Baker Hughes Weekly Rig Count - May 29 2020

The US Rig Count continues to fall according to the Baker Hughes Weekly Rig Count. The Rig Count fell to 289 rigs in the US, down 62.5% since March 13. Week on week, rigs were down 5.6%, the lowest percentage weekly drop since March 27. 

The Permian Basin continues to see the majority of the losses in the US, losing 14 of the 17 rigs dropped this week (82% of the total). With the exception of the Permian and the Bakken, rig count appears to be stabilizing. While we have seen a return to higher oil prices in the last week, we should expect count to continue to sink lower for the next several weeks.

Table 1: Baker Hughes Weekly Rig Count - May 29 2020

Figure 1: Baker Hughes Weekly Rig Count - May 29 2020

World Oil - Precision Drilling CEO sees shale’s recovery a year away, at best

CALGARY (Bloomberg) --Even if the economy continues to recover and a second wave of the pandemic is less damaging than the first, U.S. shale drillers may still take at least a year before moving rigs back into the field, according to the leader of an oilfield-services company.

Precision Drilling Corp. Chief Executive Officer Kevin Neveu said activity in U.S. shale basins is in for a “prolonged downturn,” with drilling not rebounding until late in the second quarter of 2021 at the earliest, or the end of next year at the latest. That projection assumes governments respond to secondary Covid-19 outbreaks with less drastic measures than they used in recent months.

https://www.worldoil.com//news/2020/5/28/precision-drilling-ceo-sees-shale-s-recovery-a-year-away-at-best

OilPrice.com - Deja Vu: OPEC's Recurring Oil Production Dilemma

Two conflicting reports about OPEC's plans for oil production surfaced earlier this week--both citing unnamed sources. One set of sources claimed that Russia was considering an extension of the current oil production cuts beyond the end of June. The other set of sources said that Russia was planning to ease the cuts starting in July. This is a perfect illustration of the uncertainty reigning over oil markets. This uncertainty, however, needs to be mitigated, and the most likely one to do it would be the OPEC+ club, together accounting for more than a third of global oil production.

How? By strategizing how to increase oil production in such a way as to not crash prices again-- but also in a way that will keep U.S. shale from stripping away all the benefits from higher prices. It's a tough conundrum.

https://oilprice.com/Energy/Crude-Oil/Deja-Vu-OPECs-Recurring-Oil-Production-Dilemma.html

EIA - The number of active U.S. crude oil and natural gas rigs is at the lowest point on record

Producers were operating the fewest oil and natural gas drilling rigs on record in the United States at 339 on May 12, the lowest level in the Baker Hughes Company’s rig count data series that dates back to 1987. The number of active rigs began sharply decreasing in mid-March as crude oil prices fell: rigs have fallen by 56% (433 rigs) since March 17. Most of the decrease was in oil-focused geologic plays, but natural gas-focused plays also saw significant decreases.

https://www.eia.gov/todayinenergy/detail.php?id=43796

EIA - U.S. renewable energy consumption surpasses coal for the first time in over 130 years

In 2019, U.S. annual energy consumption from renewable sources exceeded coal consumption for the first time since before 1885, according to the U.S. Energy Information Administration’s (EIA) Monthly Energy Review. This outcome mainly reflects the continued decline in the amount of coal used for electricity generation over the past decade as well as growth in renewable energy, mostly from wind and solar. Compared with 2018, coal consumption in the United States decreased nearly 15%, and total renewable energy consumption grew by 1%.

https://www.eia.gov/todayinenergy/detail.php?id=43895&src=email

World Oil - Swift production declines may keep shale operators on oil rebound’s sidelines

HOUSTON (Bloomberg) --Oil prices have surged more than 75% in the U.S. this month. But don’t expect a quick rebound in supply from shale explorers.

The quick turnaround in oil markets is exposing the shale industry’s Achilles’ heel: Lightning-fast production declines. Shale gushers turn to trickles so quickly that explorers must constantly drill new locations to sustain output.

And they haven’t been doing that. Drilling activity touched an all-time U.S. low after Covid-19 lockdowns crushed global energy demand and explorers slashed spending to survive a crash that has erased tens of thousands of jobs and pushed some companies into bankruptcy.

https://www.worldoil.com//news/2020/5/22/swift-production-declines-may-keep-shale-operators-on-oil-rebound-s-sidelines

World Oil - Oil prices climb on prediction of swift demand rebalance

SINGAPORE (Bloomberg) - Oil rose above $34/bbl, following a prediction from Russia that the market may rebalance as early as next month due to historic output cuts from global producers.

Russia, a key member of the OPEC+ alliance that has pledged to trim supply by almost 10 million barrels a day, expects the market to balance in June or July. Energy Minister Alexander Novak said global output curbs have so far exceeded those agreed by the coalition. Futures in New York were 2.5% higher from Friday’s close after there was no settlement Monday due to a holiday.

Oil has surged more than 80% this month as demand returned following the easing of lockdown restrictions in some countries, while output cuts have started to chip away at the oversupply. The International Energy Agency sees oil consumption eventually rebounding past pre-virus levels, even as some argue that the coronavirus outbreak will fundamentally shift patterns of consumption.

https://www.worldoil.com//news/2020/5/26/oil-prices-climb-on-prediction-of-swift-demand-rebalance

OilPrice.com - What Does The Work From Home Movement Mean For Oil?

A few days ago, Facebook joined Twitter in embracing remote work as a permanent option for many of its employees. In a decade, Mark Zuckerberg said, half of the company’s employees could work from home. Now, let’s consider all the high-tech companies that could afford to keep half of their employees in the home office… and what this would do to oil demand. Oilprice.com’s Michael Kern raised the question in April, soon after WTI swung into negative territory for the first time ever. Transportation, he noted, accounts for more than two-thirds of oil demand in the United States. This makes it the single most critical factor for sustainable demand in the industry.

https://oilprice.com/Energy/Energy-General/What-Does-The-Work-From-Home-Movement-Mean-For-Oil.html

OilPrice.com - Texas Economy Could Lose $24B If Oil Prices Stay In The $30s

The downturn in the U.S. oil industry could lead to more than US$24 billion of lost GDP for Texas alone, if oil prices remain in the $30s, Ed Hirs, Energy Fellow at the University of Houston, told Anadolu Agency.

