By KURT ABRAHAM, Editor-in-Chief on 6/26/2020
HOUSTON—A recent survey by the Dallas office of the Federal Reserve System reveals a very somber and wary mindset by U.S. producers toward the upstream oil and gas (O&G) market. And that attitude is reflected in their plans for coping with the Covid-19-affected O&G market. Comments and data were collected from 165 E&P executives by the Dallas Fed during June 10-18 and released on Wednesday, June 24.
Among comments received was this thoughtful look ahead by one Texas producer: “This is a summary timeline for the E&P [exploration and production] industry. First, it was dismal during the ‘lockdown.’ Second, it is/will be miserable during the ‘transition’ (June–December 2020). Third, it will be somber in the ‘new normal’ (2021). The oil industry went in a deep hole in first-quarter 2020. We reached the bottom, and now we are trying to climb up. It will be quite a while (2022+) to get back up the hole, to the pre-COVID-19 level of activity and service pricing.”
Shut-in production and re-starting. Indeed, the survey asked the executives whether they had shut-in production during second-quarter 2020, and 82% said “yes,” while 18% responded “no.” But what is more important is when these companies intend to re-start their shut-in production. On that question, 36% said the end of June, another 20% responded the end of July, while 18% said the end of August and 14% estimated the end of September. The remaining 13% said the end of November or later.
Equally important in the timing of production re-starts are executives’ expectations. In this regard, some of their optimism for when they might re-start their individual output is tempered by their expectations of what price is required for the industry, as a whole, to re-start production. On that subject, a slight majority of 51% think a price of $41/bbl or higher is required to bring back shut-in wells, with 27% saying $41 to $45/bbl, while 18% said $46 to $50/bbl and 6% indicated $51/bbl or higher. Among the 49% that said they thought re-starting output would take a price of $40/bbl or lower, 30% said $36 to $40/bbl, another 15% estimates $31 to $35/bbl, and a distinct minority of 4% said $30 or lower.
Dismal drilling outlook. Perhaps the most somber, distressing result of the Dallas Fed’s survey was the attitude of E&P executives with regard to drilling. Asked, “When do you expect U.S. drilling and completions activity to return to pre-COVID-19 levels?”, 44% said sometime between fourth-quarter 2020 and fourth-quarter 2021. Specifically, a brave 3% said fourth-quarter 2020, while only 8% responded with first-quarter 2021. Another 14% estimated second-quarter 2021, 13% said third-quarter 2021, and 6% responded with fourth-quarter 2021.
Of the remaining, solid majority of 55%, 39% said “not before 2021,” and an incredibly pessimistic16% responded with “never.” One has to wonder about the level of morale in the companies that said “never.” Some of that response may have come from some of the service executives that were part of the survey. One of these service executives commented, “Times like these are purely about survival, and many of our competitors and customers will not survive without a material change in the energy space, which I don’t expect for several quarters.”
Additional production considerations. Delving back into the situation around re-starting production, the Dallas Fed asked executives, “Do you expect extra costs when putting the wells back online?” A majority, 61%, said yes, there will be some minor costs. Another 11% said they expect “significant costs.” The remaining 27% said that they don’t expect any costs.
Asked why they had shut-in production in the first place, 94% of respondents said the prices had been too low. Another 4% said it was because refineries and/or pipelines had refused to take their oil. The remaining 1% explained that storage capacity was not available.
Other issues. Among other Dallas Fed questions, executives were asked, “When do you expect global oil consumption to return to pre-COVID-19 levels? A solid 59% said sometime between fourth-quarter 2020 and fourth-quarter 2021. Another 36% said it will be from 2022 forward, while a very pessimistic 5% said “never.”
Asked whether they expected their firms to remain solvent for the next year, 95% of executives said “yes,” while 5% said “no.” Finally, there are two comments—one long, one short—illustrate societal/political issues on the minds of executives, which affect their business.
One executive commented in detail, “With the ‘Great Crew Change’ retirement of ‘boomers,’ and COVID-19 work-at-home isolation, the industry is de-populating itself of knowledgeable and experienced personnel. That collective knowledge drain is not being effectively replaced by ‘newbies.’ The newer, younger employees don’t know much, and while they can stare at computers and run applications, they are making critical land, legal, financial and business errors at an astonishing rate but try to self-buffer from the real world impact of their errors with mental Maginot Lines of mercurial ego! I’m seeing this happen more and more frequently with contractors, purchasers, operators and business-partner companies. It’s causing everything in this industry to move at a glacial pace, because so many errors and problems have to be reported to a knowledgeable supervisor, somewhere, who can then give some one-on-one ‘counseling’ to the error-creator, who tries to defend their error to the company, who reported it in the first place. We wind up having to write more memos and e-mails, or make phone calls to a voice-message recorder, than ever before, just to keep basic functions moving that used to be routine and automatic.”
And on the political front, one executive simply said, “A Joe Biden presidency will inflict additional damage to the oil and gas industry.”
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