The Texas oil and gas boom kicked off in 1901 following the discovery of the Spindletop field near Beaumont, Texas. Referred to as the “Lucas Gusher,” it presaged the rapid expansion of a young industry that has shaped the state’s economy for more than a century, with the ups and downs common to dynamic, cyclical industries, according to the American Oil and Gas Historical Society. While the state’s production went into decline from the 1970s to the early 2000s, in the last 10 years we have seen a renaissance, and the state produces today 5 million barrels per day (bpd) of oil and 1.5 billion cubic feet per day (bcf/d) of natural gas according to the EIA. U.S. production in total has also seen similar outsized gains. However, unlike the early days, the industry tends to no longer focus on the highly permeable sands abutting salt domes like Spindletop, or other conventional reservoirs found across much of the country in places ranging from Alaska to the Gulf of Mexico. Domestic independent oil and gas companies large and small now target source rocks, not reservoir rocks, in a number of regions such as Texas’ prolific Eagle Ford and Permian shale plays (figure 1).
Figure 1: US oil and gas production by region 2009-2019
The Permian, in particular, is driving U.S. production growth, with over 450 rigs (according to Baker Hughes Rig Count) turning to the right in the play, representing half the rigs in the United States and a quarter of the rigs deployed worldwide. Moreover, those other U.S. rigs are primarily focused on shale and other unconventional plays. This shift has had implications for both the industry and its stakeholders including the broader community of landholders, workers, investors and regulators. Principally, these resource plays exchange in part below-ground (i.e., geologic) risks with above-ground ones, including logistical hurdles, social license to operate and wastewater disposal. Moreover, increasing concentration in a handful of high profile basins changes how some companies view their operations, presenting both challenges and opportunities.
For example, scaling sustainably can be more challenging for oil and gas companies invested heavily, or in many cases solely, in unconventional plays. Projects in shale plays often lack the characteristic ramp-up, plateau and decline in production, revenue and costs that one typically sees in conventional major capital projects. Per well production often drops sharply, and if a company cuts spending today, next year’s production declines significantly — over 70% for some shale wells according to Natural Resources Research. With roughly 21,000 wells drilled in the United States in 2018 (7,000+ in the Permian alone) according to Deloitte’s analysis of DrillingInfo well data accessed in May 2019, there is a significant ongoing need for consistent reinvestment, which can make shale plays, and their nearby stakeholders, more exposed to price cyclicality.
As prices dropped sharply after 2014, we saw the impact of that exposure with most companies cutting budgets and the industry overall trying to produce more with less. In particular, companies that had historically added people faster than production reversed course and became leaner (figure 2). Between 2014 and 2018, companies cut more than 50,000 oil and gas jobs, returning to 2007 levels, and at the same time increased production by 5 million barrels of oil equivalent per day (boe). Consistent with the Permian’s growth, overall Texas data tells a similar story. Even as the state’s production has increased almost 40%, natural resource employment, including oil and gas, remains well below its December 2014 peak, roughly where it was in 2011, as referenced in the Texas mining and logging employment data by the U.S. Bureau of Labor Statistics, despite the United States’ economic recovery following the financial crisis.
Figure 2: US oil and gas employment versus domestic production 2005-2018
Cost reductions, however, continue to remain a key focus for shale operators, as profits remain elusive for many despite operational streamlining and the remarkable increase in productivity. In an article by the Wall Street Journal, shale companies raised more than $40 billion annually in debt and equity five years out of nine since 2010, but there has been a notable downward trend since 2016 with the industry raising only $23 billion in 2018. That means working within cashflow will likely be increasingly important even as the number of levers they can use to reduce costs declines. The number of people employed per barrel replaced is at multi-decadal lows, and oilfield service companies who have slashed their rates have seen their net income decline by more than 150% since the beginning of the downturn according to Deloitte Insights.
However, there remain a number of opportunities for companies to increase operational efficiency and achieve economies of scale even as other streamlining strategies lose steam. For example, logistics has become an increasing challenge as trucks haul oil, water and sand to infrastructure-constrained West Texas. Building water infrastructure, including pipelines and recycling facilities, could reduce the impact of water-intensive completions on local municipalities, while potentially lowering operating costs for operators who are most active in the basin. Similarly, the shift to in-basin sand can lower the cost of fracking materials, while also reducing the need for long-haul transport. Furthermore, investment in digital technologies, and even renewable power generation, could cut the energy needed to support production operations, cutting greenhouse gases and minimizing the burden on the local electric grids. All of these strategies could mitigate the impact of oil and gas development, while creating investment and employment opportunities in shale regions.
At $60 per barrel today, and with a positive, albeit volatile, outlook for West Texas Intermediate prices, the oil and gas industry is expected to continue to grow shale production here in the United States, with Texas at the forefront according to the EIA. Nevertheless, companies should continue to focus on streamlining the business, increasing operational excellence and adopting new technologies, so that they can continue to meet growing energy demand while creating benefits for their stakeholders including investing in communities, generating tax and royalty revenue, and providing jobs to those working in Texas and other shale states.
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