The oil price collapse, the production curtailments, and the budget cuts have already resulted in layoffs in the industry, and more job losses and oil and gas company bankruptcies are coming, according to analysts and legal experts.

“Many of the endangered companies had some amount of hedging in place to help them survive 12 to 18 months of a price collapse,” Hirs told Anadolu Agency. Yet, the energy economist warned that “the write-downs of asset values and the lack of new loans from banks and other lenders will spell the end for many companies.”

https://oilprice.com/Latest-Energy-News/World-News/Texas-Economy-Could-Lose-24B-If-Oil-Prices-Stay-In-The-30s.html

Rystad Energy - US oil output set to bottom out in June, will not recover to pre-Covid-19 levels in 2021

US oil production, which has steeply declined as low prices forced shut-ins, will reach a bottom of around 10.7 million barrels per day (bpd) in June, a two-year low, Rystad Energy estimates, before it starts to slowly recover. Still, US monthly output is not likely to exceed 11.7 million bpd before 2022, a staggering difference from the nearly 12.9 million bpd achieved in March 2020.

It was just months ago that US oil production was at an all-time high and seemed unstoppable. In November 2019, production reached 12.884 million bpd, only marginally higher than 12.855 million bpd in March.

https://www.rystadenergy.com/newsevents/news/press-releases/us-oil-output-set-to-bottom-out-in-june-will-not-recover-to-pre-covid-19-levels-in-2021/

Baker Hughes Weekly Rig Count - May 22 2020

The Baker Hughes rig Count showed that US active rigs dropped by 6.4% this week. The rate of rig declines continues to decrease as we are reaching a bottom in activity. Once again, the Permian Basin saw the largest reduction in active rigs of all of the major basins, losing 62% of all of the rigs dropped this week (13 out of 21 rigs).

Table 1: Baker Hughes Weekly Rig Count Comparison for May 22, 2020

Figure 1: Baker Hughes Rig Rig Count Chart for May 22, 2020

US Land 2020 CapEx - Q1 Actual Spend vs the remainder of 2020

In the last couple of weeks, the majority of the publicly traded companies have released their quarterly earnings. With their earnings, the operators have either updated or confirmed their planned spending plans for 2020. It shouldn't come as a surprise to anyone that nearly all of the operators have revised their budgets down. Those operators that haven't revised their spending plans were already operating on a tight budget (gas focused companies) or front loaded their spending for the start of the year. 

With the downturn hitting near the end of the first quarter, all of the spending for Q1 was based on Original Capital Expenditure (CapEx) plans for 2020. All of the cuts for to 2020 will take effect after Q1. When the companies announced that their 2020 CapEx budget had been revised, they were talking about spending for the entire year. This means that Q1 spending from the previous budget will take up a larger portion of the new budget and leave less money for the rest of the year. 

This analysis will be to review CapEx changes for 2020, determine the remaining CapEx for the rest of 2020 and project how that CapEx will be spent during the rest of the year. The data in this post came from Operator Earnings and Financial reports and transcripts posted on their websites. If there was a range of CapEx spend for the year, I took the midpoint of the range. In the event that there wasn't a revised CapEx given, I estimated their spend based on rig count or activity in the area. 

I looked at 43 publicly traded companies and gathered their CapEx information for 2019, original 2020 CapEx forecast, updated 2020 forecast and their Q1 actual CapEx spend from their earnings reports and presentations. I tried to look at only US Onshore (Lower 48) CapEx but there were a few operators that did not split that information out (could include Gulf of Mexico or Alaska CapEx)

I first sorted the companies by area. If an operator works in more than one area, I listed them as Multi-Area companies. 

Table 1: US Onshore CapEx Spend, 2019 vs 2020 Original vs 2020 Updated 
(Source: Operator Earnings Reports, VDK Consulting Analysis)

The Eagle Ford CapEx had the largest downward revision in 2020, but this is represented by only one Operator (Murphy Oil). The Northeast had the smallest revision in 2020, showing a 15.7% decrease this year. The Northeast clients have been fighting low gas prices coming into 2020 and were already operating at low budgets. Most have shifted gears and are now operating in production maintenance mode, spending just enough money to maintain production at current rates.

The Permian focused clients saw a 46% downward revision while the Multi-Area clients revised their CapEx down by nearly 49.6%. Due to play economics, the Permian Basin has been the focus of the US Oil and Gas Industry. The other plays had already seen CapEx reductions coming into 2020. The Permian was the last area to see major cuts in spending and are therefore taking the largest hit.

The following chart shows 2019, 2020 Original Budget and 2020 Revised Budgets and 2020 Revised Budget percentage change.

Figure 1: 2019 Capex vs 2020 Original CapEx vs 2020 Revised CapEx
(Source: Operator Earnings Reports, VDK Consulting Analysis)

The two operators that didn't make changes were Cabot Oil and Gas and Gulfport. Cabot announced during their Q4 2019 review that they were going have maintenance CapEx in 2020 to maintain their production rate from 2019. They haven't made any changes to their CapEx for 2020 as they plan to stay in maintenance mode. Gulfport Energy front loaded their CapEx for 2020, spending the majority of the CapEx for the year in Q1. 

The chart in figure 1 shows that the gas focused operators have had smaller reductions in CapEx when compared to the oil focused operators. The gas focused operators came into the year with reduced budgets and there is a strong belief that gas prices should increase through 2020 and 2021 due to reduced gas production from oil plays

The following table looks at the individual companies in the list and compares Q1 Actual spend versus the revised 2020 CapEx spend.

Table 2: Q1 2020 Actual Spend vs 2020 Revised Forecast 
(Source: Operator Earnings Reports, VDK Consulting Analysis)

The cells are color coded to give a quick visual reference of the spending of the different operators. The green shaded cells spent less than 30% of their revised CapEx in Q1 while the red shaded cells spent more than 55% of the revised yearly CapEx in Q1.

