getting pulled from operation, wells are getting plugged and layoff notices are going out fast, bringing an abrupt halt to one of the world’s great oil booms.
A decade after the shale revolution revived the state’s oil production — eventually increasing fivefold to a record 5.4 million barrels a day in January — Texas oil and gas workers watched with mouths agape Monday as the price of the U.S. benchmark crude, West Texas Intermediate, fell to negative $37 on plunging energy demand and shrinking storage capacity.
At the offices of Millenium Exploration in San Antonio, owner Richard Monroy and a couple of employees switched their gaze back and forth across the six different news programs they were watching.
“They were all red. All you saw was red,” Monroy said. “We all stopped what we were doing and gathered around and watched the screens.”
Some 270 miles up Interstate 35, Jim Wilkes, president of Fort Worth producer Texland, was following crude prices on the New York Mercantile Exchange from home when he began calling the skeleton crew of executives at the office. He had expected prices to fall further and already decided to shut down wells in the Permian Basin. But he never saw anything like this coming.
“Everyone was in disbelief,” he said. “My thought was what is something worth when no one’s using it and there’s nowhere to store it. But I didn’t realize it would go negative.”
Hard choices
The decision to shut down wells is not one oil companies take lightly, cutting off their sole source of revenue and potentially sending them into a death spiral from which they might never recover.
As long as oil is coming out of ground, they are usually generating some cash. But that cash flow stops when wells are shutin, and it reverberates through their creditors, suppliers, service contractors and all the people who work for them. And when prices do rebound, wells that have been shut in can take months to resume normal production, if they get there at all.
“These are people used to the good times and bad and they’re having to make decisions they’ve never had to make before,” said Ben Shepperd, president of the trade group Permian
Basin Petroleum Association. “Cutting off their production, giving them no revenue for the foreseeable future. Laying off people who may have worked for them for decades.”
Even as the widening coronavirus pandemic set oil prices falling at the beginning of the year, the trouble really began in early March when Saudi Arabia launched a price war with Russia after failing to reach agreement on output cuts through their OPEC+ group. The Saudis kicked up production and offered steep discounts, driving prices down by one-third overnight to $31 a barrel.
But that was nothing compared to what the spread of the coronavirus would do to energy demand, as governments across the globe ordered their citizens to stay at home. Within three weeks, West Texas Intermediate was selling for less than $15 a barrel. Layoff notices accelerated.
One day in early April, oil field services giant Halliburton laid off more than 600 people across Texas and Oklahoma. Three days later, in a 24-hour span, five oil field services companies informed the Texas Workforce Commission they were laying off a combined 1,100 workers.
The next day, Houstonbased Pacific Drilling laid off more than 80 crew members from its drilling ship in the Gulf of Mexico, the Pacific Sharav.
Since mid-March, more than 17,000 oil field layoffs have been announced across Texas, Oklahoma, Colorado, North Dakota, Pennsylvania and New Mexico, according to analysis of state employment records.
“Our customers have drastically reduced their capital spending budgets and canceled work that had been scheduled or awarded to us, due to the sudden and dramatic drop in crude oil prices,” Michael Robinson, a human resources manager at Universal Pressure Pumping, a division of the Houston oil field services company Patterson-UTI, explained to the commission in a letter.
The stunning crash in prices came as the industry was already struggling following a year of lackluster prices and increasing skepticism about the shale boom on Wall Street. Companies that were already hurting are now reeling, more unsure than ever about the future .
Speak no evil
With no good news coming, boards of publicly traded companies and those owned by private equity firms have put gag orders on their senior executives, Shepperd said.
Rumors of a “flotilla” of oil tankers headed to the United States with Saudi oil are circulating, playing on the anger among many in the oil patch at U.S. refiners’ opposition to tariffs on foreign oil. Refiners say their facilities are engineered to refine heavier grades from the Middle East, not the lighter ones produced in Texas.
So far, Kirk Edwards, president of Latigo Petroleum in Odessa that operates in the Texas Panhandle, has not had to lay off any of his workers. But with storage tanks filling up, he said small producers like him were “totally stuck” and questioned why the government has not stepped in to reduce both oil imports and domestic production to stabilize prices.
“My biggest fear is the refineries in Texas continuing to buy the foreign oil,” he said. “They’re being selfish in not buying American oil first.”
Refineries are also struggling as demand for gasoline, diesel, jet fuel and other petroleum products plummets, inventories grow and storage tanks near capacity, pushing many to the brink of shutting down.
While oil prices have stabilized in recent days, there is no knowing when the next price collapse is coming. Energy analysts predict that storage tanks at the oil hub in Cushing, Okla., will be full by mid-May, likely pushing prices below zero again and leaving Texas producers in the once unfathomable position of having to pay someone to take their oil.
Marsha Hendler, the owner of San Antonio oil company TerraFina Energy, has already received notice from her pipeline operators that they would no longer be able to take her crude as of May 1. Since she has to keep producing to comply with her lease, she’s running pump jacks and storing the crude in her own tanks.
“I’ve got enough storage where I can last three or four months,” she said, “If I just pump one day a week, I may be able to last longer.”
Sitting inside a beat-up trailer at his oil field Wednesday, McGraw, his sons and his two-man crew decided over burgers to bring their field to a virtual halt. The crew would stay on, servicing the pump jacks and checking for pipeline leaks, and run his 50-odd wells just a few days a month to try and keep the wellhead and pipelines from corroding and the oil below from coagulating.
If enough companies follow suit, that should decrease production and potentially raise prices. Shepperd predicted U.S. oil production will fall 30 percent by July.
“These are tough people who have made tough decisions all their lives,” he said.
Going broke
The question now is whether oil companies across Texas and the rest of country will shut production fast enough to keep pace with the loss of oil demand. Until they do, storage tanks will keep filling up and prices will stay low.
Some oil companies, including Wilkes’ Texland, have secured small business loans through Congress’ $2 trillion stimulus package, allowing him to keep his 73 employees on for at least a couple months.
But if oil prices don’t rebound before the money runs out, many of those companies might not be able to hold on any longer.
“Towards the end of May we will start to ponder what the future is,” Wilkes said. “If we keep on this mode, everyone is going to go broke. There’s no way around it.”