While crude edges closer to $50 a barrel for the first time this year, oil and gas operators are hesitant to hoist the rigs and start digging.
Many oil and gas operators, reeling from a downturn that has forced budget cuts and layoffs, probably won’t put their feet on the pedals until next year – if oil prices can be sustained at higher levels. That’s a big if, industry watchers say.
Industry talk recently has centered on $50 as the catalyst to return workers to the fields. Now, talk of recovery starts at $60.
“The problem is, the companies have just been strained to the limit by their debt. I think we’re going to see a real slow response to $50 oil,” said Pete Stark, senior research director and adviser at IHS in Englewood, a worldwide consulting firm.
Al Walker, CEO of Anadarko Petroleum, Weld County’s largest producer, echoed that sentiment in an earnings call earlier this month:
“Do not expect us to increase our capital spending this year, even if oil exceeds $50,” Anadarko CEO Al Walker warned analysts in the company’s first quarter earnings call earlier this month. “We’ll be very patient as we look beyond 2016 to a sustained higher-price environment to increase capital and return to a growth mode, if warranted.”
The industry’s hey day has long since ended after prices plummeted from a peak of $100 per barrel in June 2014, down to a low of $26 this past February, a downfall that pushed even the largest companies to cut budgets and staff.
It may be another year before prices get to the point where operators are comfortable.
“I believe if you got to $60 or just north of that, you’d start to see certainly sustained production, meaning they’d be bringing some rigs back, and above that you’d start to see some growth,” said Adam Bedard, a longtime industry analyst and CEO of ARB Midstream, which is building a crude rail facility in Evans.
Though low prices mean cheaper gasoline at the pump, it has meant that traditionally high paying companies have laid off workers. Through April, Colorado has lost 5,500 positions in the mining and logging industries, the majority of which work in Weld County, producing 90 percent of the state’s oil.
Prices have been slowly climbing in the past month, but they are likely to be short-lived, as they seem to be based more on temporary disruptions in the international supply – the fires in Canada taking about 1 million barrels a day out of production, plus political turmoil in Nigeria that’s also disrupting supply.
“There’s been a lot of exogenous factors that depleted supply temporarily. But Canada will come back and Nigeria will too,” Bedard said. “You’re still faced with a situation where there’s a bit of supply. … It might take more (time) for it to run and stabilize. What’s troublesome is it’s got to be sustained. Banks need to loan money based on future prices of oil and some certainty of payback, so all that volatility in market exacerbates the difficulty in putting rigs to work.”
Anadarko is the No. 1 producer in Weld County, followed by Noble Energy. Both companies, which pump out more than 80 percent of Weld County’s oil, are positioned well in this downturn, said Erika Coombs, senior energy analyst with BTU Analytics in Lakewood.
Today, the DJ Basin is pumping out 350,000 barrels of oil daily, and that number is expected to slow this year while the market evens itself out, Coombs said.
“We have it rebounding and really growing over the next five years, reaching about 550,000 barrels a day by the end of 2021,” Coombs said.
There’s a good 1 million-barrel-a-day glut on the global market, pushing prices down. Add to that additions of production from Iran and Saudi Arabia, who show no signs of reduction, and that glut will continue.
Stark said United State’s production needs to get down to 8.5 million barrels a day before the market will rebalance – that’s 1 million less than the peak of 9.6 million a day in February 2015. As of February 2016, that number was still at 9.1 million.
“There are (several) scenarios depending on what’s going to happen with political decisions around the world,” Stark said. “We could have $45 oil for a while or go up to $80-$90 oil, and it just depends on what those things are going to do.”
For many analysts in the industry, 2017 will be slow, with prices ranging in the low $50s, with no accompanied growth. In fact, production of the Denver-Julesburg Basin, which encompasses Weld County, is not projected to grow, though it has some of the best economics in the country.
Companies drill based on their economics. If they can’t sell what they drill above their costs, they stop. What they’ve done in the past several months is drill wells, but not complete them, or get them to the point of production. They’re holding off production in hopes of a better pricing environment.
Maria Sanchez, manager of energy analysis for Ponderosa Energy in Denver, predicts prices will rise, but slowly. She expects prices to get to $67 – in 2019. The average for 2017 is expected to stay in the low $50s.
A small help for companies is that in this downturn, they’ve found efficiencies. They’ve in many cases cut drilling costs down by $1 million per well. When prices return and the market responds, they’ll be in better shape, even if prices don’t come close to the $100 peak.
“We have seen improvement in drilling and completion costs in every quarter,” Sanchez said. “The number I’ve seen on average is about 20 percent improvement or lower costs compared to last year, but we see improvement every time they come out.”
Coombs agreed:
“Long term, we expect crude to be more in the $60-$70 range. That’s largely due to all of the efficiencies that producers have realized and how much better they’ve gotten here in the U.S.”
Even those efficiencies have a way of coming back to the middle. In the downturn, service companies that operators hire to drill and produce the wells, lowered their prices substantially to compete. Prices will go back up, warns Craig Rasmuson, chief operating officer of Synergy Resources, based out of Platteville.
“The service companies have done such an admirable job of bringing prices down, they’re going to need to make better margins,” Rasmuson said. “The cost of drilling and completing a well will rise as commodities rise. We’re just going to have to account for that and see what it costs to get a quality well.”