Oil in the age of coronavirus: a U.S. shale bust like no other

BUSINESS NEWS
APRIL 15, 2020 / 1:06 AM / UPDATED 7 HOURS AGO

Oil in the age of coronavirus: a U.S. shale bust like no other

Jennifer Hiller, Liz Hampton
7 MIN READ

HOUSTON/DENVER (Reuters) – Texas oilman Mike Shellman has kept his MCA Petroleum Corp going for four decades, drilling wells through booms and busts and always selling his crude to U.S. oil refiners.

FILE PHOTO: The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, U.S., November 22, 2019. REUTERS/Angus Mordant/File Photo

But now the second-generation oilman has abandoned drilling any new wells this year and postponed some maintenance amid a sharp drop in global oil prices and brimming storage tanks. He is considering shutting most of his production down, for the first time ever.

Oil fields from Texas and New Mexico to Oklahoma and North Dakota are going quiet as drilling halts and tens of thousands of oil workers lose their livelihood. Fuel demand has plunged by as much as 30 million barrels per day (bpd) – or 30% – as efforts to fight the coronavirus pandemic have grounded aircraft, reduced vehicle usage and pushed economies worldwide toward recession.

“What scares me is not even being able to sell the product,” the grizzled oil hand said from his firm’s San Marcos, Texas, headquarters.

Refiners and other buyers are warning they may refuse his oil once contracts expire this month, he said. Or they may offer to buy at a price below his costs, so he is preparing to dip into retirement savings to pay employees, he said.

The governments of global oil producers and consumers are seeking to make unprecedented cuts to overall supply of some 19.5 million bpd. U.S. President Donald Trump heralded the deal to cut supply as one that would save hundreds of thousands of U.S. jobs.

But oil prices fell again this week, dropping as much as 10% on Tuesday, because even those cuts may fail to stem the glut. Prices remain far below production costs for many U.S. producers, including those in the U.S. shale fields – the scene of a revolution in the energy industry over the past decade that made the United States the world’s top producer.

 

Across the United States, up to 240,000 oil-related jobs will be lost this year, about a third of the onshore and offshore oilfield workforce, estimates consultancy Rystad Energy.

The U.S. oil boom died on March 6, the day Saudi Arabia and Russia ended a four-year pact that curbed output and gave shale a price umbrella. Shale firms have accrued hefty debt during the years of expansion, leaving them exposed to the price crash that followed.

In March, U.S. oil futures tumbled to $20 a barrel, a third of the January price and less than half what many require to cover production costs. The March drop led dozens of shale producers to cut spending and several retained debt advisors.

“As soon as the virus hit and oil prices dropped, they sent everybody home,” said Joel Rodriguez, chief administrator of La Salle County, home of Texas’s second-most productive oilfield.

Shale oil producers face well closures and “industry wide financial distress” even after the OPEC cuts, said Artem Abramov, head of shale at consultancy Rystad Energy. In some fields, he expects regional prices will hit single-digits per barrel, he said. (For a graphic, click here)

Spending on oil field services will fall 21% to $211 billion this year, the lowest since 2005, according to researcher Spears & Associates.

 

Unlike the 2014-2016 oil bust, lenders are not making more financing available to producers, said Raoul Nowitz, head of restructuring at SOLIC Capital Advisors. He predicts up to 60 oil producers will seek protection from creditors this year, and many will not emerge under new owners. Some banks are setting up operations to take over and run failed producers.

LAYOFFS AND SHUT-INS

OPEC’s cuts may not be deep enough for oil producer Texland Petroleum, which operates 1,200 wells in the Permian Basin, the top U.S. oilfield. U.S. refiner and pipeline operator Phillips 66 asked President Jim Wilkes to reduce his deliveries by 15%, and another buyer canceled his contract outright.

“We’ve never had a time when we couldn’t sell the oil we produce. And that’s going to happen this time,” said Wilkes.

Average daily U.S. oil production this year will fall 500,000 bpd, to 11.8 million bpd and sink another 700,000 bpd next year, the Energy Information Administration estimated. (For a graphic, click: here)

Production cuts are too late for workers like Jeremy Davis, a 36-year-old who in March lost his business development job at Advanced BioCatalytics, which makes chemicals for hydraulic fracturing.

“They won’t be fracking many wells for the rest of the year,” said Davis, who after 16 years in the oilfield would now consider work outside the oil business. “I can’t wait around for the industry to come back,” he said.

