I hope this column finds everyone healthy and staying safe. I want to thank the membership for your patience and understanding regarding decisions on the Houston Annual Convention and Exhibition. By the time you read this, we should have an announcement out. The Executive Committee, along with the staff, have worked hard on a solution that does not put our members into harm’s way and takes into account the financial aspects of that decision.
We have been through a month of lockdown due to the coronavirus, and in that time, we have seen oil prices go into negative numbers. This is paper barrels! The commodity market has a place in our business and it’s helpful to understand the history and how the commodity market has changed our industry. Back in the ‘70s when I started in the business, big oil companies all had fairly large exploration groups to find the oil to feed their refineries and have feed stock for their chemical plants. In the early ‘80s, when we saw WTI start trading on Wall Street, things started changing. Refineries could go to the commodity market and get all the oil they needed to supply their businesses. With the decline of oil prices in the ‘80s, the general thought was that Big Oil could buy reserves on Wall Street more cheaply than drilling. There were a lot of large mergers, exploration was curtailed and many geologists lost their jobs because of this.
Prior to being able to hedge, when companies borrowed money for drilling and production, they had no way to guard against a downturn in prices. During the ‘80s price route, the other consequence was bank failures. Hedging has given companies the ability to have a short-term backstop on the price that they receive for oil. Not all companies employ hedging, and the amount that companies hedge varies. Hedges can cost companies money if prices run up above the price you are hedged at – you do not get that extra reward. But in cases like today, it might be what keeps some companies out of bankruptcy within a month of a price drop.
Hedging and the commodity markets are not about supply and demand but, rather, about perceived supply and demand. With the United States and most of the world’s large economies having shut down, demand has dropped dramatically at a time when the shale revolution, along with an oil price war, have increased the supply going to the market. Storage is now the word of the day. Most all predictions show storage to be full by mid-June. At that point, the only crude that will be moving will be daily demand.
As the quip goes, “Outside of that Mrs. Lincoln, how was the play?” The past month has not been good for the industry we love and in which we all earn our livelihood. Keep in mind that, due to the coronavirus, we are not alone. Economists are predicting that unemployment will go over 15 percent and might reach 20 percent before we start going the other direction.
The most important number to be watching is demand. Demand has to bottom out and start increasing. We have to bring the economy back. People have to get back to work and we need to start flying again. This is not an endorsement of any position, but the reality regarding a potential turnaround in the oil market.
Members in Transition
AAPG is trying to help as much as we can in this unprecedented time. The Society of Petroleum Engineers has a program called “Members in Transition,” or MiT, which has been running in Houston for several years. AAPG will be partnering with SPE to expand the program to include geologists in Houston and start similar groups in Midland and Denver. The program is designed to help people that might be displaced from their jobs by equipping them with a toolbox for moving into another segment of the oil industry or becoming self-employed. With the assistance of Susan Nash at AAPG headquarters, a toolkit is being prepared that you will be able to access. That toolkit will include websites where you can find data to help if you move toward a career as an independent geologist or consultant. AAPG is also trying to have local webinars out of the various regions and sections for members to learn and expand their knowledge. Watch for an announcement coming from AAPG concerning these events.
AAPG is also putting together a carbon capture utilization and storage conference for January 2021. As CCUS gains more steam around the world, this could open up jobs for geologists. There will be a need for a very good understanding of the reservoir that will be used for storage, and that will take geological expertise. Enhanced oil recovery projects that employ the use of CO2 is one aspect of CCUS, which is another place where geological expertise is needed. Watch for farther detail.
Until next month stay safe and watch for the AAPG webinars.