The US oil industry has been shrinking in much the same way as the country’s car industry – and the price crash will accelerate the process, according to a top economist.
Patrick Jankowski, of Greater Houston Partnership, said the US had about 100 car manufacturers a century ago, but that the total had been whittled down to about a dozen, either through consolidation or bankruptcies.
Jankowski said that when he started studying oil and gas in the 1980s, Oil & Gas Journal published a report on the top 400 publicly traded firms in the US.
But he said the figure had dwindled over the years to 300, then 200, and to 150 from 2009 onwards.
“What’s going to happen to the oil industry is the same thing that happened to cars,” he warned, adding: “There will just be more and more consolidation. You’re going to see the strong companies pick up the weak companies. You’re going to see activity concentrated in fewer firms.”
Jankowski said he would not be surprised if 20-30,000 energy jobs were lost in Houston as a result of the price collapse, which equates to about 10-12% of the sector’s workforce.
“We’re going to lose everything we gained back after the fracking bust of 2015-17,” he said.
The squeeze is already being felt by the workforce, with those in the field and on drilling rigs the first to be laid off.
Equipment makers and service providers come next – and that’s already starting to happen.
Last to be affected are employees at exploration and production companies, but that stage of the cycle is probably just a few months away.
Jankowski said: “There’s a saying that the closer you are to the drill bit, the more your job is at risk, and that’s what we’re seeing.”
Even before the price crumbled, the US oil industry was set for a tough year.
Jankowski said capital markets have “closed down” to the oil and gas sector, for the most part. “Investors have become disenchanted with the poor returns from the oil and gas industry. They’re saying, ‘we don’t want you to grow production any more, we want to see profitability’.”
The price drop has made life a lot more difficult, of course.
Making a profit from US onshore shale production is out of the question at current prices.
A recent survey from the Dallas Federal Reserve Bank showed companies need a price of at least $25 per barrel to cover their operating costs.
To profitably drill a well, they need $49 per barrel.
At the time of writing, WTI was worth about $17 a barrel, having plummeted to minus 40 a few days previously.
“If oil is at $25, that doesn’t even give you enough money to service your debt,” Jankowski said.
“You can bring a shale well on pretty quickly, but you still need a price of $49-50 to make a profit.
“Offshore, a well takes years, but the reserves are so huge out there, that you might be able to profit at $20-30 per barrel. Those are such long-term projects.”
That hasn’t stopped E&P majors “shifting away” from offshore in recent years because they didn’t want to tie up their capital for so long.
He said those companies who bought US onshore assets would now be suffering from “buyer’s remorse”.
In a nutshell, the situation looks really bad for the US onshore oil industry, which is going to become a lot smaller.
Jankowski added: “The oil and gas industry is not going to go away, but it will look very different.
“Even if consumption doesn’t go back to before, we still need to find oil and gas.
“I’m not worried Houston is going to sink into the sea, but what’s going to drive growth in Houston if it’s not going to be the oil and gas industry anymore?”
Recommended for you
