Skilled labor, or the lack of it, is the ingredient that oil’s prognosticators just don’t include in their thinking. And so the price of crude goes through its gyrations pretty much independent of oil industry realities.
by Jesse Mullins
It was one of those lunch-table conversations that arise whenever oilfolk gather and the subject turns to… well, to media, or oil prices, or how media influences oil prices.
PBOG Magazine staff was sharing a table with several PBPA members at February’s membership luncheon and one of “those” conversations took off.
Just as someone deplored the latest backslide in the price of crude, someone else ventured an opinion on why it happened.
Paul Kenworthy, co-chair of PBPA’s Legislative Committee, went further than that, offering a view on how world oil observers overrate America’s ability to deluge the world with unconventional oil and send prices into a tailspin. [We later interviewed Kenworthy, to get his reiteration of the lunchtime conversation, and it’s those remarks that we share below.]
“They [media outside Texas and New Mexico] think that we’re sitting here, out here in the Permian Basin, and all we have to do, if the price moves up sufficiently, is just turn on a tap and the world gets flooded with crude,” Kenworthy said.
“You’ll notice on the national and international business news that oil prices will move up or down, sometimes on a daily basis,” he said. “Prices will react on the headlines of some oil ‘expert’ who warns that any upward movement in the price of crude can cause U.S. shale producers to immediately increase their production. Now, it is true that shale operations, or the methods of drilling shale wells, do not require the same long lead time that major offshore projects, for instance, require. So, it is true that shale drilling can raise output sooner, at least in relation to offshore, but there’s this assumption out there that it’s easy for shale to do it quickly [and dramatically].”
Kenworthy indicated that that last assumption is a huge assumption.
“If you talk to some of the larger service companies, companies who are members of the PBPA, they will tell you that they’re really busy. That the manpower they have is as busy as it can be under the circumstances right now. There may be idled equipment, like those stacked drilling rigs that people see, or even idled fracking equipment and drilling equipment. But those experienced oil and gas people who do all of this service work—who do the drilling, the stimulation, etc.—they are highly trained. They have experience and they don’t just sit around in downturns and wait for upturns, they go do something else.
“So here’s the bottom line: these predictions of swift increases in shale production don’t take into account the fact that—even with a high oil price—you can’t just [move that quickly]. You can’t just say, ‘Okay, $70 a barrel. I’m going to call Schlumberger and XYZ Drilling Company and they’re going to come out tomorrow and we’re going to produce some shale oil.’
There are three elements necessary for an oil company to produce oil, Kenworthy said. One is the land—the leases. Another is capital, because oil wells can be bottomless pits of capital. But the third thing, the least-commented-on thing, is having the expertise to do it. And that’s an issue in low-population-density West Texas and New Mexico. Out here, everybody is busy.
“And so the predictions that a $5 or $10 or $15 increase in the price of oil is going to automatically result in a bunch of short term shale production—I just doubt the ability is there to do that,” Kenworthy said.
Another reason why this region isn’t so likely to swiftly “ramp up” production (isn’t that what we always see in the media—that we are going to suddenly “ramp up” oil output?) stems from the fact that, even in the oil-rich Basin, the total output here is just a small fraction of world output.
Said Kenworthy: “Right now, I believe the worldwide oil market, is—what?—96 million barrels a day? [96 million was the 2016 figure—editor] And you see oil [prices] moving because Libya shut down a couple hundred thousand a day. Or you might hear talk about OPEC and Russia cutting back. But look at the sum total of shale production and see how that stacks up. I don’t know exactly how much it is, but it’s in single digits [in millions of barrels]. Well, at that level, it would have to double before the increase in shale production would really register on the worldwide supply demand meter. Does that make sense?”
Yes, it does. Sometime this year, the pace of worldwide production of crude oil is supposed to reach 99 billion barrels per day. Meanwhile, just this January, the United States’ own production attain a level of 10 million barrels per day. Most shale oil production is coming out of the United States, but even in the United States, not all crude oil is shale oil. Not by a long shot.
So what Kenworthy is saying is significant.
