As you’re reading this, you have 2020 behind you. As I write this, there are still about six weeks of waiting for the year to come to a grinding halt.
The year began with some “known unknowns.” Presidential election years are always uncertain, and this time we were sitting in front of a clear choice, from the business side. The phrase “Green New Deal” is to the oil and gas industry what “tax audit” is to banks and what “Sherlock Holmes” is to Moriarty. Except, both of those other phrases imply that the second party has sinned.
Not that the oil and gas industry is perfect—we could flare less, leak less, and negotiate a bit better. But we are not guilty of the wild charges levied by the Green Lobby, personified by busloads of Blue State Meanies (apologies to the Beatles’ Yellow Submarine) threating lawsuits and criminal charges against us for fueling their buses, making their cell phones, and generating most of their electricity.
We thought that was all we were up against. That was a large, visible, and quite vocal opponent that we could vote against, argue with and, hopefully, keep in check. In February, however, about the time of the first caucuses and primaries, we learned of an enemy 60 nanometers (nm) to 140 nanometers (nm) in diameter.
Before those microscopic invaders shut everything down, some changes were already in process. They were just moving more like a glacier than the Tsunami they quickly turned into.
By the middle of March, worldwide shutdowns had slashed oil and gas demand, dropping prices briefly into negative territory. By September, drilling hiatuses and shut-ins of producing wells had led 40 onshore oil and gas companies to file bankruptcy, involving nearly $54 billion in debt, according to law firm Haynes and Boone, LLP.
Of necessity, those who survive have tightened budgets to the point of strangulation, laid off employees, idled equipment, and refinanced anything that would let them reduce payments at all.
In writing about those companies throughout the year, I’ve noticed some trends involving those who’ve survived.
Here are some of the top changes we’ve seen.
Business Models
Back in 2010, improvements in fracturing unleashed oil from previously impervious formations. And it unleashed a flood of investment money from previously indifferent investors. The combination reversed a decades-long production decline and made the United States almost energy independent.
A closer look at the business model, however, showed some assumptions that may not have been false, but were at least greatly exaggerated. Private equity, venture capital, and even some stock market money rushed toward both producers and service companies from about 2010 to mid-2019. Many gave their newly adopted children a blank check to buy leases or equipment and to open new offices in various basins.
The idea was that growth was always good and that these open-ended investments could be recouped, and more, in 3-7 years when the PE firm sold to another one. The next one would spend even more money to grow it even more and… you get the picture.
Several experts have told me throughout 2020 that this model had some success in the early years due to high oil prices—touching $150, then $100 before crashing almost to single digits, or to subzero numbers as in April of 2020.
During those triple digit days, several people told me “this boom is different—it’s technology driven.” Better methods, greater data, and newfound analysis would allow profits at previously unheard-of prices.
That was true, until those methods kept everyone producing in 2015 long after they should’ve stopped in order to let the price recover. Yes, money could be made, but not nearly enough.
By early 2019, I’ve been told, the non-Texas investors had lost patience with the yesterday-we-were-profitable-today-we’re-broke model. They began asking their companies to make money—today.
That was already happening somewhat, then COVID-19 slammed the brakes. Notes starting coming due, income stopped. No more could the investors sell for even what they had in the company.
Fortunately, throughout the year I found several service companies who had avoided overreaching and were doing—well, they were doing okay. Nobody was buying oceanfront property in the Hamptons.
There were two main things the more successful companies shared. They had only expanded organically, adding a related service here and there at the request of longtime clients; and they developed new, efficiency-boosting technology.
It was technology like back-office software to handle tickets and billing; remote monitoring and control systems; proprietary improvements on downhole tools; leveraging manufacturing efficiencies to reduce prices and thereby underbid the competition while still making at least some money.
The purveyors of these changes say they were needed anyway to help the oil patch weather constant price fluctuations, and the pandemic forced the industry to embrace them sooner rather than later. The terms “disruptors” and “game changers” were used liberally in 2020, and were more true than tiresome. We tired of the phrase, but when every game is being disrupted, the phrase was only overused because it was overtrue.
Demand Changes
Zoom, Microsoft Teams, Skype, and their category have ushered in changes that may never be completely undone. I’ve heard many people say they will never again spend a day flying back and forth to Houston or Dallas to give a 30-minute presentation.
It’s not that they’ll never travel—if there are multiple meetings or a plant inspection, or if a face-to-face introduction is needed, they’ll be on the next plane. But that’s still a lot fewer people driving to the airport or enjoying the Friendly Skies.
The bigger change, however, is the daily commute. Apart from a few thousand people curtailing air hops, there are millions avoiding the daily commute. In June, some estimated 40 percent of the work force was working from home, more than double the 18 percent some recorded in previous years. Many said they never planned to return to a daily commute.
Other statistics show that gasoline usage had already peaked in around 2018, and was starting a slow decline. In 2020, demand for all fuels dropped precipitously. (See chart)
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MGFUPUS2&f=M
https://tinyurl.com/ya5cm4nr
Daily doses of news reporting vaccine success stories are igniting hope that at least some of the demand will return within six months. Combine that with the fact that few rigs are turning to the right as prices crashed, and there’s hope for a price recovery by the middle of 2021. Some are expecting a price jump past $60, feeling that demand will rise faster than shut-in wells can be restarted and drilling programs can get back in gear.
How will it play out? So many factors are involved, including the decisions of OPEC+, that only time will tell.
The Green Menace
Could air pollution be reduced, especially in big cities?
Yes.
Could refineries reduce emissions? Yes.
But the organized threat against all use of fossil fuels goes way beyond the idea of getting more efficient and cleaning up leaks and spills. That’s the real threat to the industry.
The far left senator from New England… a teenager from Scandinavia… a radical congresswoman from New York… these are among the leading cast members of the Green New Deal. They have made many promises, but have yet to explain how to pay for trillions of dollars of infrastructure changes, or how to find enough lithium to give everyone batteries for their vehicles and homes, for when the wind doesn’t blow and the sun doesn’t shine.
Many of the major oil companies are therefore hedging their bets and buying into “green” energy. Some of this is due to the influx of activist shareholders voting their way onto boards and influencing decisions.
With Republicans likely holding onto the Senate and gaining enough seats in Congress to make the Democrats’ majority there razor-thin, hopefully the damage by radicals can be minimized.
A new term I learned this year is “greenwashing.” That is, making something sound green and environmentally friendly when it really isn’t. It’s like saying that wind turbines will replace fossil fuels. Except that it takes tons of coal to smelt the metal for the bases; hundreds of tons of cement for the bases; rare earth and other mined substances for the electronics. That’s not to mention the square miles of landfill for those massive blades when they wear out and must be discarded.
A similar case can be made for solar panels.
The only renewable I’ve seen that keeps its own problems to a minimum is geothermal. It has a small footprint, and it involves drilling wells at least somewhat similar to oil wells. Some oil companies are moving this direction.
It has never been more clear than in 2020 that change is survival. Really, the last 10 years have shown us that, with the advent of directional drilling, hydraulic fracturing, new sources of funding, and the reintroduction of exporting, among other changes.
Just as we’ve seen the demise of seemingly bedrock retail giants like Sears, JC Penney, and others, the last two busts have seen more than a hundred E&P companies bite the asphalt.
Change or die. Whatever exactly happens tomorrow, that’s going to be the path to survival.
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By Paul Wiseman