Wall Street investors had already pulled back on the shale sector over the past couple of years because of poor returns, leaving producers with limited options for refinancing, said industry executives and analysts.

“There is no more lifeline,” said Lance Loeffler, the finance chief at top U.S. fracking service provider Halliburton Co.

PayZone Directional Services, a Denver-based driller, threw in the towel last month.

We could have stayed open and run until the money was gone but sometimes you just have to know when to cash in your chips and leave the table,” said Beth Thibodeaux, chief executive officer.

TIME TO MOVE ON

So much unsold oil is sloshing around that some pipeline operators, fearful of having their lines clogged, are insisting that producers halt connecting new wells and prove they have buyers or storage outlets before oil from existing wells can be put into a line.

They have warned “by mid-May storage is full” and will refuse to take any more, said Scott Sheffield, CEO at Permian Basin producer Pioneer Natural Resources.

He and some other executives in Texas and Oklahoma want state regulators to mandate up to 20% output cuts, sparing only the smallest producers. In Texas, energy regulators on Tuesday heard Sheffield call for a state order to halt 1 million bpd from its shale fields to prevent sale at below production cost.

 

MCA Petroleum owner Shellman said he tells friends who lost their jobs that it is time to leave the oil business. “It’s not ever going to be like it was.”

Shellman, who as a youngster got his first taste of the oil business accompanying his parents to their own oil wells, has promised to pay his employees from savings even if they have to shut in wells. But the pain goes well beyond Shellman’s wallet.

“From an emotional standpoint, this is killing me,” he said.

Reporting by Jennifer Hiller in Houston, Liz Hampton in Denver; editing by Gary McWilliams and Edward Tobin

Beyond the Oil-Industry Bloodbath

Feb 24, 2016 By Bradley Olson WSJ
Executives from BP, Hess and Suncor strike a confident stance in a protracted period of low oil prices.

HOUSTON—Beleaguered oil and gas executives gathered here for a global energy conference sounded a common message: Blood may be in the water, but it isn’t ours.

Forced to reckon with a prolonged period of low energy prices, oil chiefs at the annual IHS IHS -0.27 % CERAWeek energy gathering sought to portray themselves as steely survivors in an industry grappling with spending cuts and asset sales

Many executives counted how many previous crashes they had weathered. Some took solace in the musings of “Persian wise men” and philosophers from the 19th century.

Industry leaders nonetheless were emphatic on two points: Their companies will pull through, and whenever the price rebound comes, they will be ready to take advantage of it.

“Times are tough, you’d almost call them brutal right now,” said Lamar McKay, BP BP -1.59 % PLC’s deputy chief executive. “But we will adapt. We will make it.”

The words at times seemed at odds with immediate financial realities, although many were taking a long view. BP, for example, reported a $5.2 billion loss in 2015 and earlier this month announced an additional 3,000 job cuts.

Hess Corp. HES -0.52 % chief executive John Hess touted his company’s survival prospects, saying among other things he sees lower costs than peers in North Dakota. Yet, the company saw a loss of more than $3 billion in 2015, its first in more than a decade.

“Our company has some of the best acreage,” Mr. Hess said. “We can be more resilient as prices recover.”

The mood reflects the realization that no cavalry is coming. Energy companies are likely to stay mired—for months if not years—in a global oil glut that has sent crude prices to $30 a barrel.

That became clearer Tuesday when Saudi oil minister Ali al-Naimi told a packed ballroom here that the kingdom had no plans to cut its output to boost prices. Instead, the world’s largest oil exporter is banking on market forces to drive out companies saddled with higher production costs. That, in turn, would reduce global supplies.

Mr. Naimi said his country was prepared to withstand $20 crude if needed to thin the herd.

Oil prices, which had rallied last week on news of a tentative agreement by Saudi Arabia, Russia, Venezuela and Qatar to freeze oil output before falling on Mr. Naimi’s comments Tuesday, edged 0.9% higher on Wednesday to $32.15 a barrel.

Energy companies have cut more than 300,000 jobs world-wide since mid-2014, when crude-oil prices began their tumble from $100 a barrel, according to Houston consulting firm Graves & Co. Globally, nearly $1.5 trillion of spending will be canceled from 2015 to 2019, according to IHS, a consulting and analytics firm. The spending cuts will push U.S. shale output down by 600,000 barrels a day this year and by 200,000 barrels a day in 2017, according to a forecast unveiled here on Monday by the International Energy Agency.