Looking at the data, several operators have spent more than 60% of their planned 2020 CapEx in Q1. These include Bonanza Creek, Centennial Development Company, Extraction Oil and Gas and Murphy Oil. These companies have reduced operations to minimum levels and likely won't increase activity until 2021. 

When reviewing the earnings reports, 6 operators gave guidance on how much money they would spend in Q2 and the rest of the year. For the operators that gave only Q2 guidance, I calculated how much CapEx was remaining and split it out for the rest of the year.

Table 3: 2020 CapEx Spend Projections with Operator Guidance
(Source: Operator Earnings Reports, VDK Consulting Analysis)

I was expecting the operator guidance to show that there would be minimum spending in Q2 and then an increase in spending in Q3 and Q4. Ovintiv is following that plan with reduced spending in Q2 and then more spending in Q3 and Q4. EOG has reduced their spending but plan to spend a consistent amount through the end of 2020. The remaining operators appear to be spending a reduced amount in Q2 when compared to Q1 and then will have minimum spending for the rest of the year. 

Since this small data set of operator spending shows a wide variance in plans, I will project two different scenarios for remaining CapEx spend. Scenario 1 will take the remaining budget for 2020 and split it evenly among the remaining months. Scenario 2 show a larger proportion of spend in Q2 (40% spend of CapEx) following by reduced spend in Q3 and Q4 (30% each quarter). 

Table 4: Scenario 1: Even Spend of Remaining 2020 CapEx
(Source: Operator Earnings Reports, VDK Consulting Analysis)

Table 5: Scenario 1: Quarterly Decreasing Spend of Remaining 2020 CapEx 
(Source: Operator Earnings Reports, VDK Consulting Analysis)

Actual spending will probably be between these two scenarios and will depend on the operator requirements throughout the year. These scenarios also show that the operators that have spent most of their budget in Q1 will have very little activity for the rest of the year. The Gas Focused operators that were operating on tight budgets already will likely maintain their activity pace for the rest of the 2020.

Even though oil prices have risen in recent weeks, I would expect little to no impact on 2020 CapEx. Current oil prices are still below break-even prices for most operators. We will likely see increased oil production as shut in production comes back online. New Drilling and Completion activity will likely increase in 2021.

SPE - New Low for Active US Crude Oil and Natural Gas Rigs

As of 12 May, only 339 oil and natural gas drilling rigs were operating in the US, the lowest since the numbers were recorded in 1987—marking a 56% decline (433 rigs) since 17 March. Most of the decrease was in oil-focused geologic plays, but natural-gas-focused plays also saw declines.

Within that 2-month period, 71% (308 rigs) of those taken out of service were in the top three US crude-oil-producing regions: the Permian, Eagle Ford, and Bakken. In mid-March, the Permian region had 405 operating rigs; by 12 May, that number had fallen by 57% to 175 rigs. The Eagle Ford and Bakken regions saw similar declines in that period, losing 64% and 69% of their rig counts, respectively.

https://pubs.spe.org/en/jpt/jpt-article-detail/?art=7075

RigZone - Shale Faces Multibillion-Dollar Hedging Crunch

(Bloomberg) -- U.S. shale drillers spooked by the epic meltdown in oil markets are trying to figure out how to protect themselves in the future. It won’t come easy, or cheap.

After oil’s crash below zero, explorers face hefty premiums for the financial instruments they rely upon to insure against price swings. Meanwhile, they’re also unwilling to lock in future supply with forward prices for crude remaining lackluster.

“Producers are stuck between a rock and a hard place right now,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets. “There has been a dearth of opportunities to hedge for 2021, and this is traditionally the time period when you lean into next year’s hedging at more robust levels.”

https://www.rigzone.com/news/wire/shale_faces_multibilliondollar_hedging_crunch-21-may-2020-162162-article/?all=HG2

World Oil - Physical oil prices are surging worldwide, but can it last?

SINGAPORE (Bloomberg) --From the Middle East to Siberia, the North Sea down to Latin America, the prices of physical cargoes of crude oil are rallying hard almost everywhere, underpinning a surge in headline futures markets. Now, though, attention is turning toward just how sustainable the recovery will really be.

Brent crude traded on the ICE Futures Europe exchange has nearly doubled over the past month and is trading above $36 a barrel, while America’s West Texas Intermediate -- which dipped into negative territory at one stage -- has also soared. All that’s happened because global producers have slashed millions of barrels of output tightening the real supply of oil, while demand has started to recover, led by China.

https://www.worldoil.com/news/2020/5/21/physical-oil-prices-are-surging-worldwide-but-can-it-last

OilPrice.com - Is The Oil Collapse Over Already?

It has just been an amazing week for crude oil! We haven’t seen upward movement in WTI like we’ve seen this week in…forever, on a percentage basis. Buoyed by a dramatic shift in sentiment following an avalanche of good news generally, over a very short time span oil has rocketed higher.

Key among this data was a crude storage report turning out to not be as bad as originally feared and on the decline. In the most recent weeks’ edition of the EIA-WPSR, a slight build was forecast, that turned into an actual decline of 0.7 mm bbls. The market loves data like this, particularly in the face of several months of increasing bearish data up to this point.

https://oilprice.com/Energy/Crude-Oil/Is-The-Oil-Collapse-Over-Already.html

OilPrice.com - Why U.S. Shale Is Too Important To Fail

It may well be the case that the U.S. shale sector has cut over US$50 billion from its planned spending this year, the number of operating rigs has fallen by 40 per cent in the past four weeks, and output has fallen by nearly one million barrels per day (bpd) over the same period. It is equally true, though, that what all these reports overlook is that the shale oil (and gas) sector is too important from a geopolitical and economic perspective to the world standing of the U.S. for it to be allowed to fail, and all other considerations are secondary. In reality, the U.S. shale sector is set to emerge stronger, and earlier, than the vast majority of people think.

https://oilprice.com/Energy/Energy-General/Why-US-Shale-Is-Too-Important-To-Fail.html

EIA - The number of active U.S. crude oil and natural gas rigs is at the lowest point on record

Producers were operating the fewest oil and natural gas drilling rigs on record in the United States at 339 on May 12, the lowest level in the Baker Hughes Company’s rig count data series that dates back to 1987. The number of active rigs began sharply decreasing in mid-March as crude oil prices fell: rigs have fallen by 56% (433 rigs) since March 17. Most of the decrease was in oil-focused geologic plays, but natural gas-focused plays also saw significant decreases.

