Industry in Flux: Oil and Gas jobs remain on the line as prices drop
No group of people knows how badly the oil industry is suffering in the United States more than the oil workers of south Louisiana.
Oil production and service companies, which employ a significant portion of workers who live in the Houma-Thibodaux Metropolitan Area, have let hundreds of people go in recent months.
According to statistics provided by the Louisiana Workforce Commission, of the 1,100 jobs lost in the last year, 700 were in the “mining and logging” category, which includes offshore oil service companies. The commission attributes the loss of those jobs to the falling price of oil.
As with all unemployment statistics, LWC’s figures do not include people who have given up hopes of finding a job. It only counts those who are currently receiving unemployment benefits.
But with oil prices continuing to dip, the fear of becoming a jobless statistic is shared among many offshore workers.
According to Don Briggs, president of the Louisiana Oil & Gas Association, there are now 71 oil derricks on Louisiana soil where, in past years, the state has averaged 114 and 31 offshore production platforms when there were generally 60.
Energy economist Loren Scott said Houma and Lafayette are suffering the most.
West Texas Intermediate crude oil, the benchmark price index for U.S. produced crude, was trading at $44 per barrel in mid-September, a price not seen since early-2009, according to the U.S. Energy Information Administration.
Local energy economists project that is not going to change within the next year. The EIA predicts WTI crude will trade at an average $54 per barrel in 2016
“Oil prices very possibly will remain low in the high 40s to 50s [per barrel] for some time to come,” Briggs said.
Scott has a more optimistic prediction, putting the average price per barrel between $55 and $60. He said Credit Suisse, a major worldwide financial institution, predicts the global demand for oil will grow 1.7 percent because of growth in developing countries.
According to a report issued by the Organization of the Petroleum Exporting Countries in mid-September, the world economy is predicted to grow 3.1 percent in 2015. OPEC attributes the growth to developing nations. Still, the developing nations consume a fraction of the oil the U.S. and China consume per capita.
He said there are other reasons why demand for oil will grow, but couldn’t go into details because they are embargoed until mid-October, when a detailed report on the state of the industry in Louisiana will be released.
Scott agreed the oil industry will likely experience growth in 2017, but would not provide specifics, citing the embargoed report. “There’s a whole chapter on Houma,” he promised.
Raoul LeBlanc, senior director of financial services for Information Handling Services, a financial analytics firm, also said the oil and gas industry should experience growth by the end of 2016. The growing demand for oil in developing countries coupled with long-term projects in energy production are expected to drive the market.
Many future projects are planned for the Gulf of Mexico, which LeBlanc predicts will see “a lot of momentum in deepwater” in the next couple of years.
In order to understand what will happen, though, it’s important to know why oil prices are so low.
WHY ARE GAS PRICES SO LOW?
The primary reason oil has been priced so low since December of last year is because Saudi Arabic is waging an economic war on U.S. shale play production, LSU economist Loren Scott said.
Today, the U.S. consumes 23.3 million barrels of crude oil and other liquid fuels per day, according to Don Briggs. The entire United States including the Gulf of Mexico produces 13.9 million barrels per day. The country still imports nearly half of what America consumes.
Since 2008, the U.S. has increased its oil production by 85 percent thanks to advances in hydraulic fracturing and horizontal drilling in the shale oil plays of the Northeast and Midwest regions, Scott said.
“No other country in the world even came close to that,” he said. The United States has grown its oil and natural gas production so much over the past seven years that it is now the number one producer of natural gas in the world and is neck-and-neck with Saudi Arabia to be the number-one world producer of crude oil.
That scares Saudi Arabia, historically the world’s leader in crude oil production, because they depend on oil to pay for between 80 and 85 percent of their government spending.
The dilemma Saudi Arabia is now facing is similar to the one they faced in the 1980s when the U.S.S.R. began producing record levels of oil. Non-OPEC countries began producing more and more oil, increasing worldwide supply, so in order to bring the price of a barrel up, Saudi Arabia cut production dramatically.
According to Raoul LeBlanc, senior director of financial services at Information Handling Services, a financial analytical firm, the difference between now and then is that Saudi Arabia, being the lowest-cost producer of oil in the world, is facing huge increases in the world’s supply of oil, largely thanks to growth in U.S. shale.
“Historically, they were the market balancer. If there was a market imbalance, if there was a surplus, they would cut production,” LeBlanc said. “The problem they were having, if they had cut production … let’s say they cut 500,000 barrels per day, that would’ve propped up the price, but in another five or six months, the U.S. would’ve grown by 500,000 barrels per day.”
Scott said the U.S. had imported 66 percent of its oil from Saudi Arabia at one time, but now imports only 43 percent. That translates to a loss of 2 million barrels sold to the U.S. every day.
As if the loss of its share of the U.S. energy market wasn’t enough, shale oil producers began selling their oil, Scott said. But oil produced from the shale plays is light, sweet oil. The over-supply of light crude caused the worldwide price for light crude to drop. Shale producers tried to sell their crude to the U.S. refineries in the south, but those refineries are set up to refine heavier crude.
There has been an export ban on oil in the United States for more than 40 years. The intent was to increase energy independence and security, but there is no export ban on refined petroleum products.
As Scott explained, shale producers built a tiny, $500,000 refinery to skim a little bit of the volatile gases off the top of the sweet crude. The resulting product was considered by legislators as a refined product, so the shale producers began to export the light crude, which the U.S. is not equipped to refine.
“They were able to just do a little minor refining and export a barrel of oil,” Scott said. “When the Saudis saw that, they said, ‘First of all, you ate dramatically into our U.S. market. Now you’re going to start eating into our international market? I don’t think so.’”