Troubled energy companies also can’t count on well-financed white knights to save them by writing fat checks for oil and gas acreage—at least not until oil prices show signs of stabilizing, said Bobby Tudor, CEO of energy-focused investment bank Tudor, Pickering, Holt & Co. “There’s just no money coming into the system,” Mr. Tudor said.

At least 48 North American oil and gas producers have filed for bankruptcy protection since the beginning of 2015, imperiling more than $17 billion in debt, according to law firm Haynes and Boone.

More are soon to follow, shale pioneer Mark Papa, the former CEO of EOG Resources Inc. and now a partner at energy-focused private-equity firm Riverstone Holdings LLC, told attendees. There will be “a lot of bodies, a lot of bankruptcies,” said Mr. Papa.

Saudi Arabia’s refusal to cut output could bankrupt as many as half of all shale producers, Scott Sheffield, CEO of Pioneer Natural Resources Co. PXD -0.20 % Not his company, though, he said Wednesday in an interview. Pioneer lost $623 million in the fourth quarter and has cut its 2016 budget to $2 billion. But, he also voiced his concern that the industry may not be in a position to take advantage of a rebound.

“When it’s time for us to respond in 2019 and 2020, we are not going to be able to respond quick enough,” he said.

The prevailing sentiment this week was certainly a departure from the swagger of previous years, when executives emboldened by high prices and the heady promise of shale oil touted multibillion-dollar expansion plans or “moonshot” drilling programs. Still, some CEOs sought to convey confidence that, while the industry may suffer, their companies were well positioned to ride out the storm.

“We will be one of the last guys standing,” said Steve Williams, CEO of Suncor Energy Inc., SU 1.39 % which is selling assets to raise cash for dividends.

While many speakers acknowledged the current hardship, they also took comfort in the idea of an eventual rebound, asserting that the era of low prices has chastened them.

Night is darkest before dawn, said Joe Kaeser, CEO of Siemens AG SIEGY -1.84 % . His remarks captured the Darwinian mood. To survive a bear attack, one needn’t outrun the bear, just out-sprint another person running for his life, Mr. Kaeser joked.

Former BP CEO John Browne, now executive chairman of L1 Energy, quoted German philosopher Georg Wilhelm Friedrich Hegel in expressing hope that the industry will be better prepared compared with past crashes once prices rebound.

“Hegel says if there’s one thing history teaches you, it’s that history doesn’t teach you anything,” Mr. Browne said. He added: “I hope that we will actually do the things that we can do properly and just don’t get carried away as we did during the high prices.”

—Erin Ailworth, Alison Sider and Chester Dawson contributed to this article.

Write to Bradley Olson at Bradley.Olson@wsj.com

Another Oil Crash Is Coming, and There May Be No Recovery

http://bloom.bg/1OubYHH (See Video)

Superior electric cars are on their way, and they could begin to wreck oil markets within a decade.

February 24, 2016 — 4:45 AM ES Bloomberg

 

It’s time for oil investors to start taking electric cars seriously.

In the next two years, Tesla and Chevy plan to start selling electric cars with a range of more than 200 miles priced in the $30,000 range. Ford is investing billions, Volkswagen is investing billions, and Nissan and BMW are investing billions. Nearly every major carmaker—as well as Apple and Google—is working on the next generation of plug-in cars.

This is a problem for oil markets. OPEC still contends that electric vehicles will make up just 1 percent of global car sales in 2040.Exxon’s forecast is similarly dismissive.

QUICKTAKEOil Prices

The oil price crash that started in 2014 was caused by a glut of unwanted oil, as producers started cranking out about 2 million barrels a day more than the market supported. Nobody saw it coming, despite the massively expanding oil fields across North America. The question is: How soon could electric vehicles trigger a similar oil glut by reducing demand by the same 2 million barrels?

That’s the subject of the first installment of Bloomberg’s new animated web series Sooner Than You Think, which examines some of the biggest transformations in human history that haven’t happened quite yet. Tomorrow, analysts at Bloomberg New Energy Finance will weigh in with a comprehensive analysis of where the electric car industry is headed.

Even amid low gasoline prices last year, electric car sales jumped 60 percent worldwide. If that level of growth continues, the crash-triggering benchmark of 2 million barrels of reduced demand could come as early as 2023. That’s a crisis. The timing of new technologies is difficult to predict, but it may not be long before it becomes impossible to ignore.