Since March 17, 71% (308 rigs) of the rigs taken out of service were in the top three U.S. crude oil-producing regions: the Permian region in southeastern New Mexico and western Texas, the Eagle Ford region in southern Texas, and the Bakken region in Montana and North Dakota. Drilling in oil-focused plays has declined as the impact of mitigation efforts for the 2019 novel coronavirus (COVID-19) have caused declines in petroleum demand and the resulting fall in crude oil prices. In mid-March, the Permian region had 405 operating rigs. By May 12, that number had fallen by 57% to 175 rigs. The Eagle Ford and Bakken regions saw similar declines in their rig counts, of 64% and 69%, respectively, in that time.

https://www.eia.gov/todayinenergy/detail.php?id=43796&src=email

World Oil - Oil highest since March as Chinese demand reaches 13 MMbpd

SINGAPORE (Bloomberg) - Oil rose to close at its highest in two months as demand in China returned to near pre-virus level and output curbs continued in the U.S. and elsewhere.

Futures in New York climbed as much as 9.8%. Chinese oil use is at 13 million barrels a day, just shy of the levels of a year earlier, traders and executives said. The dramatic turnaround is a sign of the speed at which the market is starting to recover from an unprecedented collapse in demand that forced prices below zero last month.

At the same time, major producers’ output cuts are starting to take hold. American shale drillers reduced drilling rigs to the least in more a decade and Russia pledged strict compliance with the record OPEC+ cuts. Saudi Arabia didn’t give extra volumes of oil to three Asian customers who asked for it, according to refiners.

https://www.worldoil.com//news/2020/5/18/oil-highest-since-march-as-chinese-demand-reaches-13-mmbpd

World Oil - U.S. shale’s quick response to falling oil prices is paying off

CALGARY (Bloomberg) --In brokering the end to the global oil-price war last month, the Trump administration assured leaders that America’s shale patch would throttle back production.

But few expected that the cuts would run this deep -- and happen so quickly.

Drillers are laying down rigs and shutting in wells at a frantic pace in response to the plunge in oil prices caused by the coronavirus pandemic. A week after West Texas Intermediate crude settled below zero for the first time ever, analysts at JPMorgan projected that the U.S. would cut output by 1.5 million barrels a day by June. Two weeks into May, production is already down by at least that much and continues to decline.

As a result, oil storage tanks that were in danger of brimming over got a break last week when inventories shrank for the first time since January. The market has noticed: WTI for June delivery rallied to near $30 a barrel on Friday, up from $10.01 when it became the prompt contract on April 21.

https://www.worldoil.com/news/2020/5/15/us-shale-s-quick-response-to-falling-oil-prices-is-paying-off

Baker Hughes Weekly Rig Count - May 15 2020

The Baker Hughes Rig Count showed that weekly rigs dropped by another 9% this week. Looking at the regional data, it appears that ArkLaTex, Northeast and DJ Basin have reached a bottom. The Bakken, Eagle Ford, MidCon and Permian accounted for the main rig declines this week.

At the start of the rig decline, the Permian Basin had 54% of all of the rigs running in the Lower 48 (418 of 771 active rigs). Looking back the weekly rig losses, the Permian has lost a higher proportion of rigs compared to the total rig count. On a weekly basis, the Permian has accounted for 57% of the rig loss total compared to accounting for 54% of the rigs at the start.

In the last week, the Permian rig losses accounted for 72% of the total rigs lost (23 of 32 rigs lost) but the Permian rig total was 54% of the total rigs (175 rigs in the Permian out of 327 rigs). As other area rig counts begin to stabilize, we can expect the Permian to account for the majority of the lost rigs.

Baker Hughes Weekly Rig Count - May 15 2020

Source: Baker Hughes

Oil Price.com - How U.S. Shale Can Survive The Oil Crash

The question regarding whether we have reached peak oil demand is a pressing concern for U.S. upstream activity. U.S. tight oil’s current cost structure, which generally requires ~$50/barrel WTI to make it economically viable, suggests that oil demand needs to return to pre-COVID levels for U.S. shale to recover (Fig. 1). This article considers the industry’s ability to lower its cost structure further in order for it to maintain competitiveness.

https://oilprice.com/Energy/Crude-Oil/How-US-Shale-Can-Survive-The-Oil-Crash.html

Rystad Energy - US fracking activity forecast to hit rock bottom in May, recovery set to start in 2020’s third quarter

The Covid-19 pandemic and the low oil-price environment it has created continues to affect global energy markets and activity levels by oil and gas producers. New fracking jobs in the US are not immune to the trend and Rystad Energy expects May to be the month that such activity will hit rock bottom before a recovery begins in the third quarter of 2020.

We estimate that the total number of started frac operations in the country’s Lower 48 states will end up at around 300 to 330 wells in May 2020, down from April’s 337 wells.

Many companies chose to initiate complete nationwide frac holidays for the second quarter, and the remaining frac spreads were released after their last jobs were completed in April, which made the decline in started jobs particularly dramatic last month. Some activity is still going on, and we have so far identified 92 started frac operations in May on a standard-month basis.

https://www.rystadenergy.com/newsevents/news/press-releases/us-fracking-activity-forecast-to-hit-rock-bottom-in-may-recovery-set-to-start-in-2020s-third-quarter/

World Oil - U.S. projects falling rig counts, crude production through 2021

WASHINGTON - The U.S. Energy Information Administration expects U.S. crude oil production to fall in 2020 and 2021 as efforts to mitigate the spread of the 2019 novel coronavirus disease continue to result in a steep drop in demand for petroleum products and crude oil prices. In its May Short-Term Energy Outlook, EIA forecasts that U.S. crude oil production will average 11.7 million barrels per day (bpd) in 2020 and 10.9 million bpd in 2021. These levels would be 0.5 million bpd and 1.3 million bpd, respectively, lower than the 2019 average of 12.2 million bpd.