So, while Americans were enjoying Thanksgiving dinner in 2014, the 12-member countries of the Organization of the Petroleum Exporting Countries met to discuss cutting production of crude to prop up the price. Many OPEC members need oil to sell at much higher prices for production to be viable. Unfortunately for them, OPEC voted not to reduce production.
Saudi Arabia is historically the swing producer of crude in the OPEC countries. The country exports more than 7 million barrels of crude oil per day, according to the OPEC website. With their massive share of the average 30.1 million barrels a day OPEC countries collectively produced in 2014, Saudi Arabia can single-handedly affect the price of crude worldwide by choosing to either cut or boost production.
“The OPEC countries, especially Saudi Arabia, are determined to cripple the U.S. domestic oil shale players to the point that it will bring down their production so that the Saudis can continue and grow their market share,” Briggs said. “It’s really a shoot-out between the U.S. oil shale players and Saudi Arabia.”
And that is exactly what is happening. Saudi Arabia is producing as much oil as they have the capacity to, flooding the world market with oil that costs them $8 to produce, Briggs said.
According to a July report from Business Monitor International, a leading financial information service, the majority of U.S. shale oil plays will break even as long as crude trades at $80 per barrel or more. The more developed shale plays can remain profitable so long as crude trades at $40 or more per barrel.
Some shale plays are easier and cheaper to extract oil from than others because of their geological properties. For example, the Fayetteville Shale Play in Arkansas is the most expensive play and the most vulnerable to volatile oil prices.
LeBlanc said the average break-even price for a barrel from American shale plays is in the $55 range, which is still less than last year, when the average was between $65 and $70. He said the average breakeven price for off-shore production platforms is between $15 and $20.
According to the EIA, the break-even price of oil for shale plays in the United States will continue to drop as the production companies that can withstand prolonged oversupply in the world crude market make advancements in technologies.
But LeBlanc said he believes the breakeven number is meaningless because some plays are cheaper to produce from than others, so oil producers are doubling down on the most profitable wells anyway when the price of oil is low. So although there is less drilling activity, production levels have remained high because most of those wells weren’t producing much oil anyway.
WHEN WILL IT END?
Oil industry workers may have to wait more a year for the price of oil to rise to acceptable levels, according to prominent energy economists.
Much depends on the amount of economic growth in developing countries over the course of the next couple of years.
The Organization of the Petroleum Exporting Countries is comprised of 12 countries, which all depend on oil exports to support their governmental budgets. No country depends on oil exports more than Saudi Arabia.
About 89 percent of Saudi Arabia’s budget is supported by exports, according to the EIA. That money pays for social services, law enforcement, roads, bridges and education, as well as other services.
“Has [Saudi Arabia’s overproduction] hurt America’s shale plays? Yes,” Chris John, president of the Louisiana Mid-Continent Oil and Gas Association, said. “Has it devastated them to the point of where they thought [it would]? Absolutely not. In fact, I think the damage is done and I think we can hang in there where we are longer than they can hang in there.”
According to the Kingdom of Saudi Arabia’s Ministry of Finance, their 2015 budget will suffer a $38.6 billion deficit, nearly 17 percent of their budget, due to the lowered price of oil. The country has $733 billion in savings, though, according to the EIA, which it can use to bridge the financial gap.
But not all of the OPEC countries have a piggybank as full as Saudi Arabia, though.
For example, Venezuela has some of the largest proven oil and natural gas reserves in the world and was one of the founding countries of OPEC. In 2013, the country was the ninth largest exporter of crude in the world.
But Venezuela’s economy is highly dependent on oil exportation. According to the EIA, Venezuela is currently suffering a 63.8 percent inflation rate. Several news agencies have reported that the country is printing money as fast as it can to keep up with rising prices and citizens are buying U.S. dollars on the black market to maintain their wealth.
“Many countries came to view those lofty price levels as sort of the way life was,” LeBlanc said. “They’re really hurting. Their budgets and their finances and their economies are having pretty severe strains.”
LeBlanc said Venezuela needs a barrel of oil to sell at $90 or more to make a profit, finance its government and avoid runs on its currency.
Venezuela called for an emergency OPEC meeting in August and again in mid-September to discuss cutting production to the OPEC oil basket. In fact, LeBlanc said, there have been 15 calls for emergency meetings among OPEC countries, but not a single one came from Saudi Arabia.
Venezuela, Nigeria, Algeria and Lybia are all OPEC countries that are suffering greatly right now as a result of oversupply. These countries and other non-OPEC countries have been producing record levels of oil in order to maintain market share and revenue levels, according to various news sources.
“There’s a tremendous amount of civil unrest developing within those countries,” LOGA chief Briggs said. Each country needs oil to trade at an average of $100 per barrel to maintain their governments, he said.
With no sign that Saudi Arabian or U.S. oil producers are going to cut production anytime soon, the question remains: when will the over-supply end?
Leblanc said OPEC has only “temporarily abdicated their role of market-maker.”
U.S. shale represents advances in technology that are here to stay. As the market has shown, LeBlanc said, U.S. producers are not willing to cut production to bring the price of a barrel up, and neither is Saudi Arabia – at least not in the near future.
While the price of a barrel of crude was over $100, U.S. shale producers rushed to grow their share of the world’s market, but they grew faster, probably, than the demand for crude did, LeBlanc said.
“What’s really happening is the market is seeking equilibrium,” LeBlanc said. “… Now, it’s a market and it’s likely to overshoot and undershoot, but we think [south Louisiana’s oil and gas market is] going to equilibrate in the next five years.”
The equilibration mark, economists agree, may be closer to $70 per barrel.