Frackers see long road ahead
As OPEC cuts its production, U.S. firms ready for future growth
WASHINGTON — Two years ago, with the world awash in oil and prices falling, OPEC nations considered cutting production to prop up the market. Instead, they took a different path to curb supplies, choosing to keep pumping oil, a move that many interpreted as the beginning of a campaign to push down prices until U.S. shale drillers and other high cost producers were driven out of business.
But last week, the Organization of the Petroleum Exporting Countries called a pause in the stand-off, agreeing to cut production for the first time in eight years and signalling that whatever victory the cartel might have achieved, it was far from total. The two-year price war has driven scores of Houston, Texas and U.S. companies into bankruptcy, but it has also left the
oil-dependent budgets of OPEC nations in tatters, creating large deficits and forcing their governments to burn through reserves to maintain public services.
And as prices recover, OPEC may find that its strategy has given rise to even fiercer competitors, who survived the worst oil bust in 30 years by becoming more efficient.
At an event here on Friday, Hess Oil chief executive John Hess recalled the words of the former oil minister of Saudi Arabia, Ali Al-Naimi, who, as prices headed below $30 a barrel earlier this year, said high-cost U.S. producers needed to “lower costs, borrow cash or liquidate.” Hess told Naimi, who also spoke at the event, the former oil minster had proven to have “the right vision.”
“Now the market is getting into balance,” Hess said. “Producers have to compete and it has to be on the basis of efficiency and cost.”
Few winners
Some analysts have viewed the deal to cut production as a retreat by OPEC, which underestimated the resiliency of U.S. shale drillers and hurt its members economies. Others say the cartel, by not intervening in the market earlier, accomplished much of what it wanted, lowering U.S. production and leaving behind a diminished U.S. shale industry. But ultimately, the extended downturn produced few winners.
Today, the oil industry finds itself in a very different world from the summer before that 2014 OPEC meeting, when crude was selling for more than $100 a barrel and investors were buying up any lease they could find. Since then, more than 100 North American oil and gas companies have filed for bankruptcy as of mid-October and the number of rigs operating in the United States is down below 600, less than one-third of the more than 1,900 rigs spread across the country two years ago. An estimated 350,000 workers have been laid off worldwide.
Despite a modest resurgence as crude has climbed from its low of $26 a barrel February to more than $51 Friday, the stock prices of Houston oil companies like ConocoPhillips and Apache Corp. are down more than one-third from the summer 2014. Lending to U.S. oil and gas companies has by and large shut down over the past 12 months, meaning the firms don’t have access to the capital needed to launch new projects ,said Andrew Slaughter, executive director of Deloitte’s Center for Energy Solutions
“Some of the U.S. independents have maintained strong balance sheets so they have financing capacity, but I would say that’s the minority,” said Andrew Slaughter, executive director of Deloitte’s Center for Energy Solutions. “It’s not something where you get a price (increase) and everyone can be back to work the next month. I think it would be an 18to 24-month recovery process.”
At this moment, ramping up operations is not a priority for many drillers. Oil and gas CEOs say they want to see prices in the $55 to $60 range for a sustained period of time before increasing spending. Following OPEC’s move to cut production, many analysts are forecasting that prices could rise to $60 next year and $70 in 2018.
After turning what was thought to be worthless rock into a flood of oil, drillers around Midland and South Texas were forced during the downturn to hone their drilling techniques and logistics to lower the cost of hydraulic fracturing and horizontal drilling that opened shale reserves. The challenge now will be seeing how much of those cost savings can be maintained as energy service companies like Halliburton and Baker Hughes unwind the deep discounts they offered producers during the worst of the bust and labor costs rise as companies try to lure workers back to the oil patch, said Michael O’Connor, a director at the consulting firm AlixPartners.
“They have to be thoughtful around maintaining their development costs, looking for the fields with the best economics,” he said. “If they continue to do that they could grow their production, but they have to be disciplined.”
‘We tend to cheat’
OPEC’s agreement to cut 1.2 million barrels a day gave a jolt to oil markets, with crude climbing 14 percent from Tuesday to settle at $51.68 a barrel in New York Friday. It was the highest closing price of the year.
In the days leading up to the decision, many analysts were skeptical that the cartel could make the deal. But, analysts said, these oil-dependent economies were also feeling the pain of stubbornly low prices. Saudi Arabia, for example, is running a budget deficit equivalent of 20 percent of the nation’s economic output — double the size of U.S. deficit during the worst year of the Great Recession, according to the energy research firm Wood Mackenzie. The Kingdom has pushed back major infrastructure projects, cut state employee wages and burned through $180 billion in financial reserves, a quarter of its coffers, as oil prices have languished.
At the Washington event Friday — staged by the think tank Center for Strategic and International Studies — Al-Naimi, who was dismissed as Saudi oil minister in May, said that when OPEC met in 2014 , members like Algeria and Venezuela wanted the cartel to reduce supply — only were not willing to do so themselves.
“Nobody wants to take a cut except Saudi Arabia,” he said. “There’s still more supply than demand (now). If (the OPEC countries) make a concentrated effort to reduce, there will be a balance. But that remains to be seen. Unfortunately, we tend to cheat.”
That tendency is among the reasons that many analysts and energy executives remain cautious about the OPEC deal. It won’t be known until mid-February, when OPEC nations report production figures, whether cartel members are sticking with the agreement. In addition, the deal is contingent on Russia and other non-OPEC producers, which meet later this week, lowering their output by 600,000 barrels a day.
Even before the OPEC production agreement, there were signs that the glut of oil supplies were shrinking and markets stabilizing. The Energy Department reported that as of Nov. 25, U.S. stockpiles were down to 488 million barrels — a decrease of 24 million barrels, or 5 percent, since April.
Labor force is key
For now, oil executives and analysts generally remain bullish on the future of the U.S. hydraulic fracturing industry. On Friday, Hess called it a business “still in its infancy” and said production from U.S. shale fields should hold steady at $50 a barrel and rise by 300,000 barrels a day at $60.
But finding workers to get those rigs up could provide the next challenge to the industry. After a severe downturn in which so many oil and gas workers saw their livelihoods disappear, enticing veteran hands back could prove easier said than done, said Bill Herbert, managing director at Simmons & Co.
“The bigger issues is not the solvency of the industry, it’s going to be the labor force,” he said. “We’re in a full employment economy, and people who were laid off are not exactly going to be salivating to get back into the industry.”