The benchmark West Texas Intermediate (WTI) crude oil average spot price dropped from $58 dollars per barrel (b) in January 2020 to $29/bbl in March and $17/bbl in April. This sharp decline in the oil price is already having a significant effect on drilling activity in the United States. The number of active drilling rigs in the Lower 48 states, excluding the Federal Offshore Gulf of Mexico (GOM), totaled 753 as of February, but it fell to 738 in March and 572 in April, the lowest since May 2016. As of May 8, 2020, the Lower 48 land rig count stood at 355 rigs, according to Baker Hughes data.

https://www.worldoil.com//news/2020/5/14/us-projects-falling-rig-counts-crude-production-through-2021

Rystad Energy - OFS stocks lost half their value since 2020 began: EPCI top performers, offshore drillers scratch bottom

It is widely acknowledged that the oilfield services sector (OFS) is the energy world’s worst-hit market from the Covid-19 pandemic. What is staggering is the extent that the capitalization of listed OFS companies has fallen. A Rystad Energy analysis reveals that stocks in OFS companies have collectively lost half their value since the beginning of 2020.

Analyzing a representative group of 116 listed OFS companies, accounting for around 71% of the traded equities in the sector in 2019, Rystad Energy found that the firms have lost approximately 49% of their market capitalization since the beginning of this year.

https://www.rystadenergy.com/newsevents/news/press-releases/ofs-stocks-lost-half-their-value-since-2020-began-epci-top-performers-offshore-drillers-scratch-bottom/

What the term FID means and its impact on global oil supply.

In the world of large oil and gas projects, FID stands for Final Investment Decision. This is the point in the life of a major project where a company/group decides to approve (or sanction) a project and take it from paper to reality. In very large projects, the board of directors for the company makes the final decision. This is also the point when the company communicates with its investors and the public that they are committed to building this project

The FID is just one point in the life of a project. Before a Final Investment Decision is made, a project goes through several steps. These include a Feasibility Study (to determine if this project is economic), commitments from partners (these projects are so expensive that multiple sources of cash are needed), and the FEED (Front End Engineering and Design). During the FEED period, the technical requirements and the overall costs of the project are determined. These things are then presented to the group making the Final Investment Decision. 

Once the FID is made, the project moves to the EPCI stage (Engineering, Procurement, Construction and Installation). This is the stage where the majority of the project costs are incurred. During the EPCI phase, the final designs are approved, the materials are approved and ordered, contracts are signed and equipment is ordered.

Before the FID, the costs associated with the project are relatively small. Once FID is made, the company is committed to spending the money to complete the project. It becomes much more difficult to stop a project after the FID is approved. 

In today's environment, everything is being questioned. Before March 2020, most oil price forecasts had the price of oil at $40 USD or higher. During the feasibility studies, this price of oil would have been used in economic analysis. Now, there are many forecasts that predict oil prices will be below $40 through 2021. At current prices, nearly all of the major projects are uneconomical. While forecasts show oil prices should increase, most companies will hesitate to take unnecessary financial risks.

At the start of April, Wood MacKenzie stated that out of the 50 projects they were tracking at the beginning of 2020, potentially only 10 would be approved this year. As seen in Figure 1, the number of approved projects could be less than the number of projects approved in 2015, which is the last time we saw a major drop in oil prices.

Figure 1: Wood MacKenzie Upstream Project Tracker, Q1 2020

With this delay in projects, the amount of money being spent on oil and gas projects globally will be decreased as well. In a recent Rystad Energy article, their analysis showed that 2020 Greenfield (new oil and gas fields) tendered contracts are expected to decrease to $60 billion, the lowest in 20 years.

Figure 2: Rystad Energy Tendered Contract Analysis, Service Cube, May 2020

Rystad forecasts that 2021 will only see a minor uplift in activity followed by a significant increase in 2022. This will mean a delay in future supplies by at least 2 years. The full Rystad article can be found at the following link:

Rystad Energy - Greenfield E&P Tenders shrink

The reason that a FID delay is important is that it will have a significant impact on oil (or gas) supply in the future. The rule of thumb is that it takes 5 years from the start of a project until it is producing oil. If a project is significantly delayed, it will be difficult to restart from the same spot. Many projects will likely go through the Feasibility and FEED stages again, though likely at a faster rate. There will be significant labor challenges when the project discussions resume as many talented people have been forced out of the industry. 

The forecasts for reduced future oil supply are already beginning. Rystad Energy released a forecast at the beginning of May forecasting a supply deficiency of 5 million barrels of oil per day (BOPD) by 2025.

Figure 3: Rystad Energy Supply Forecast, May 2020

Before the oil price collapse, Rystad was predicting that supply would exceed demand in 2025. With reductions in exploration, they forecast that supplies will be below demand. The full Rystad article at the following link:

Rystad Energy: Oil Supply under supply by 2025

The future under supply will cause oil prices to increase significantly. The OPEC countries will likely be able to meet most of the demand increase but additional supplies will be required. In a pre-COVID-19 oilpatch, the US was able to add supplies rather quickly (6 to 12 months). In a post COVID-19 world, where investment money is tight (maybe non-existent),  and equipment and personnel are limited, it may be difficult for US oil companies to add to global supplies. 

If any of us are left working in the oil and gas industry by 2025, there is a light at the end of the tunnel. It won't be another train but a boom that will require us to rebuild the industry. We just need to get there.

Rystad Energy - Taps closing! US shut-ins to reach at least 2 million bpd in June as oil producers walk the walk

US oil producers have been expected for some time to have to shut down oil production as a result of the Covid-19 pandemic, but they were initially slow to move. Now that profitability and storage limitations have started to hurt, the curtailment wave has accelerated. A Rystad Energy analysis shows that gross US cuts could reach at least 2 million barrels per day (bpd) in June, including liquids.

