Dean Barber

U.S. Oil is Poised for a Comeback

In Corporate Site Selection and Economic Development on July 17, 2016 at 9:59 am

She seemed upbeat despite her circumstances. We met her back in the spring at an eatery in a small town in West Texas on our way back to Dallas.

She was a waitress there, the victim of an industry slowdown that has dissolved a third of the Texas petroleum workforce in the past two years. Friend and colleague consultant Tim Feemster and I couldn’t help but ask her questions and she didn’t mind answering.

She said that she and her family had moved from Pennsylvania to Texas about five years ago to work in the oil fields. Times were good then and so was the money. While working as a safety officer for a drilling company, she was making a six figure salary, about five times more than what she was making in the restaurant.

“But just you wait,” she said with a smile and nodding with certainty. “The industry will come back, and I will be back at it, too.”

Her optimism appears to be warranted, according to a recent report by Goldman Sachs, which states that U.S. oil industry is about to stage a big comeback from the painful downturn and big job losses caused by oversupply.

More Production, More People

Goldman is forecasting American oil production to resume growing next year after the recent drop to two-year lows. About 700 oil rigs will be added to production — and each one supports an average of 120 to 150 employees.

As more oil fields come back on line, there will not be enough people to do the required drilling, well completion and other related work. To keep up with the expected ramp-up in drilling activity, the oil and gas industry would need to add 80,000 to 100,000 jobs between now and the end of 2018, according to the Goldman report.

In a blog entry/podcast last week, famed oilman T. Boone Pickens, sat down with John Hofmeister, a former president of Shell Oil, who predicted the price of oil will reach $80 a barrel this year and possibly go as high as $100 a barrel in 2017.

Those gentlemen know a lot more about oil than I ever will. Still, I tend to believe that nobody really knows what oil prices will be in the future. It would not be shocking to me for oil to hover around $50 per barrel for the foreseeable future.

Indeed, cheap oil, which wiped out nearly 170,000 oil and gas jobs nationwide since late 2014 and bankrupted more than 80 energy producers and oil-equipment suppliers in Texas, might be the new normal.

Cost Cutting Creates Opportunities

The oil market collapse (it bottomed out at $26 a barrel this past February) did fix one of the industry’s biggest problems: high cost inflation. In a low cost environment, companies have had to cut costs to avoid bankruptcy.

“Costs had gotten pretty astronomical,” said R.T. Dukes, an analyst at the energy research group Wood Mackenzie in an interview with theSan Antonio Express-News. “In a high-price world, you really seek out production at all costs. When prices are low, you focus on costs.”

Cost-cutting measures and layoffs have brought the cost of pumping shale oil in Texas down to $41 a barrel. The recent surge in oil prices back to around $50 a barrel is already encouraging more U.S. production.

Wood Mackenzie says oil companies in West Texas can make money in the Bone Spring and Wolfcamp oil plays with $37 a barrel oil, while their rivals in the Eagle Ford Shale in South Texas could turn a profit at $48 a barrel. The average break-even price in North Dakota’s Bakken Shale is $58 a barrel, while in Oklahoma’s Scoop region, it is $35 a barrel.

A Failed Strategy

U.S. oil production recently dropped below the 9 million barrel mark for the first time in nearly two years, caused in large part by a supply glut created in large part by a relentless pumping strategy employed by OPEC nations designed to deliver a deathblow to American producers. But the attempt has failed, as production in the U.S. is still twice of what it was in 2008.

Goldman Sachs predicts rig counts will double to 909 by the end of 2017, and that the supply from the Lower 48 U.S. states could increase by 600,000 to 700,000 barrels per day between the fourth quarter of 2016 and the end of 2017.

As more oil and shale companies in Texas and North Dakota start pumping again, that could keep a lid on gasoline prices, always welcomed news for consumers.

The U.S. Has the Most

What’s more, the U.S. holds more recoverable oil reserves than Saudi Arabia and Russia thanks in large part to its shale oil, according to a recent report by Norwegian consultancy Rystad Energy.

The U.S. currently holds an estimated 264 billion of barrels of reserves in existing fields, discoveries and yet to be discovered fields, according to Rystad.

That compares with 256 billion barrels for Russia and 212 billion barrels for Saudi Arabia.

More than 50 percent of remaining oil reserves in the U.S. are unconventional shale oil with Texas alone holding more than 60 billion barrels of shale oil.

But A Finite Supply

Still, it remains critical for the U.S. to focus on developing other, renewable forms of energy.

Rystad Energy estimates total global oil reserves at 2092 billion barrels, or 70 times the current production rate of about 30 billion barrels of crude oil per year.

“This data confirms that there is a relatively limited amount of recoverable oil left on the planet. With the global car-park possibly doubling from 1 billion to 2 billion cars over the next 30 years, it becomes very clear that oil alone cannot satisfy the growing need for individual transport.”

The Great Crew Change

In addition to having to cut costs to remain viable in a low-price environment, U.S. drillers are also having to deal with the looming retirement of thousands of older workers.

A demographic hangover is plaguing the industry, stemming from the last great downturn in the 1980s when scores of drillers went out of business, driving a generation away from the business. That has left a shortage of workers in their late 30s to 50s at a time today when companies try are trying to replace the Baby Boomers who make up much of senior management.

This problem is being referred to in the industry as “the Great Crew Change,” with companies trying to plug the gap by training younger employees, recruiting outside the industry and enticing veterans to hang on longer. It’s forcing drillers to hold on to hard-to-replace scientists and engineers amid the current downturn.

John Christmann, the CEO of Houston-based Apache Corp., told Bloomberg that his company runs a three-year professional development program for new hires designed to cement their ties to the business. About half the company’s technical staff are 36 or younger; another third are over 50.

“There’s a big gap from 1985 to 2000 when not very many people entered this business,” said Christmann. While Apache is prepared for the transition, the industry as a whole is “reeling a little bit because we don’t have a lot of those managers,” he said.

The wave of retirements is taking place at a time when the industry is bleeding talent. Oil and natural gas companies have cut more than 350,000 jobs worldwide since crude prices started to fall in 2014, according to a May report by Houston-based consultant Graves & Co.

The American Petroleum Institute says the oil, natural gas and petrochemical industries employed 1.4 million people last year. Companies will need to hire almost 30,000 workers annually over the next two decades to replace departing and retiring employees, according to the trade group.

Postscript: I will be on a long road trip east of the Mississippi in late July and early August and will be available to visit certain communities. See “Clifftop or Bust!” for more details.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. He can be reached at dbarber@barberadvisors.com or at 972-890-3733.  Mr. Barber is available as a keynote speaker.

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  1. I heard T. Boone Pickens speak for the 4th time on this subject last spring and he is bullish on the price of oil as Dean indicates. He also stated that the Saudi’s blame the US for the glut since we were producing over 10M barrels for a while when 10 years ago we were 3-4M. I agree with Dean that the combination of US, Saudi, and Russian oil production did produce the glut. In the end it seems the glut has been reduced if not eliminated for the price to continue to go up. One thing is very clear now to the US and the Saudi’s- OPEC does not have the choke hold on the price of oil they used to have. Good news for us in the US.

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