Texas oil industry insiders are spooked about rapidly decling oil prices

Courtesy Oil Investor

Just as quickly as it emerged, the oil boom is crashing.

Drilling budgets across Texas and the world are being slashed. Crude prices today are almost 60 percent lower than they were six months ago. The last time the world saw such a rapid descent was the financial crisis of 2008. Before that, it was 1986, when two thirds of Texas’ drilling rigs shut down in two years’ time.

It is a sharp turnaround for the Texas oil industry, which in just five years tripled its production and drove hundreds of billions of dollars into the economy.

For decades Texas oil had slowly been disappearing from the world market. The big companies were chasing oil buried under ocean floors off the coasts of Russia and Nigeria and in thick, tar-like crude in western Canada. Then came advances in hydraulic fracturing and the shale drilling revolution. Suddenly, what had been considered third-rate fields in Texas’ Eagle Ford and Permian Basin became some of the most sought-after prospects in the world.

Now concern is deepening that the U.S. oil industry is entering what could be a sustained downturn.

“It’s going to be devastating. For all practical purposes we lowered the barrier to entry so low that every Tom, Dick and Harry could go out and rent a rig,” said Fadel Gheit, a managing director with the investment firm Oppenheimer & Co. “The longer prices stay down, the more companies are throwing in the towel. We will see a lot more pain before we get any gain.”

Supply and demand
As with those earlier busts, the cause is simple supply and demand. For years, the world’s oil supply, buoyed by the U.S. fracking boom and a period of relative stability in Middle East production, was on the rise even as demand, driven by more efficient cars and economic struggles in Europe, was weakening. Eventually, the markets caught on. For now, Texas continues to pump oil at increasing rates. But the oil industry operates on a delayed fuse. Contracts must be wound down. Billions of dollars in investments must be considered.

As U.S. shale producers continue to announce drilling budget cuts of 20 to 35 percent this year, some analysts are predicting the state’s oil production will plateau in coming months. After that — if prices do not rebound — production will begin to decline.

Signs of decline are already emerging. The numbers of drilling permit applications filed with the Texas Railroad Commission is down 45 percent since last March. U.S. rig counts are falling at the fastest rate in more than two decades.

As the oil boom ramped up, the 7:30 a.m. Southwest Airlines flight from Dallas to Midland turned into a cattle car of oil workers and executives traveling back and forth. And then one day it wasn’t.

“We had a couple guys going out to Midland on the Southwest flight. Usually you have to book a week in advance. And this morning it was half full,” Chris Cooper, CEO of Oilfield Water Logistics in Dallas, said last week.

So far, the full brunt of the price collapse has not hit the Texas oil fields. But layoff announcements are flowing fast.

Oil field services giant Schlumberger announced Thursday that it was cutting 9,000 jobs, 7 percent of its worldwide workforce. Halliburton, which merged with Baker Hughes late last year, is laying off an undisclosed number of employees in its Houston headquarters on top of 1,000 job cuts across Europe, Africa, Asia and Australia. And the European giant Shell announced earlier this month that it would cut 5 to 10 percent of its workforce in western Canada’s oil sand fields, which have some of the highest oil extraction costs in the world.

About 300,000 people work in the Texas oil and gas industry, 50 percent more than did four years ago, according to federal labor statistics. They came from all over to work in an industry where even the unskilled can earn close to six-figure salaries.

Hiring has now come to a virtual halt as companies weigh the risks of laying off employees they invested heavily in training, said Tobias Read, CEO of the Houston recruiting firm Swift Worldwide Resources. “It’s gone from frenzy to freeze,” he said. “Next is reduction.”

In the Eagle Ford, everyone is on edge waiting for layoffs to begin. Mike King, who runs a workers’ camp in Carrizo Springs, south of San Antonio, said Thursday that he was still above 75 percent capacity but was worried it wouldn’t stay that way for long.

“There’s so much speculation. It’s hard to know what reality is,” he said. “When this stuff changes, it changes rapidly. This afternoon I could get a call from one of our clients that all our guys are out of here, we lost our contract.”

For now, economists are preaching that a downturn in production will not have the same devastating impact it had on the Texas economy in the 1980s. Then, the wave of defaults on loans to oil companies sent a shock wave through the finance sector, forcing the closure of seven of the state’s 10 largest commercial banks.

The economy is more diversified now, said Mine Yücel, director of research for the Federal Reserve Bank of Dallas. And the flip side of low crude prices — cheap gasoline — is expected to boost consumer spending.

Even so, less demand for pipes and drilling equipment would threaten recent industrial expansion along the U.S. Gulf Coast. Already U.S. Steel has announced it is laying off 142 workers at a pipe-finishing plant in Houston.

How low will it go?
Watching the daily tick-down of West Texas Intermediate has turned into a running guessing game of “how low will it go?”

Just a few months ago, analysts predicted the price would bottom out at $70 a barrel, and then $60. Now it’s at $46, and many have given up trying to guess when the bottom will come.

At a speaking engagement in Dallas Tuesday night, T. Boone Pickens, the outspoken energy investor, repeated his prediction that once U.S. production slows, prices will rebound and be close to $100 a barrel in 12 to 18 months.

“I like to get out in front of it,” Pickens said. “We’ll see if I’m right.”