Crude oil prices continue to rise, but Oklahoma’s oil and gas companies are not necessarily popping any corks. Sarah Terry-Cobo writes in the Journal Record that crude oil hit its highest levels in three-and-a-half years on Friday, but it is more difficult to drillers to make a profit, even though prices have been near or above $60 per barrel since January.
It doesn’t take as many rigs to produce oil, margins are thinner and investors expect efficiency to increase, said several industry observers. The mass layoffs from several local drillers early this year might be the last, at least until the next downturn, said energy finance professor Stuart MacDonald with the University of Central Oklahoma.
Terry-Cobo spoke with KGOU about what “lower for longer” prices will mean for Oklahoma drillers.
Jacob McCleland: It's the Business Intelligence Report, a weekly conversation about business news in Oklahoma. I'm Jacob McCleland. Our guest today is Journal Record senior reporter Sarah Terry-Cobo. Sarah, thank you so much for joining us.
Sarah Terry-Cobo: Hi Jacob. Great to be here. Thank you for having me.
McCleland: I want to talk a little bit about crude oil prices today because those prices are continuing to rise. But you wrote last Friday that oil and gas companies aren't necessarily celebrating. The rising oil prices come during a time of layoffs. Just last week, Devon announced that they'll lay off around 300 workers. Chesapeake laid off 400 workers earlier this year. What's going on here? What's the disconnect?
Terry-Cobo: Well so it kind of follows along this mantra that so many drillers are adjusting to, and that is "lower for longer." So even though crude prices are in the mid-to-high 60's per barrel, it's unlikely that they will reach the highs of a few years ago when it was $100 per barrel. So each of the companies that have laid off large groups of workers this year have their own unique issues. For Chesapeake that was due in part to the company selling off a bunch of oil and gas assets, and they had to downsize the number of people they had to match the amount of work. And not to mention they've got a lot of debt about 9 billion dollars. For Devon, the spokesman there for that driller, his name is John Porretto, he says for them it's about adjusting to that lower for longer mentality and for a lot of them they're just able to produce more oil with fewer drilling rigs. That's good for investors because they're spending less money than they did a few years ago and producing the same or more, but maybe not so good for workers.
McCleland: Do you think we're past the point of seeing major layoffs in the industry right now?
Terry-Cobo: Well it's hard for me to judge but a couple of sources say they think the worst is over for a while. So West Texas Intermediate, that's the benchmark for US crude, it closed trading higher than $67 per barrel on Friday which one energy finance professor says that's a likely sign oil could rise to $70 per barrel, hit that resistance point, so to speak.
McCleland: Right now there are fewer than half as many onshore drilling rigs in the United States as there were before the downturn. In 2014, there were some 1300 rigs. Now there are about 700. Why is that significant?
Terry-Cobo: Well it's important to note that U.S. oil production is actually higher now than it was in the peak back in the summer of 2014, before oil prices started sliding a few months later. So with more oil pumps using fewer rigs, that's a sign of efficiency. Sort of what I mentioned before. But efficiency gains are really some of the most important lessons that drillers learned during the downturn how to squeeze every last penny and renegotiate contracts when they could so they could lower their overhead costs.
McCleland: So when oil prices are high like they were between 2010 and 2014, there isn't much of a need for that efficiency because it's just so profitable to drill exactly but when but when we're talking 60 to 70 dollars per barrel efficiency is more important. How does that efficiency change how oil and gas companies operate?
Terry-Cobo: So it's different, but for some it means you don't need as many people to do the same amount of work. For others, that means they get a higher return or a higher profit margin for every barrel of oil or every thousand cubic feet of gas they produce. That makes it more attractive to investors who would be more willing to lend them cash as long as they spend it wisely. And investors, they want a return on their money too. So if the drillers have higher profit margins, shareholders expect something in return, like a dividend or something along those lines.
McCleland: So it sounds like there's more productivity and more efficiency. Is it really just all about the price of oil at this point?
Terry-Cobo: Well yes and no. So one source, Mike Stice, he's the dean of the Geology and Geophysics college at OU, he says you know unconventional drilling is way more expensive than it used to be. You know what used to cost $300,000 for a well is now like a $10 million well. So the margin that they make on $60 oil is much smaller than what it used to be. And he says that's why you have 9 percent layoffs for Devon in the midst of $60 a barrel. That's just good old fashioned economics. That's the market at work unfortunately.
McCleland: We've been talking today with Journal Record senior reporter Sara Terry-Cobo. Sarah thank you so much.
Terry-Cobo: Absolutely great to be here, Jacob.
McCleland: KGOU and the Journal Record collaborate each week on The Business Intelligence Report. You can find this conversation at kgou.org. You can also follow us on social media. We're on Facebook and Twitter, @JournalRecord and @kgounews
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