Let’s round off the worldwide figure and call it 100 million barrels daily. Now, given that U.S. production is 10 million barrels daily, that’s only 10 percent of world oil consumption. And, as we indicated, not all U.S. crude is shale crude. If we estimate that, say, half of all U.S. production is shale (unconventional) oil—and that’s reasonable, because U.S. production has roughly doubled since 2009 (just before the shale boom), and the gains can hardly be credited to conventional oil, which was already in decline—then that means that, at best, unconventional oil accounts for just 5 million barrels a day, or five percent of the world daily output. It’s that “single digit” figure that Kenworthy mentioned. How is a tiny segment of the world oil industry going to “ramp up” enough to offset, say, a 1.8-million-barrel cutback proposed by OPEC? Or, put another way, how is the U.S. shale biz, with its mere 5 percent share of market, going to manage, by its best efforts, to fill any world shortfalls in supply, or wreck any broadbased trends?
Just as the stock market is driven by the news cycle, so are world oil prices driven by reportage. Markets can be driven by jitters, by noise, by over-hyped events that will be forgotten by next week. And what Kenworthy is saying is that market trends in crude prices seem to be overly reactionary, made so by the way they factor all this hypothetical American “potential” into every fresh Asian or Middle Eastern scenario.
When shale became red-hot some five years and more ago, Wall Street and the financial press self-educated itself on the phenomenon, and “Permania” took off. These outsiders didn’t know everything about our world, but they did learn two things, and learned them well—probably too well. One was “stacked payzones.” Another was “DUCs,” or Drilled (but) UnCompleted wells. Wall Street might not understand about the Basin’s worklife world, but they’ve decided that our acreages are all like tiramisu or layer-cake, stacked with benches of black gold. And they know, or think they know, that our oilfields are thick with DUCs, and that all that’s needed to uncork these drilled wells is just to tap them.
But it’s not that simple.
“They [markets outside oil country] think that all we have to do is flip a switch, and all these DUCs are gonna fly,” Kenworthy said.
That’s that “ramping up” that all of us read about in any discussion of world oil prices.
“Here, in the Permian Basin, we blow and go and everyone is saying, ‘Man, we increased by 100,000 barrels [regionwide] in just the last two to three months!’” Kenworthy said. “Okay, I don’t doubt that. But, an increase of 100,000 barrels, in a market of [99 million] barrels—you tell me how much effect that’s going to have. I question the ability of shale production to increase by a factor of millions of barrels a day or even high hundreds of thousands a day. I’m just saying that predictions that shale production can increase so quickly as to affect the international price of oil, well, I question that assumption.”
But apart from the Basin’s exceedingly modest market share in world oil supply, there is that added matter of skilled labor, or lack thereof. And here Kenworthy made his best point.
“So, there’s this idea that we’ve got an inventory of Drilled UnCompleted wells, and, ‘You don’t even have to drill ’em … You just go complete ’em.’ That may be true [about the inventory], but keep in mind, you need a massive amount of expertise and high pressure pumping equipment to complete them. It’s not like there’s a shortage of drillers, but not a shortage of completion services. There’s a shortage of all of the skilled services. ‘Turning on the tap’ means drilling and completing and running the infrastructure to get the resources to market, and building the gas plant to take care of the gas, and on and on. You have to call service companies. You have to call in roustabout crews. In all of these areas, you still have the same problem of a shortage of expertise. That’s to say nothing of the need for experienced commercial drivers. If the price of oil went to $100, or went to $1,000, tomorrow, ask these service companies how many more wells they could frac. I think you’ll hear that they’re working at capacity already, and that getting additional skilled help is the biggest challenge they face.”
Meanwhile, the same shortage of skilled labor that brings a ceiling to how much added oil the Permian can tap, causes challenges here at home for those who are already working at capacity producing our region’s TKTKTKTK million barrels a day.
It’s the same all over. Ask Todd Bush, founder of Energent Group. Bush says that, “Lumping in trucking and sand companies… every company we talk to is challenged with hiring experienced drivers. In order to operate one tractor trailer that can deliver sand, you actually need three people with CDLs and with experience. Several of the trucking companies that haul crude may also haul water, but they don’t haul sand. They typically want someone who’s been hauling sand for two years.
