The year 2020 has come to a merciful end, and praise the Lord and pass the pancakes for that bit of good news.
When the publisher of SHALE Magazine and host of In the Oil Patch radio show, Kym Bolado, asked me during one of our December shows if the oil and gas industry has ever seen a more challenging year than 2020, I was almost at a loss for words.
But not quite — because I am really never at a loss for words.
But this was close. What year, after all, has ever been worse for this great industry than the one just past? From the collapse of the OPEC+ deal on March 4 to the beginning of the draconian COVID restrictions that crushed demand for crude across the globe, to the ongoing assault on the industry’s reputation and license to operate by a vast array of well-funded leftwing environmental groups, 2020 came at oil and gas companies like a rolling ball of knives.
Honestly, the only year I could think of that could even compete with 2020 for damage to the U.S. oil and gas business was 1985, the year that crude prices dropped from $40 per barrel down to below $10 in a span of a few weeks and stayed at extremely low levels for several years. Of course, I have a bias towards that period of time since I was laid off the following year and was out of work for about two months, the only time in my adult life that I was out of work for more than a day.
Tens of thousands of others lost their jobs in 1985 and 1986, and not just those in the oil business. The collapse of the Texas oil industry led, in turn, to the collapse of the savings and loan business in the state, and our economy lagged behind the national economy for over a decade. Those were very tough times for the industry and for Texas.
Interestingly, the collapse of 1985 was caused by the very same dynamic that led to the initial collapse in 2020: The flooding of the market by Saudi Arabia and other OPEC countries in a vain effort to recapture global market share that was being lost to a booming U.S. industry. Our news media has focused so much on the impacts of COVID restrictions this year that the Saudi price war with Russia that began on March 4, when Russia temporarily pulled out of the OPEC+ deal to limit crude exports, has been largely forgotten.
The Saudis responded to Russia’s refusal to sign onto heavier export limits by flooding the market with their own crude to intentionally deflate oil prices, thus encouraging the Russians, whose economy is heavily reliant on oil revenues, to concede to the new deal. That strategy worked after about six weeks, but not before the U.S. had invoked its “15 days to flatten the curve” approach to COVID, shutting down vast swaths of the economy in a vain effort to slow the spread of the virus. As nearly as I can tell, we will be in about day 260 of that “15 days to flatten the curve” strategy when this issue of the magazine goes to publication.
But even 1985 pales in some ways in comparison to 2020. While the price for U.S. crude officially fell to as low as $6 per barrel (I knew some producers in that year who actually sold oil for less than $2 a barrel), who will ever forget the day in April 2020 when the price for West Texas Intermediate fell into negative territory? And not just a little bit negative, mind you: A lot negative, like $-37.63 per barrel for West Texas Intermediate negative.
Talk about a shock to the system.
That was all directly related to the Saudi effort to flood the market. The price went negative largely over fears by traders that U.S. crude oil storage levels would be maxed out completely during May, amid media reports of a flotilla of oil tankers carrying more than 50 million barrels of Saudi crude heading straight to American refineries.
As has so often been the case in recent years, those reports about the Saudi flotilla turned out to be not exactly accurate, much of that crude was, in fact, headed to refineries in Europe and South America, and massive actions by U.S. producers to stop drilling and shut-in existing wells prevented the feared overwhelming of crude storage facilities. Of course, the downside of all of that halting of drilling and shutting-in of production was that many U.S. producers were no longer generating enough cash flow to be profitable. In turn, it has resulted in a flood of Chapter 11 bankruptcy filings.
According to Haynes and Boone, more than 50 U.S. oil and gas companies filed for Chapter 11 protections during the first nine months of 2020, most of them taking place in Texas. Included among those companies’ names were former industry leaders such as Chesapeake Energy, Whiting Petroleum, Denbury Resources and Ultra Petroleum.
Haynes and Boone also released a list of 54 oilfield services companies who had declared Chapter 11 during those nine months. That list includes the likes of Diamond Offshore Drilling, McDermott International and Noble Corporation.
That drop in profitability has inevitably led to an increased pace of industry consolidation during the last half of 2020, especially in the upstream part of the business and with a particular focus on the prolific Permian Basin that spans West Texas and Southeastern New Mexico. Cash-rich companies had a field day snapping up cash-poor Permian producers at bargain-basement prices.
In July, Chevron snatched up Noble Energy (unrelated to Noble Corporation) in a $13 billion buyout that would have cost north of $30 billion just a year earlier. In September, Devon Energy acquired WPX Energy for $5.6 billion. October saw two huge deals, with ConocoPhillips executing a $9.7 billion takeover of Permian giant Concho Resources and the $7.6 billion merger between Permian producers Pioneer Natural Resources and Parsley Energy.
All of these and the other big merger and acquisition transactions that took place during 2020 will provide a higher degree of financial stability related to the assets being acquired. But the downside, of course, is that each and every one of those transactions also involved thousands of headcount reductions, given that a major goal of any such merger or acquisition is to create cost savings and economies of scale.
Bottom line, 2020 was a year of carnage for the domestic oil business, especially the months of March through August, when the worst of the fallout took place. The positive news is that both the price of oil and the domestic rig count embarked on a slow but steady rise to more healthy levels. Given that, it is certainly reasonable to hope that 2021 will present the industry with better times than 2020 did.
After all, a quick look back at history tells us it could hardly be any worse.
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].