Many Shale Companies Are Unable to Ramp Up Oil Output
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The reason: Many independent companies are too financially strapped, have let go too many workers, or have idled too much equipment to immediately ramp up again.
Just as U.S. output fell more slowly than predicted—even as oil plunged from around $100 a barrel in 2014 to $30—it is likely to be slower in recuperating, even if prices rebound to $50 a barrel or more, some oil executives and analysts now say.
More than three dozen U.S. oil and gas producers plan to cut their capital spending for 2016 by nearly half, on average, compared with last year, according to a Wall Street Journal analysis of company financial filings.
Some of the largest U.S. oilfield-services firms have laid off 110,000 people in the past year, Evercore ISI analysts estimate, and many of those workers have no plans to return to the industry.
It isn’t clear that oil prices will continue their recent rally: Global crude prices fell 2.1% Monday to $39.53 as a tentative agreement by key members of the Organization of the Petroleum Exporting Countries to freeze production ran into obstacles.
Still, even if prices return to levels where shale drillers can make money again, many companies are vowing to be cautious. Some are tempered by what occurred last spring, when producers jumped back into drilling new wells after oil prices briefly hit $60 a barrel, inadvertently worsening a supply glut that ultimately made prices worse.
One reason output remained robust last year is that drilling and fracking wells got cheaper. Producers leaned on services companies to cut costs, and certain wells were still profitable even at lower prices. But now many companies say they have cut as much as they can.
In the Bakken Shale region, prices will need to be above $60 for benchmark West Texas Intermediate crude for at least three months before the area sees a meaningful uptick in drilling activity, said Lynn Helms, Director of North Dakota’s Department of Mineral Resources.
“If you’ve been on a strict diet for a long period of time, it takes a while to put the weight back on,” he told reporters Friday.
The U.S. Energy Information Administration estimates that U.S. oil output in February was down 600,000 barrels a day from last year’s peak of close to 9.7 million barrels a day—a 6% drop—and some of the biggest U.S. shale producers have said they plan to curb production by another 10% this year.
Experts such as IHS’s Daniel Yergin have predicted that U.S. shale drillers would emerge as the world’s new swing producers, stepping into a role traditionally filled by Saudi Arabia and other OPEC nations. The research firm said it still expects the U.S. will play that role in global markets, thanks to shale, but said current headwinds could delay a response to higher prices.
U.S. oil producers have built up an inventory of drilled but un-fracked wells, a dormant source of oil that could translate into a quick burst of new supplies. Such wells could churn out 620,000 barrels a day for six months if they were all brought online at once, Goldman Sachs analysts wrote in a research note last week.
But companies that want to put rigs back to work right away are likely to be limited by a smaller workforce and depleted equipment, which could make it difficult to coordinate a ramp-up.
Basic Energy Services Inc., a fracking firm that has cut more than 40% of its workforce since the downturn began, has estimated that only one in five laid-off workers will return, taking with them the expertise they developed during the years when companies mastered techniques like drilling and fracking wells that extended thousands of feet horizontally underground.
“We have lost a lot of good people. They won’t be back,” Chief Executive Roe Pattersonsaid at a conference last week.
After transferring from Houston to Calgary in 2013 to oversee the Canadian unit’s logistics and purchasing of the sand and nitrogen gas used in fracking, he lost his job last month. Now he is looking at companies in other industries that have large supply chains, where his skills could transfer easily.
“I can’t afford to wait idle on the sidelines for prices to recover,” said Mr. Janezic, 33. “I’ve got to get things rolling.”
Schlumberger has said some 1,700 of its young engineers with two or three years of experience are effectively on extended leave—receiving some elements of salaries and benefits, but not costing the company much until they are needed again.
“Quite a few of those guys have no problem taking a year off, traveling the world,” saidPatrick Schorn, Schlumberger’s president of operations, at the Credit Suisse Annual Energy Summit last month. “When there is an upturn, those are the first guys we call back.”
Still, many new workers will have to be hired and trained—a process that could take months, analysts say. And they will be working with rigs and pumps that have deteriorated or sometimes stripped apart to cheaply repair working equipment as it broke down.
“Coming back this time is going to be tough, no question about it,” said Tom Petrie,chairman of Petrie Partners, a boutique investment banking firm. “These cutbacks have been painful.”
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