2021 was a wild ride for energy recovery
PROFITS SURGED, BUT INDUSTRY TESTED BY CLIMATE, FLUCTUATING DEMAND
Big Oil has come a long way since a once-in-a-century pandemic shut down global economies and halted travel, bringing about a historic crash in crude demand and prices. In a second year shaped by the deadly coronavirus, the industry also faced a deadly winter storm, a powerful hurricane and mounting pressure to adapt greener policies. Still, the nation’s largest oil companies, Exxon Mobil and Chevron, posted their biggest profits in years, the price of crude soared to $80 a barrel and production in the Permian Basin is nearing a record 5 million barrels a day. Yet the
Oil executives are talking of a multiyear boom after years of underinvestment in new drilling projects. Some Wall Street banks such as JPMorgan and Goldman Sachs are predicting that crude prices will hit $100 a barrel next year as demand outstrips supplies. Gasoline prices nationally average $3.30 a gallon, $1.10 higher than a year ago, according to fuel-tracking website GasBuddy.
“We had a dramatic surge in global energy consumption as we recover from COVID,” said Francisco Blanch, global head of commodities and derivatives research at Bank of America. “We’ve all printed a lot of money and we’ve all given it to people to try to keep the economy going. Ultimately, that’s led to more industrial activity and more demand for energy.”
If the oil industry is at the start of another boom, it’s an odd one, however. Historically, oil booms have come greater investment, more drilling and a massive hiring spree in addition to higher prices. But while crude production and profits rebounded this year, energy investment, drilling activity and oilfield employment remain stubbornly slug
gish.
“We used to define an expansion by the famous rig count and tens of thousands of jobs added over a long period of time and a production increase,” said Karr Ingham, a petroleum economist with the Texas Alliance of Energy Producers. “We had significant industry expansion this year, but that’s really only marked by production itself because we didn’t get the rigs and the employment growth. How do you define a boom at this point?”
Even as oil topped $85 a barrel in October, a sevenyear high, large oil companies held capital spending to historic lows this year. Exxon said it expects to spend about $16 billion on new capital projects this year, compared with $23 billion last year. Chevron said it expects to 2021 spending to reach $15 billion compared with pre-pandemic levels of $19 billion to $22 billion.
Instead of bolstering spending on new drilling, publicly traded oil majors have focused on paying debt and raising dividends to woo back investors who had fled the industry after previous oil busts.
“Capital discipline and investor pressure will continue to constrain growth,” Godwin said. “That puts a limit on the year-over-year growth in activity and capital expenditure.”
Missing jobs
That’s troublesome for Houston, the energy capital of the world that’s home to one of the largest concentrations of oil and gas workers. As long as oil majors hold the line on capital spending, new drilling projects — and jobs — will be slow to return.
U.S. drillers added 228 rigs over the course of 2021, bringing the national rig count to 579, according to oilfield services firm Baker Hughes, far below the peak of almost 1,100 rigs at the end of
2018 and the 790 rigs operating just before the pandemic. The rig count is a leading indicator of the nation’s oil and gas production.
Oilfield employment in Texas has steadily risen this year, recovering
2,000 jobs a month in four of the past five months. Yet, the state has recovered 15,700, or just a quarter of the 63,000 jobs lost during the pandemic last year, according to the Texas Petro Index from the Texas Alliance of Energy Producers, an industry group.
Oil extraction, production and service companies in Texas employed 173,100 workers in November, according to the Petro Index. That’s a far cry from the recent high of 240,000 workers in December 2018 and the state’s all-time peak energy employment of
307,200 in December 2014.
“That just tells you how far we have to go,” Ingham said. “Getting back to 240,000, which is where we were the last time we peaked in 2018, seems like a long ways off. It’s an open question whether we’ll ever get back to that number. Employment is coming back very slowly.”
After three major oil busts in the past seven years, the oil industry has learned to do more with less, producing more crude and natural gas with fewer rigs and workers. The equipment and crews have become more efficient with advances in technology and operational practices. Houstonbased Nabors Industries recently drilled three wells using a fully autonomous rig that replaced roughnecks with robots.
