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U.S. producers look for bright spots amid rising job cuts, bankruptcies

U.S. producers look for bright spots amid rising job cuts, bankruptcies

 

As the price of West Texas Intermediate crude inched toward $40 a barrel in late June, a sense of optimism began to stir among U.S. producers. As more businesses began to reopen from the coronavirus, and more people began driving, energy demand ticked upward.

But the struggles are far from over. The U.S. oil and gas industry has lost more than 100,000 jobs since early February. The Norwegian research firm Rystad Energy analysed U.S. jobs data and found that almost 45,000 of those losses came from producers, another 23,000 from service companies and about 16,000 from pipeline operators.

Many of the cuts have fallen hardest on Texas, which accounts for half of all U.S. drilling activity. About 45,000 jobs have been lost in the upstream energy industry in the state, Rystad found.

Prices and demand aren’t the only concern. Capital is in increasingly short supply as bankers cut back on credit lines for shale drillers. While some of the capital curtailment reflects doubts about long-term prices, it also shows that lenders have grown tired of financing wells that failed to produce as much as predicted.

As a result, lenders have been reassessing assets of oil companies’ books. Moody’s Corp. and JP Morgan Chase & Co. estimate that asset-backed loans to the industry will be reduced by as much as 30 per cent — equal to tens of billions of dollars. That may be enough to tip some weaker companies into bankruptcy.

In an earlier report, Rystad predicted 73 U.S. oil and gas companies may file bankruptcy this year, and that number likely will grow to more than 240 by the end of 2021.

All those bankruptcies could lead to additional financial burdens on the industry. One Democratic congressman from California has called for a federal program to pay the cost of environmental damage from abandoned wells.

Rep. Alan Lowenthal claims that 56,000 such wells are leaking methane and other air and water pollutants. He filed a bill last year that increase the minimum bond companies must pay on the federal oil and gas leases to ensure proper well cleanup if the company abandons them. Republicans have staunchly opposed the measure.

The Government Accountability Office, the investigative arm of Congress, found that 84 per cent of the bonds issued for oil and gas wells on federal lands are too low to cover remediation costs.
It may be another year before the industry sees meaningful production growth, and when it does, it will primarily be in the Permian Basin, the prolific region of West Texas and eastern New Mexico that has been the focus of the recent shale drilling boom. Other regions, such as the Eagle Ford Shale in South Texas— which had only one drilling permit request in late May — likely won’t see a rebound until 2024.

North Dakota’s once-booming Bakken Shale may have to wait until 2026, according to a forecast Wood Mackenzie. The Bakken, where production has fallen to 1.1 million barrels a day in June from 1.5 million last fall, has been the hardest-hit U.S. oil-producing region.

In the meantime, another basin — the Haynesville Shale in East Texas and western Louisiana — may be getting renewed attention. Several companies filed permits for new drilling in the region in June. Some industry observers believe that the slowdown in oil production could lead to higher natural gas prices, because there’s less gas being produced as a byproduct of oil wells. As a result, gas-rich plays like the Haynesville may look more appealing to producers.

Not everyone, however, is optimistic about a recovery. Goldman Sachs recently said it believes global oil production outside of OPEC will stagnate during the rest of the decade from lack of investment. Investors got burned financing risky projects when prices collapsed in 2014 and 2016, and even when prices climbed in 2017, most companies posted poor returns. Industrywide, investment remains well below 2014 levels, and the pandemic has exacerbated the trend, putting a number of large projects on hold.

One buyer, however, has been taking advantage of the downturn to diversify its investments. Saudi Arabia’s sovereign wealth fund has been snapping up stakes in North American energy companies with depressed market values, including Suncor and Canadian Natural Resources. The Saudis also bought shares of international majors, including Royal Dutch Shell, Total and BP.

While the fossil fuel industry continues to struggle, renewables have rebounded more quickly and continue to draw new investment. In June, Houston energy storage company Broad Reach Power, which is backed by a private equity group, said it plans to install 15 utility-scale batteries at sites in Houston and Odessa, in West Texas. It plans to store electricity when it’s cheap and sell it into the wholesale power market when prices jump, such as during the blazing summer months.

Texas ranks fourth among states for grid-scale storage capacity. The storage project builds on a burgeoning renewables industry in Texas, where 61 per cent of new power capacity growth between now and 2023 is expected to be solar-generated, according to the Electric Reliability Council of Texas, which operates most of the state’s power grid. Another 27 per cent will come from wind and 7 per cent from battery storage.  

Texas, which has long prided itself for being the cradle of the oil and gas industry, is now leading the way on renewables as well. It’s already the biggest producer of wind energy in North America, and with solar growing rapidly the state could retain its claim as the energy capital of the world, even as the nature of that energy changes.

Read the latest issue of the OGV Energy magazine HERE.

Published: 10-07-2020

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