“Meanwhile, on the pressure pumping side, with those companies, as they get the equipment, it’s going to take several months to get a new crew ready to be worked. Call it a 4-6 month lead-time to hire, assemble, onboard, and deploy a crew.”
Bush agreed with what a Feb. 28 TKTKTKTKTK Dallas Morning News article said about trucker salaries hitting 6-figures and he said he tends to hear numbers anywhere from $115-120K per year.
Clint Walker, general manager of CUDD Energy Services and chairman of the PBPA, observed that upturns aren’t always met with a ready supply of skilled labor.
“We have a lot of private equity coming into our market,” Walker said. “And they are pushing the demand for all services. [But] we just came through 2015 and ’16, which were really tough years, and during those times you’d have to scale back your labor force to whatever the market conditions were. And besides that, a lot of people just don’t like the cyclicality of our business. Because some of those guys got laid off. And then the other part of it is, with the skilled labor, even if you have it, there’s a lot of times you’re working in 118 degrees and there’s days you work in 18 degrees. And a lot of these guys just don’t like doing that.”
So getting new blood into the skilled labor pool, or even into the unskilled labor pool, is a challenge. And with Millennials, Walker said, “there’s just a different work ethic than the rest of us grew up with.”
Millennials want their time off, and so the employer must schedule the desired time off for these workers. “And that becomes a very important aspect of it,” Walker said. “We have to go to rotating schedules just to keep hands.”
Tommy Taylor, who is director of oil and gas development at Fasken Oil and Ranch, said that hiring and employment are becoming more difficult, not just for his company but for their peers. “Unemployment numbers here are [already] pretty low,” said Taylor, who sits on PBPA’s Executive Committee. “They came up a little bit in ’15 and ’16. But they didn’t get as high as what we might have initially expected because many of the public companies kept operating and kept a lot of rigs running. But with oil prices up this year, we’ve seen some of the rig count go up. We’re up around 400 rigs right now [in the Permian Basin], so services have tightened up. Sometimes on drilling rigs we’re having to wait for cementing crews to come out because there’s just not enough people to go around. Here [at Fasken] we have a dedicated frac crew, but I’ve heard that other people are having trouble locating crews to do the work for them.”
Costs are up, as well.
Taylor: “It just depends on what service you’re looking at as to how much they’ve gone up. We’ve noticed that tubulars pricing has strengthened somewhat, so we’re trying to pick our times when we buy our tubular goods to make sure that we’re still getting a good deal and they’re not too high. But yes, frac costs are up, cementing costs, all your services are up—which you would expect. It’s because, as we’ve heard, a lot of the service companies that have just been treading water here for several years haven’t acquired any new equipment. They’ve just been trying to keep the doors open and pay their staffs and so they’re going to have to go up [and absorb the cost of the new equipment] if we want to expand the service base here.”
Asked if there is one area in which Fasken would most likely feel the pinch—whether it is in obtaining sand, water, or people—Taylor cited the latter two.
“All of those are important. But our engineering manager, he always says it’s two things: People and water. People and water. If you don’t have that, you’re out of business in this unconventional play. That’s just never been more true than today. If you don’t have the right people, the people who have the skills, you’re going to pay for it one way or the other.”
We’ll give the last word to Bryan Livingston, CEO and managing partner at Dallas-based Capital Alliance Corp.
“Because the capital investment is so steep, it’s just not the same industry as a few decades ago, [when it was in] the boom-and-bust cycle. It’s just a more complex world now, given the high cost of bringing a well online. It just imposes discipline, a longer view, and [requires] looking three or four cycles ahead as you’re spending. This is just a much more sophisticated producers’ market. People are much more globally conscious.
“We see more restraint on the part of employers, and of the workforce too,” Livingston said. “We think that in the view of many producers and other decision makers, boom-and-bust is not necessarily the way things have to be. It is possible to have sustained and predictable pricing that allows companies to budget for growth and sell commodities into a healthy market. So some of the restraint maybe coming from an industry that sees the potential for a less volatile business cycle.”
Workforce: it’s what drives the Basin. It’s what sets the limits. Whatever the rest of the world might think, the workforce of the Permian creates its own reality. World observers of oil can think what they may, but that doesn’t mean that the Basin will behave as outsiders think it ought.
The dogs bark, but the caravan moves on.