What the Natural Gas Saga Portends for Bubblin’ Crude

Oil worker

Oh… I thought the boom was supposed to last twenty years. What am I supposed to do with this degree in oilfield construction technology now?

Hey! I’ll bet some of you thought that the Wolf Camp was long gone… Not so!

I was set this morning to discuss the “recovery” in oil prices last week, only to once again stare at red numbers today. Not to be deterred, I shall jabber on about another topic – falling rig counts.

You see, falling rig counts have been the gold standard for Pollyannas promising the return of $100 barrels. Surely, the thought goes, when the rig count falls far enough production will too! At least, that’s the theory.

Unfortunately, reality and economics stymie even the most pessimistic rig watchers. Despite losing over 60% (!) U.S. rigs, crude production remains stubbornly above 9 million barrels per day (a level never before seen). Rig watchers say this figure is going to drop… any minute now… reductions are imminent… wait for it…

There is an analog to this tale, however – natural gas. Rig counts fell there too over several years. When the boom in shale gas started, the rig count skyrocketed. When the price fell, just like with crude, rig counts declined precipitously. There again, Pollyannas touted production would follow suit. Only it didn’t… ever… for years.

Why? Simple economics… firms lowered service costs, and sunk those savings into maintaining production in economic wells for longer periods. For the industry, that meant maintaining production while lowering long-term costs. This was good for the survival of gas companies – not as good for companies on the exploration and drilling side (I’m looking at you, 80% of the Permian Basin). What is more, once rung, that bell could not be un-rung. Once prices rose (marginally, but still), production companies took profits, without needing to resort to more exploration. That meant that jobs lost in the gas industry were gone for good.

Those companies not able to compete in this new environment went the way of the dodo, and leaner companies swooped in and gobbled assets, exacerbating the “problem” (from the view of service companies). Long term, this was a new world order in the natural gas market. Low prices were no longer the panacea for low prices.

I will not firmly predict that such a sea change is what we’re seeing in crude markets, but I will say that there are indications to that effect. If so, service companies and independents are in for a long slog.

About Sennoma Civitano

You can trust me. I'm a law-yuh. Oh, and I have a Master's in Public Affairs. I read books. About things.
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2 Responses to What the Natural Gas Saga Portends for Bubblin’ Crude

  1. Jack A. Najarian says:

    Midland/Odessa was featured on CBS’ Sunday Morning this past Sunday. You should check it out. While I was watching it,I thought to myself, wow, I used to watch this show just down the street from where they were shooting the show. The guy on the show was making $1,800.00 a day in the boom, and now he is out of a job in the bust.

    Like

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