In case you hadn’t noticed yet, the oil and gas industry in the U.S. has not only recovered from its terrible, COVID-generated bust of 2020, it is actually now in the midst of a modest boom. It is not the leasing, drilling and fracking boom the industry experienced from 2017 through 2019, though; rather, it is a boom being driven by improved oil prices, adoption of technological solutions and implementation of internal processes and efficiencies mandated by not just last year’s industry depression, but by investors as well.
Simply put, upstream oil and gas companies have had to become better at what they do over the last year and a half in order to survive.
And survive they have, as evidenced by the numbers. From the low point of the 2020 bust on September 1, 2020, through the end of April, both the domestic rig count and number of active frac spreads more than doubled. Rystad Energy issued a report in April that found the number of hydraulic frac jobs performed in the Permian Basin during March of this year actually exceeded the number in that region during March 2020. With the folks at Primary Vision reporting that just a little more than half the number of active frac spreads were on the job in March compared to a year ago, can this really be possible?
Well, yes, it can, when one remembers what was taking place in the industry in March of 2020. That was, after all, the month when the federal government implemented its “15 days to flatten the curve” strategy related to COVID-19 — a “temporary” strategy that continues to linger more than a year later, and it became crystal clear that the world was experiencing a real pandemic that would last for months, if not years. As a result, domestic producers were busy de-funding drilling programs and deactivating plans for fracking wells throughout that month.
That’s a direct contrast to March of this year, a time during which drillers were ramping up their drilling and fracking programs to take advantage of the newly robust crude prices. So, the Rystad report, though initially counterintuitive, actually makes perfect sense and is just one of many indicators of the modest boom the industry finds itself in today.
That being the case, the question inevitably arises about whether or not the U.S. oil and gas industry will once again embark on a drilling frenzy that will see it do what it traditionally does, and drill itself right out of prosperity again, increasing domestic oil supply to such an extent that a glut forms and prices crash. Indeed, the U.S. Energy Information Administration, in its April Short-Term Energy Outlook, projects that thanks in large part to continuing strong oil prices, the industry would ramp up production by 1.5 million barrels of oil per day over the next 20 months.
But the EIA may want to cool its heels just a bit. Frankly, this forecast seems unrealistic and fails to consider the depressing impacts that Biden/Harris administration policies, like the ban on federal leasing and increasing permitting delays, will have on the industry in the months to come.
We should also note that, while the counts of both active rigs and frac spreads have doubled since last September, they remain as of this writing at just more than half the levels of the heights they reached during the 2017-19 boom. More to the point, both the Baker Hughes Weekly Rig Count and the Enverus Daily Rig Count leveled off in April, which could be an indicator that upstream companies are starting to reach the limits of their budgeted drilling plans for the first half of the year. This trend was certainly consistent with the leveling-off of crude prices during April after their dramatic rise during the first quarter of the year.
What about that global demand growth? Optimistic forecasts from the EIA and other analysts also could be overly optimistic about continued recovery in global demand growth, especially in light of April’s reports out of India of new economic lockdowns in response to another spike in COVID infections there. The country’s Ministry of Health reported more than 309,000 new cases on April 22, a new record high for a single day in any country.
With the new set of lockdowns and other health-related measures being implemented in that country expected to last for weeks or even months, the Indian government said it expects its domestic energy demand to fall by as much as 20%. That placed downward pressure on crude prices right at the time during which corporate upstream companies were in the middle of revising their drilling and fracking budgets for the second half of the year.
Timing is important in all of this, and the timing of this significant glitch in demand growth is likely to only encourage drilling and production companies to be more cautious and conservative in their drilling plans for the second half of the year. My belief is that the combination of these and other factors could well result in just enough positive momentum to keep the industry booming at its current modest level without overheating and drilling itself out of prosperity one more time. This has never been an industry that has had any real ability to exert any real degree of self-discipline over itself, but it seems as if the stars are at least trying to align for the creation of an extended period of industry growth that could last through the rest of 2021 and into 2022.
Wouldn’t it be something if the domestic U.S. oil and gas industry was able to avoid drilling itself out of prosperity one more time? I’ve been involved in the industry since 1979, and such a happy outcome would be a first for me.
About the author: David Blackmon is the Editor of SHALE Oil & Gas Business Magazine. He previously spent 37 years in the oil and natural gas industry in a variety of roles — the last 22 years engaging in public policy issues at the state and national levels. Contact David Blackmon at [email protected].