Net oil production cuts could reach 835,000 bpd in May and 877,000 bpd in June, compared to around 256,000 bpd in April, according to Rystad Energy’s interpretation of early communication from 31 US oil producers.

https://www.rystadenergy.com/newsevents/news/press-releases/taps-closing-us-shut-ins-to-reach-at-least-2-million-bpd-in-June-as-oil-producers-walk-the-walk/

Hart Energy - Shale Pioneer Chesapeake Energy Considers Bankruptcy Filing

Chesapeake Energy Corp. said May 11 it was unable to access financing and was considering a bankruptcy court restructuring of its over $9 billion debt if oil prices don't recover from the sharp fall caused by the COVID-19 pandemic.

The announcement follows last month's statement by the pioneering shale gas producer that it was in talks to line up bankruptcy financing and was in talks for a loan to run its operations through the court proceedings.

Company filings showed it had a combined debt of more than $1 billion by way of debt maturities and interest expenses, of which $250 million in senior notes were due this year.

https://www.hartenergy.com/news/shale-pioneer-chesapeake-energy-considers-bankruptcy-filing-187521

World Oil - Oil storage crisis fading on global production cuts and recovering demand

LONDON (Bloomberg) --While the global oil market remains in a dire situation, it’s starting to look like the nightmare scenario envisioned for the past month might just be averted.

The industry feared a flood of unwanted crude would overwhelm the world’s storage tanks as fuel demand was shattered by the coronavirus. Once that “storage wall” was hit, producers would be forced into a chaotic wave of potentially damaging shut-ins at oil wells.

In recent days, however, the alarm is starting to subside.

After the brutal price crash, producers have cut output on a historic scale, including unprecedented reductions by the OPEC+ alliance. Now demand is starting to creep higher as governments ease lockdowns, letting drivers back on the roads.

https://www.worldoil.com/news/2020/5/12/oil-storage-crisis-fading-on-global-production-cuts-and-recovering-demand

World Oil - Continental Resources shutting in 70% of its May production

HOUSTON (Bloomberg) --Continental Resources Inc., the oil explorer founded by billionaire Harold Hamm, is curtailing about 70% of its crude output in May in one of the most aggressive production cuts announced to date among U.S. producers.

The Oklahoma City-based company, which doesn’t typically hedge its production, withdrew its 2020 guidance and is dropping rigs, the driller said Monday in its first-quarter earnings statement. Continental also reported a $1.13 billion draw on its credit facilities and bought back 8.1 million shares of common stock in the quarter, according to a regulatory filing.

https://www.worldoil.com/news/2020/5/11/continental-resources-shutting-in-70-of-its-may-production

Oil Price - Why Young Professionals Are Steering Clear Of Oil & Gas

A career in oil used to be an attractive option for college students and high school grads alike. Oil and gas was one of the few industries where one could make six figures a year without a college diploma. And those with a diploma? They made high six figures with all sorts of perks and benefits.

Those days are gone.

During the last oil crisis, between 2014 and 2016, a few hundred thousand jobs were lost in the industry globally as oil companies were forced to shrink their exploration and production activities. Now we are seeing a repeat of that same scenario: frac crews in the U.S. shale patch are being dismissed because companies are suspending all new drilling and shutting in operating wells. Industry majors are revoking internship proposals. Oil and gas is once again viewed as a poor career choice.

https://oilprice.com/Energy/Energy-General/Why-Young-Professionals-Are-Steering-Clear-Of-Oil-Gas.html

Baker Hughes Weekly Rig Count - May 8 2020

Since March 13, the US Land Rig Count has dropped 53%. It appears that we could be approaching a bottom for the rig count as the decline rate has slowed. Between the weeks of April 19 and May 1, the rig count was shrinking at nearly 12.5% per week. The rate has slowed to "only" 8.4% this week. Hopefully we will hit the bottom in the next month and then we can start working our way out of this hole.

Source: Baker Hughes Rig Count

Source: Baker Hughes Rig Count

JPT - North American Contractions: Murphy Oil, Marathon Oil, and Halliburton

Oil and gas companies in the hard-hit North American market are announcing new downsizing figures as they cope with a historic collapse in crude prices.

Murphy Oil is the latest operator to announce significant layoffs and the closing of offices. Casualties include the company’s legacy headquarters in the small town of El Dorado, Arkansas, which was home to 80 employees. The firm’s longstanding office in Calgary will also be eliminated, along with 110 employees.

https://pubs.spe.org/en/jpt/jpt-article-detail/?art=7011

JPT - Oilfield Life After the COVID-19 Crash

This latest crash reminds me of the old R.E.M. song, The End of the World as We Know It (and I Feel Fine).

I have been through quite a few of these roller-coaster rides in my career, and while all have had the same shape, this one is quite different.

For the first time, we in the industry are caught in that “perfect storm” of big players, playing their game of trying to upset the law of supply/demand, and the external imposition of near-complete destruction—albeit a temporary one—of the demand curve.

Never has the entire world been locked down, not able to move about, travel, or conduct business. As a result, and for the first time ever, we witnessed oil futures go negative and the panic of the traders.

https://pubs.spe.org/en/jpt/jpt-article-detail/?art=6997

Oil Price - The Terrifying Truth About Trading Oil

When we buy stocks – as long as we don’t trade on margin – we know that the worst case scenario is a 100% loss on our investment. But that turns out not to be the case with the oil market, which entered record territory last month.

On April 20th, the price of West Texas Intermediate (WTI) for May delivery opened at $17.73 a barrel, and then started a long slide.

The contract was set to expire the next day, and most traders don’t want to take delivery of 1,000 barrels of oil. Given the COVID-19 induced demand collapse, it wasn’t surprising to see selling pressure the day before the May contract closed.

https://oilprice.com/Energy/Oil-Prices/The-Terrifying-Truth-About-Trading-Oil.html

World Oil - Oil at $30 may be enough to revive shale activity, say drillers

HOUSTON (Bloomberg) --A pair of prominent shale producers said all they need is oil around $30 a barrel to consider bringing back curtailed crude output and fracing new wells.

