Are Hard Times Ahead for Oil Drillers?
As most of you know, I have been involved in the drilling industry for most of my career, involved in water well drilling, geotechnical drilling, heat pump drilling, oil and gas drilling, and just about anything else that required a hole in the ground. I’ve seen the booms and the busts come and go. I know that all drilling requires that the driller provide a useful and profitable hole for the customer.
The last almost five years, I have been in the Northern Rockies working in the Bakken “boom” and, other than the weather, enjoying myself. Now I see a change that will affect us all. In my area, during the month of December we went from 186 rigs to 158 rigs actively drilling, with more to come. Why, and what does this mean?
The shale formations such as the Bakken, the Eagle Ford and the Marcellus shales have made America the largest producer in the world, surpassing even Saudi Arabia and Russia, but it is very expensive to produce. The technology, such as directional drilling and fracking, can easily double or triple the cost of a well. The oil in Saudi Arabia is much cheaper to produce. For instance, some wells in the Middle East and Russia are profitable with a price as low as $7 per barrel, while the break-even point for some Bakken wells is approaching $60 per barrel. Our competitors in the world market have been quite happy to have the prices, and their profits, at this level, until the United States passed them in production, thus cutting into their market share. We are now in a price war.
Another cost that makes our oil less competitive on the world market is shipping cost. Due to politics, we now ship most of our oil by rail rather than pipelines. Shipping by rail costs upward of $16 per barrel and is fraught with safety issues. This cost comes right off the wellhead price that the producers get, making them less profitable. Shipping oil by pipeline, the safest method, costs about $4 per barrel, but is stalled by groups that don’t understand or appreciate the contribution oil has made to our society.
When we can buy gasoline for less than $2 a gallon, the average motorist cheers, but there is another side. Every rig that stacks out directly affects more than 100 hands that work on it. This includes not only the roughnecks on the crew, but all the service hands, truck drivers, dispatchers, etc., that it takes to support a rig. When they are laid off, they quit building new houses and drilling water wells, quit going on vacation, and quit spending money in general. This affects the merchants around them. This is the “pebble in the pond” effect that will shortly affect all of us, whether we are in the drilling business or not. Carpenters cheer when they can fill their work trucks at $2 a gallon, until there are no more houses to build. Storekeepers cheer when their transportation costs go down, until their goods don’t sell. Resort owners cheer that people can buy cheap gas to get to their resorts, until they realize that people are not going on vacation anymore because they are unemployed. The precipitous drop in oil prices will affect us all, whether we are in the drilling business or not.
It also has a huge effect on the markets. Nearly 20 percent of the junk bond market is in energy bonds. The last time the price of oil dropped $40 was in 2008, and preceded the last major recession we had, by several months. A junk bond crash is a good indicator of coming economic hard times, a “canary in the coal mine” so to speak.
Our competitors worldwide can last a long time on the profits they have made, and even produce at below cost to ruin our economy and maintain their market share. They are ruthless. Meanwhile, our government stalls such infrastructure projects as the Keystone pipeline, and some are even suggesting that we increase taxes on gasoline on the theory that we are getting such a good deal now that we won’t notice a few more cents at the pump. Seems to me that some of our so-called leaders shouldn’t even be allowed to play with matches.
What are we to do? In my lifetime, I have seen several boom-and-bust cycles. It reminds me of a bumper sticker I saw in west Texas a few years ago. It read: “Lord, let us have one more boom, I promise not to waste the next one …” Or words to that effect. Well, we had our one more boom. Now, the major service companies like Schlumberger, Halliburton and Baker-Hughes are announcing huge layoffs. These are highly paid, highly skilled hands. I hope y’all saved enough to hunker down for a while, because I see hard times coming. I have paid off my house, cars and trucks, and planted a garden. I’m getting my rig in shape in case there are any wells to drill. We can also vote for candidates that put America first, instead of pandering to small but vocal groups that refuse to see the coming train wreck (both actually, and economically!).
I hope that by the time this article is published, the world situation settles down, prices stabilize and that we can all go on with our lives.
For more Wayne Nash columns, visit www.thedriller.com/wayne.
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