I know I’m not alone. Each day, as part of my morning routine, just as reliably as I brush my teeth and brew strong coffee, I check the price that oil is trading for on global markets.
How do I know I’m not alone? Because my first calls of the day – usually with AAPG leaders – usually begin or end with a reference to oil prices. We all know that watching the price of oil does nothing to boost demand, but still we watch, ever hopeful that today will be a good day in the markets.
Dallas Fed Quarterly Survey
The Federal Reserve Bank of Dallas is watching, too, as it monitors economic health in the Eleventh District, which comprises Texas, northern Louisiana, and southern New Mexico.
Late last month the Dallas Fed issued their latest quarterly energy survey, cataloging the responses to a variety of questions from 168 energy companies – 115 exploration and production companies and 53 oilfield services companies – operating or headquartered in their region.
The results of the survey were bleak.
The second quarter of 2020 showed continued deceleration in business activity, hitting the lowest level ever in the four-year history of this survey. The E&P sector reported significant decreases in both oil and natural gas production, with oil hitting an all-time low. Capital expenditures decreased both in E&P and oilfield services.
As the industry contracts so is unemployment on the rise, and according to the Dallas Fed the “fifth consecutive negative reading suggests an acceleration in job cuts.”
And yet, as Bloomberg reported in a June 24 story, some companies are beginning to bring production back onstream as oil hovers around $40 per barrel. They report that this trend is being led by companies who need cash to service large debt loads.
But don’t expect production to rebound quickly. Averaging the forecasts of five major consultancies, Bloomberg reports that “looking out 18 months, U.S. output will still be around 16 percent below its peak in February. It will probably be at least 2023 before the U.S. again hits its record close to 13 million barrels a day.”
If it ever does.
The Dallas Fed asked executives when they “expect U.S. drilling and completions activity to return to pre-COVID-19 levels.” Sixteen percent of respondents don’t think we’ll ever get back there. Their more optimistic colleagues – 3 percent – think it will happen in 2020, while 41 percent are looking at 2021 and 39 percent think it will occur in 2022 or later.
One of the big challenges, as the Bloomberg story explains, is that while restarting production from shut-in wells will provide a temporary boost to production, these wells typically experience rapid decline. It will take new wells to prevent this decline, but that takes additional investment capital, which is in short supply.
“Shale operators have burned through about $340 billion over the past 11 years, using borrowed money and equity raised from Wall Street, leaving little left over for investors,” the Bloomberg reporters write. “The end result: Energy stocks have fallen this year to less than 3 percent of the S&P 500 Index in terms of weighting by the companies’ market capitalization.”
One interesting feature of the Dallas Fed survey is that they invite respondents to also submit comments, which they summarize unattributed in their report.
There were a few that stood out to me:
“Collectively, producers in the oil industry are our own worst enemy. Instead of adapting and responding to market signals, we are constantly managing unmanageable levels of debt. This drives irrational decisions that over the long haul are detrimental to the economic health of the oil and gas industry.”
Another suggested “this downturn will weed out a lot of shale players who were effective ‘money changers’ who took willing investors and Wall Street for a ‘churning’ experience in shale over the last five years or so. Hopefully, real money might begin to look at real projects that make a real return on investment as we move forward … ”
Finally, “I’m a petroleum geologist and independent producer who has been involved in the oil and gas business for almost 50 years, and I have never experienced an environment such as what we are living through today. The sustainable investing (no carbon) position of many large Wall Street firms casts a long shadow on the capital-intensive petroleum industry. In my view, we will need transportation fuels and chemicals for the foreseeable future. This is even though electric cars will overtake internal combustion engines within the next 20 years.”
I don’t know if that last commenter is an AAPG member, but it would not surprise me if they were. Our industry continues to change and evolve, and with it, AAPG and its members.
Welcoming the New EC
As we begin a new fiscal year, I’d like to thank outgoing President Mike Party, Treasurer Richard Ball, Vice President of Sections Jeff Aldrich and House of Delegates Chair John Kaldi, for their leadership and support over the past year.
I’d also like to welcome incoming President Rick Fritz, who takes the chair of the Executive Committee, as well as incoming officers President-elect Gretchen Gillis, Treasurer Denise Stone, Vice President of Sections Linda Sternbach, and HoD Chair Steve Brachman to the Executive Committee. They join Vice President of Regions Bob Shoup, Secretary Stephanie Nwoko and Editor Bob Merrill as our leaders for fiscal year 2021.