Diamondback Energy Inc. is curbing production this month by 10% to 15% and sending home most of its fracking crews for the whole quarter. The Midland, Texas-based company expects to end this year with more than 150 wells that were drilled but never fracked as U.S. producers avoid pumping oil into a vastly oversupplied market. Parsley Energy Inc., meanwhile, has curtailed a quarter of its output and temporarily abandoned its five-rig, two-frac crew program.

The historic rout in crude prices amid the Covid-19 pandemic has spurred an unprecedented retreat from shale exploration. Producers from Chevron Corp. and Exxon Mobil Corp. to mom-and-pop drillers are curbing output as the world runs out of places to store additional oil supply.

https://www.worldoil.com//news/2020/5/5/oil-at-30-may-be-enough-to-revive-shale-activity-say-drillers

Force Majeure: How is COVID-19 impacting the NBA and the Oil and Gas Industry

About a week ago, I read a brief article about Continental Resources declaring force majeure on an oil delivery contract in the Bakken due to COVID-19. The report stated that Continental Resources could not have foreseen the dramatic drop in prices caused by COVID-19 and that selling oil at negative prices constitutes waste and therefore could not deliver oil to the refinery. 

(https://www.worldoil.com/news/2020/4/24/continental-resources-declares-force-majeure-on-some-oil-deliveries

After reading this article, I decided to do some research on force majeure to understand it's potential impact during the COVID-19 crisis. 

According to Wikipedia, force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, epidemic or an event described by the legal term act of God, prevents one or both parties from fulfilling their obligations under the contract. 

In other words, if an unforeseeable or uncontrollable event occurs that makes it impossible for a party to meet its contactable obligations, this could be considered a force majeure event and the party may be excused from completing their obligations.

Let's consider the NBA before looking at the oil and gas industry. COVID-19 had an impact on the NBA when the suddenly cancelled a game in Oklahoma City just before it was set to start. Rudy Gobert had tested positive for COVID-19 and the league cancelled the game and then suspended the season. They were quickly followed by the NHL and the rest of the USA after that. 

The NBA has a force majeure clause in their agreement with the NBA Players Association and they specifically mention epidemics as one off the events that would trigger the force majeure clause. The Collective Bargaining Agreement (CBA) states that the league can withhold nearly 1% of the players salaries per cancelled game if a force majeure event is triggered. It also states that it can cancel the entire CBA due to the event. It's unlikely that the NBA would cancel the CBA but they have very specific language in their contract about their response to force majeure events.

The link to the NBA force majeure clause, Section 39.5 can be found at the following link. 

NBA CBA Term of Agreement

On April 17 2020, the league and the union came to an agreement that they would reduce the remaining salaries by 25% starting in mid-May. This will impact the remaining games for the 2019-2020 season. It's unclear if they will restart the season and have playoffs at this moment.

In the oil and gas industry, Force Majeure is a common clause in many Master Service Agreements (MSA). If you have had the opportunity to review a MSA, you will likely come across a section titled Force Majeure and it will list all of the potential issues that could be considered force majeure. Most oil and gas MSAs include acts of war, civil unrest, industry strikes, federal or state regulation changes and acts of God (which usually means earthquake, flood, fire, hurricane, etc). Very rarely do they include anything related to epidemic or pandemics 

While the definition of force majeure frees parties of liability, it usually means during the period the event is happening and both parties need to work towards limiting the impact of the event. If the contract cannot be completed due to the force majeure event, then the contract may be cancelled without penalty to either side. The clause cannot be invoked due to negligence or inability to meet contract standards.

Does this mean that the entire oil and gas industry will be able to declare force majeure to exit or suspend unattractive contracts? The short answer is most likely not. The devil is in the details and the language of the force majeure contract will determine how the clause is invoked.

(Note: I am not a lawyer and I am not offering any legal advice. The following is a summary of several different discussions I have read about force majeure. Consult an actual lawyer for advice)

After reviewing several different law websites, here is the basics of utilizing force majeure

1: Determine if your MSA contains language that could be related to the impact of COVID-19. Most MSAs are clear about war, strikes, civil unrest, etc. but are vague on pandemics. If there is a reference to act of God (meaning a natural event outside of our control) or government actions (ie shelter in place mandates, reduced international travel, closed borders) then this may be deemed a force majeure event. 

2: Determine how your activities were impacted related to COVID-19 events. Most clauses state that the activity was hindered, delayed, impossible or impracticable to complete. A company will have to demonstrate that their business was significantly impacted by a force majeure event. This could include a lack of staff or supply chain issues due to shelter in place orders. It may not be a force majeure event when performance is more expensive or inconvenient, the clause usually requires performance to be impossible to complete.

3: Document events and notify the other parties in the contract. Once a company has determined that they are impacted by a force majeure event, they need to document their case and notify the other party of the contract. If the other party doesn't agree and they choose to go to court, documentation is a must.

While the NBA has clear language in their agreement on how to deal with epidemics/pandemics, most oil and gas companies do not. It's clear that, with sports suspended due to COVID-19, it is impossible for the NBA to provide players to play. Most oil and gas companies have terms in the force majeure section that are open to interpretation and it is likely that they won't be able to use this clause during this crisis. I would expect that MSAs will have specific language associated with pandemics from now on.

Rystad Energy - A trillion dollars! This is by how much global E&P revenues will fall in 2020 due to Covid-19

The devastating effect of the Covid-19 pandemic on global oil and gas exploration and production (E&P) companies is better understood by looking at the industry’s expected total annual revenues for 2020. A Rystad Energy analysis shows that global E&P revenues are now forecasted to fall by about $1 trillion in 2020, a drop of 40% to $1.47 trillion from last year’s $2.47 trillion.

Before the Covid-19 pandemic, Rystad Energy expected total E&P revenues to reach $2.35 trillion in 2020 and $2.52 trillion in 2021. Now 2021 revenues are also projected lower, at $1.79 trillion.