Drillers Unleash ‘Super-Size’ Natural Gas Output

Drillers Unleash ‘Super-Size’ Natural Gas Output

Sept 1, 2015 By Russell Gold

Applying newer fracking methods to existing field offers potential for more and cheaper fuel

Newer production techniques being applied to a natural-gas rich area that stretches from northeast Texas into Louisiana are affecting U.S. pricing because of its potential to ‘super-size’ output in an area close to many fuel pipelines. Photo: Douglas Collier/The Shreveport Times/Associated Press

The U.S. may have far more natural gas than anyone imagined, all reachable at a profit even with today’s bargain-basement prices.
Experimental wells in Louisiana by explorers including Comstock Resources Inc. CRK -10.49 % and Chesapeake Energy Inc. CHK -3.07 % are proving highly lucrative thanks to modern drilling techniques and the sheer volume of fossil fuels that can be coaxed out of the ground.
The trick is applying supersize versions of the horizontal-drilling and fracking techniques that worked successfully elsewhere to an area that hasn’t seen this approach yet. The gains come from extending the lateral portions of wells by thousands of feet and pumping them full of enormous volumes of sand, chemicals and water to flush out more hydrocarbons.
So far, the impressive results have been confined to a small area in a single Louisiana parish near the Texas border. But if the approach works across the giant Haynesville Shale, which spans 120 miles across both states, the era of low American gas prices could extend for decades into the future, experts say.
“There’s a large likelihood that the United States will be enjoying very low gas prices for a very long time, maybe 20 years,” said Mark Papa, who has monitored Haynesville developments as a partner at Riverstone Holdings LLC, one of the biggest energy-focused private-equity firms in the U.S.

The field produces 8% of the nation’s natural gas, making it the second largest after the giant Marcellus Shale in the Northeast. Because it is located in Louisiana, near several interstate pipelines, potential export facilities and industrial consumers, an increase in gas production in the Haynesville has an outsize impact on gas prices across the entire country.
The cost of natural gas matters because the fuel increasingly powers the U.S. economy and is critical to the Obama administration’s push to reduce carbon emissions in electricity generation. American gas consumption has risen at a 2.4% annual growth rate for the past decade, while demand for coal has fallen by 2.7% and oil by less than 1%, according to the federal Energy Information Administration. Gas now is used to generate about 30% of U.S. electricity and heat nearly half of all American homes.
Domestic natural gas is abundant and inexpensive, largely due to the newer drilling and extraction techniques that came into widespread use a decade ago.
The Haynesville Shale was a popular location for energy companies to drill in 2007 and 2008, when U.S. gas prices briefly topped $13 a million British thermal units. Local governments in Louisiana, flush with tax receipts, handed out bonuses to employees and built new high-school football fields.
But the region’s gas was buried in deep, hot rocks, making it relatively expensive to produce. And when gas prices fell to below $4 a BTU in 2009, energy companies moved their drilling rigs elsewhere. Some went in search of more lucrative oil in North Dakota and Texas; others went northward to Pennsylvania, where the gas-rich Marcellus Shale was less costly to produce.
But a few companies never left and kept drilling a handful of wells each year. Recently, Comstock, Chesapeake and closely-held Vine Oil & Gas LP drilled Haynesville wells that suggest the gas is economic to exploit at today’s lower prices.
In August, Comstock officials told investors that it could get a 30% return on its new wells even with gas at $2.50 a million BTUs. The Frisco, Texas-based company plans to drill more wells in Louisiana’s Haynesville than it will in the oily Eagle Ford Shale in South Texas.
Comstock shares have tripled since it released news of its new Haynesville wells. “It was a bold move to return to the Haynesville and I know there were a lot of doubters out there,” Kim Pacanovksy, an equity researcher at Imperial Capital LLC, said on an investor call with Comstock management, “but you’re starting to see dividends now, so congratulations.”
Chesapeake’s management also is heralding its Haynesville results. Similar to Comstock, the company is drilling gas wells with longer horizontal legs and using more sand and water to crack open the rocks.
“Applying this technique has really doubled the area that we can drill in the Haynesville, Jason Pigott, a Chesapeake executive vice president, told investors.
‘A brilliant example of how the cost of supply continues to come down.’
— Robert Clarke , Wood Mackenzie research director
The costs to hydraulically fracture wells, the process of pumping water, sand and chemicals into the ground under high pressure to force out the fossil fuels, have fallen in the past year. This is particularly evident in the Haynesville, which the U.S. government classifies it as the second-largest gas deposit in America behind the Marcellus.
“This is a brilliant example of how the cost of supply continues to come down,” says Robert Clarke, a research director at Wood Mackenzie, an energy consultant. Newer Haynesville wells are producing more gas, are larger and are being drilled more quickly, he said.
Mr. Clarke cautioned that these experimental lower-cost wells have been drilled in a relatively small area of the Haynesville and by a small number of companies.
Mr. Papa, the former chief executive of EOG Resources, said abundant, inexpensive gas will have a profound impact on power generation markets and the overall economy.
“The power of the natural gas story on the U.S. economy is still underrated,” he said.
Write to Russell Gold at russell.gold@wsj.com

