Source: Denver Post April 9, 2020
Saudi Arabia-Russia price war intensifies problem with oversupply of oil.
An abrupt drop in demand unlike any seen before has left the oil and gas industry “in unknown territory,” likely dashing the prospect of a quick recovery from the coronavirus pandemic and a global price war, analytics firm Enverus says in a new report.
In the report, “The Dark Side of the Boom,” released Tuesday, Enverus, which provides data and intelligence to energy companies, has forecast an average price of $23 a barrel of oil for 2020. That includes several months below $15 a barrel. Enverus sees the average price for West Texas Intermediate crude, one of the main benchmarks in oil pricing, rising to $32 a barrel in 2021 and $45 by early 2022.Bernadette Johnson, the Colorado-based vice president of strategic analytics at Enverus, said in a statement that the industry has never seen “demand destruction occur this much and this fast.”
A new report by the U.S. Energy Information Administration estimates that the worldwide consumption of petroleum and liquid fuels averaged 94.4 million barrels a day in the first quarter of this year, down 5.6 million barrels a day from the same period in 2019. The effects of falling demand are playing out in Colorado’s Denver-Julesburg Basin on the northern Front Range and in other major oil-producing regions across the country. Denver-based Whiting Petroleum filed for bankruptcy last week, citing the severe downturn in oil prices. Occidental Petroleum, Noble Energy and Extraction Oil and Gas, all major producers in Colorado, are cutting their spending and employees’ hours and pay.
And Denver-based Liberty Oilfield Services said last week that it is significantly reducing its workforce and slashing the pay of the company’s officers. It’s the company’s first-ever layoffs. Lower prices and heavy debt loads had led several oil and gas companies to scale back spending plans as they headed into 2020. Many of those plans got tossed because demand for oil and gas plummeted as businesses and transportation fell off to slow the worldwide spread of the new coronavirus. Then, a price war started by Saudi Arabia and Russia in early March triggered a nearly 25% single-day drop in oil prices, the biggest one-day drop since 1991. Disagreements over proposed production cuts blew up negotiations between the two countries and Saudi Arabia began flooding the already saturated market with cheaper oil.
And that’s created another big headache for the industry: a lack of space to hold the oil that the world isn’t in a hurry to use. About half of the 60-some companies Enverus tracks released have amended capital spending and operation plans, eliminating a total of more than $21 billion. There were 846 drilling rigs operating across the U.S. at the start of March, but the number dropped to 762 by March 25, according to Enverus. The nationwide rig count was 664 at the end of last week, according to Baker Hughes, one of the world’s largest oilfield services companies. The Denver-Julesburg Basin had 18 rigs. There is hope that the two giant exporters might revive talks to stabilize prices. However, Erika Coombs of BTU Analytic said there are indications that Saudi Arabia and Russia would want cuts by U.S. operators in exchange for reining in their production. “Because the U.S. is not state run like Saudi Arabia and other large oil-producing regions, and instead is a bunch of independent operators trying to act around price signals, it might be a little tough to get the U.S. to act in concert,” Coombs said.
The American Exploration and Production Council, which represents 25 of the country’s largest independent oil and gas producers, said Wednesday that its members are cutting back to protect their businesses, employees and communities affected by the current crisis. Before the twin blows of coronavirus and Russia and Saudi Arabia fighting for bigger shares of the market, Coombs said the Denver-Julesburg Basin was experiencing decreased capital investment compared to last year. The decrease was due in part to Occidental Petroleum’s purchase of Anadarko Petroleum, she said. For Anadarko, the dominant producer on the Front Range, the Denver-Julesburg Basin was a core asset, Coombs said. “For Occidental, they have a different strategy, different set of assets,” Coombs added. “The D-J Basin didn’t fall as high in the rankings for them as it did under Anadarko.”
Along with low prices and demand, another big problem is the prospect of running out of room to store the crude produced. “If we physically run out of storage, then prices need to go lower than $20 (a barrel) because we need to start incentivizing producers to shut in their oil product,” Coombs said. “It’s much more serious than just cutting the number of rigs and slowing your completion” of drilling wells.It will likely mean shutting down wells or significantly curtailing the flow from them, Coombs added. Johnson agreed. She said there are more petroleum liquids “sloshing around in the world than there is storage capacity to contain it.” Midstream companies, which process, store and ship oil and gas, are trying to provide as much storage as possible, said Ryan Smith, a senior commodity director at East Daley Capital Advisors in Centennial. There are major storage facilities on the Gulf Coast and in Cushing, Okla.
“We do expect Cushing to fill up in the next couple of months,” Smith said. Enverus foresees more pain for the industry as workers are laid off, rigs are laid down and wells are shut in. But Johnson said prices should start looking better by 2022 and 2023. In the meantime, the low prices could lure reluctant investors who have been on the sidelines, she said. “We may not like it, but the market has been responding in a rational manner. We’ll see lower prices before we see recovery, but the market is working, and we can see a path to recovery,” Johnson said.