At the same time, oil producers have raised production by focusing on completing wells instead of drilling new ones. The number of drilled but uncompleted wells, known as DUCs, fell to the lowest level in four years. Completing these DUC wells boosts production without drilling new wells.
As 2021 comes to a close, U.S. oil production has reached 11.7 million barrels per day, significantly more than the pandemic low of 9.7 million barrels a day but still less than pre-pandemic levels of 13 million barrels per day in March 2020.
Still, the recovery this year has been anything but smooth.
Unsteady return
In February, the polar vortex froze much of the middle of the country, cutting natural gas production in Texas by nearly half. The freezing temperatures and drop in gas supplies caused power plants to go offline, forcing Texas grid manager ERCOT to impose rolling blackouts that contributed to the deaths of more than 200 people and led to billions of dollars in property damage.
In late August, Hurricane Ida caused one of the largest disruptions to U.S. Gulf oil production. U.S. crude production fell by 1.5 million barrels during the storm after offshore producers shut down nearly all oil and gas production in the Gulf ahead of the storm. Royal Dutch Shell, in particular, suffered heavy damage from the storm, which knocked out 40 percent of the company’s Gulf oil production.
Oil production rebounded quickly from the February freeze and Hurricane Ida, but the industry faces challenges as it enters the new year. Omicron, a fast-spreading variant of the coronavirus, threatens renewed economic lockdowns and travel restrictions around the world, which could temper energy demand.
The threat of climate change also looms large over the industry, which faces mounting pressure from government regulators and investors to change business models and lower emissions to prepare for a low-carbon future. The International Energy Agency, widely respected in the industry, warned this year that the drilling of new oil and gas wells must end if the world hopes to meet a net-zero emissions target by 2050.
In May, an activist investor shook up oversight of Exxon when it won a quarter of the seats on the company’s board. At Chevron, shareholders backed a climate proposal urging the oil giant to cut customers’ carbon emissions. And a Dutch court ordered Shell to cut its greenhouse gas emissions by 45 percent by the end of the decade — double the reductions the company had planned.
In the U.S., President Joe Biden moved swiftly to accelerate reductions in the nation’s greenhouse gas emissions in line with scientists’ warnings of the dangers posed by climate change. One of Biden’s first acts as president was to bring the U.S. back into alignment with the Paris climate goals of net-zero emissions by 2050.
Biden undertook a wide-reaching agenda that included hundreds of billions of dollars for clean energy development, tougher environmental regulations, a review of oil and gas leasing on federal lands and waters, and the more symbolic move of cancelling federal approval of the Keystone XL pipeline project.
The White House wasn’t able to accomplish everything Biden set out to do, with Republicans and even some members of his own party blocking the most ambitious proposals, including an end to tax breaks for the oil and gas industry. But Biden’s policies marked a stark reversal of former president Donald Trump’s climate skeptic agenda. While still far short of what scientists say is necessary, the international
commitment to reducing emissions continues to build, with nations ramping up their climate targets at November’s COP26 climate summit in Glasgow.
Oil giants have responded in different ways to the so-called energy transition. European majors BP, Shell and TotalEnergies have moved swiftly to shift investments from fossil fuels to renewable energy projects, such as wind, solar and electric vehicle charging. U.S. giants, such as Exxon Mobil, Chevron and Occidental Petroleum, are investing heavily in emission monitoring and reduction technologies such as carbon capture that could keep fossil fuels viable in a low-carbon world.
“The BP, the Shells, the Total, Exxon Mobil and Chevrons of the world started making big highprofile investments in the energy transition,” said Stephen Perich, UBS’s managing director and head of energy transition. “Not only that, they’re concurrently selling and divesting their legacy energy businesses so that’s a trend we expect to continue.”
Ultimately, 2022 will likely be another year of recovery for the oil industry, even as it navigates the energy transition. Ingham, the petroleum economist, said that next year oil prices could reach $90, the rig count would continue rising and Texas oil employment would surpass 200,000.
It won’t be the big boom of years past, but it’s a whole lot better than the big bust of last year, Ingham said.
“My sense is we are going to continue the demand recovery from COVID in 2022,” Ingham said. “It may continue to be choppy at times, but by the end, it would be a year of general global economic recovery that brings energy demand along with it, and will probably put upward pressure on prices.”