The Saudis Gambled and Texas Won

OPINION COMMENTARY

Energy innovators across the U.S. will always beat those who bet against capitalism.
By GLENN HEGAR
Aug. 31, 2015 7:20 p.m. ET
In November 2014, the leaders of Saudi Arabia made one of the biggest bets in history. Their strategy was flawed, and they’ve already lost.

In an OPEC meeting that month, Saudi Arabia announced it would maintain high oil-production levels despite falling prices. The Saudis were betting that by keeping prices low they could protect their market share and kill America’s energy renaissance—a rebirth driven largely by Texas, which produces 37% of America’s oil and 28% of its marketed natural gas.

An oil well in Garden City, Texas. ENLARGE
An oil well in Garden City, Texas. PHOTO: GETTY IMAGES
The Saudi strategy seemed to make sense. The conventional wisdom was that energy producers working in “tight” shale formations would be squeezed by low prices, since their extraction methods—hydraulic fracturing and horizontal drilling—are more expensive than conventional drilling. So, surely, once that happened Texas would be in serious trouble.

Columnists at the New York Times and elsewhere said the “Texas miracle” was fading, or even dead . . . and some of them seemed happy about it.

But an interesting thing happened on the way to the collapse of the Texas economy—it didn’t collapse.

First, many people still don’t seem to realize how diversified the state economy has become. In 1981 oil and gas production and its support services accounted for nearly 20% of Texas’ gross state product. Today, after years of incredible growth in the industry, it contributes less than 14%.

Dallas and Austin are booming today, but not because of oil and gas. Even in the 1990s when oil spent much of the decade at less than $30 a barrel, the state economy grew steadily.

And despite the slump in energy prices, oil and gas production in Texas and the U.S. has continued to rise. In fiscal 2015 oil prices were lower than my office had predicted, but revenues from Texas’ oil-production tax came in higher than expected, at nearly $2.9 billion.

Opinion Journal Video
Texas Comptroller Glenn Hegar on how the Lone Star state’s economy has thrived in the Obama era. Photo credit: Getty Images.
What the Saudis and the naysayers closer to home seem to have forgotten is that the free market is the greatest incubator of technological innovation. Energy producers in this country have gauged the challenges of lower prices, are working to tackle them, and it’s paying off.

The technology behind shale production is advancing rapidly, and its costs are falling. Today the industry can tap multiple separate oil pools from a single vertical hole, drilling horizontally through miles of rock with computer-guided, steerable drill bits. Some of these “octopus” wells can feature as many as 18 horizontal shafts.

Articles about falling rig counts don’t take this into account. We’re seeing additional innovations such as the use of recycled “fracking” water, carbon dioxide and other substances to break formations, reducing the use of precious fresh water in drilling.

An extended period of below-$40 prices—if that’s what’s ahead—will have an effect on the industry and many families will have to endure consolidation and layoffs. Weaker and overleveraged players will go out of business. The oil industry as we knew it before prices dropped may never be the same.

But if history is any guide, oil and gas prices won’t remain low forever. And the technology, the talent and the infrastructure associated with America’s energy renaissance aren’t going away. They’re new facts in the global landscape. When prices rise, American capital will flow back to the oil patch and production will ramp up again.

OPEC’s gamble to kill American innovation was a short-term strategy without an endgame, and no appreciation of how the strategy would spur greater efficiencies and innovation in the U.S. Call this a gentle reminder: It is never wise to bet against capitalism, especially in Texas.

Mr. Hegar is the Texas comptroller of public accounts.