Companies’ cash flow is also set to plunge. For 2020 we estimate free cash flow for the E&P sector will shrink to $141 billion, or one-third of what it was in 2019. This is based on our base-case oil price scenario of $34 per barrel in 2020 and $44 per barrel in 2021, so there is a considerable downside risk if the current low-level prices persist.

https://www.rystadenergy.com/newsevents/news/press-releases/a-trillion-dollars-this-is-by-how-much-global-ep-revenues-will-fall-in-2020-due-to-covid-19/

Rystad Energy - Global investment slowdown set to hike oil prices and cause undersupply of 5 million bpd in 2025

The Covid-19 pandemic will leave not only short-term, but also long-term scars on the oil market. Even though the world is currently facing what is arguably the largest oil glut ever recorded, the tables will turn dramatically in coming years. The lack of activity and investments currently planned by cost-conscious E&P firms, combined with an inevitable rebound in global oil demand, is set to cause a supply deficit of around 5 million barrels per day (bpd) in 2025, Rystad Energy calculates, with prices seen topping $68 per barrel to balance the market.

In our base case scenario, global demand for liquids in 2025 will reach around 105 million bpd. Before the Covid-19 pandemic, Rystad Energy expected supply to slightly exceed demand. However, due to the steep curtailment of investments and activity that the current crisis has brought this year, Rystad Energy now estimates that the downcycle in the upstream industry will remove about 6 million bpd from production forecasts for 2025.

https://www.rystadenergy.com/newsevents/news/press-releases/global-investment-slowdown-set-to-hike-oil-prices-and-cause-undersupply-of-5-million-bpd-in-2025/

World Oil - Challenge lies in choosing which wells to shut in amid the oil downturn

HOUSTON (Bloomberg) -- Shutting an oil well in 2020 is relatively easy, and can even be done with a few taps on an iPhone in some cases. Figuring out which to shut, and for how long, is the hard part.

In the wake of a killer pandemic and the worst crude crash in history, the U.S. has become ground zero for a vast new experiment in the industry. Producers are shutting wells at a tremendous rate with oil prices sitting at historic lows. On Friday, Exxon Mobil Corp. said it will cut the number of its rigs in the Permian Basin by 75%, running just 15 by year’s end. Chevron Corp. said it’s now down to just five rigs there, a 71% drop.

https://www.worldoil.com//news/2020/5/5/challenge-lies-in-choosing-which-wells-to-shut-in-amid-the-oil-downturn

World Oil - Oil rally continues as output cuts appear to reduce inventories

SYDNEY (Bloomberg) --Oil extended its rally into a fifth day on signs that a glut might be easing as leading producers slash their activity.

Futures in New York climbed almost 5%, after rising 3.1% on Monday, in the longest streak of gains since July. Genscape reported a 1.8 million-barrel build in inventories in Cushing, Oklahoma, the delivery point for West Texas Intermediate crude. If the U.S. government reports a similar number Wednesday, it would mark the smallest increase at the hub since mid-March.

https://www.worldoil.com//news/2020/5/4/oil-rally-continues-as-output-cuts-appear-to-reduce-inventories

World Oil - Oil demand is beginning a slow, and fragile, recovery worldwide

LONDON (Bloomberg) --Few have a better watchtower over oil demand than Joe Gorder, chief executive officer of major U.S. refiner Valero Energy Corp. But this week Gorder didn’t even need his business insight to know that fuel consumption was starting to recover in America.

He only needed to look at the streets of San Antonio, the Texas city where he’s based, to see traffic emerging after weeks of lockdown.

“People are starting to get out more,” Gorder said. “I think there probably is a pent-up demand for folks to get out of their houses and get mobile.”


From the streets of San Antonio to Barcelona and Beijing, traffic data, sales at fuel stations, and pipeline flows all suggest that the slump in oil demand probably bottomed out around the middle of April, and has now started a modest -- and very tentative -- recovery. The signs matter beyond the petroleum industry as they provide a glimmer of hope after a torrent of negative economic data.

https://www.worldoil.com//news/2020/5/1/oil-demand-is-beginning-a-slow-and-fragile-recovery-worldwide

World Oil - More oil companies qualify for Federal Reserve loans after rules change

WASHINGTON (Bloomberg) --The Federal Reserve revamped its Main Street Lending Program in ways that will allow battered oil companies to qualify for the aid after industry allies lobbied the Trump administration for changes.

Larger, more heavily indebted companies can now qualify and use the money to pay off prior loans under the changes the central bank announced Thursday.


The move opens the door to more oil and gas producers, said Senator Kevin Cramer, a Republican from North Dakota, who had pressed the administration on the issue as energy companies struggle to survive an epic collapse in fuel demand and crude prices.

https://www.worldoil.com//news/2020/5/1/more-oil-companies-qualify-for-federal-reserve-loans-after-rules-change

Baker Hughes Weekly Rig Count - May 1 2020

The US land Rig count continues to decline as the impact of reduced oil demand due to COVID-19 continues to evolve. The Permian basin had the largest decline, dropping 27 rigs. The DJ Basin lost over half it's active rigs, dropping to 7 total rigs in the DJ. The MidCon is a historic lows, with only 17 rigs running in the area.

Source: Baker Hughes Weekly Rig Count - May 1 2020

JPT - Three Money-Saving Ideas To Frac Faster

For reasons deep below the surface and right atop it, the North American shale sector was due for a period of turbulence and contraction. Then came two unforeseen accelerants: a global pandemic and a costly price war—the combined forces of which sent oil prices down by a record 65% during the first quarter of the year.

The double blow to the US shale sector has meant that in all likelihood, hydraulic fracturing activity in North America has peaked. Going forward, there will be fewer players and less production. Some estimates project that by the end of the year, the hydraulic fracturing market will be just 50% of what it was before the latest crash.


Just as likely though is that this disruptive corner of the oil and gas industry will persist. Shale resources in the US remain vast. Even more untapped resources are found elsewhere. But first, costs will have to be cut and a lower-cost business structure will be needed to match this second round of “lower for longer.”

https://pubs.spe.org/en/jpt/jpt-article-detail/?art=6921

Oil Price - The Oil Wells That Will Never Recover

It is very common today to read about shutting-in of producing oil and gas wells to reflect the reality there are fewer and fewer places to store oil right now. An old oilfield maxim-the cheapest storage is in the ground. It wasn’t coined to meet the criteria that are extant today as regards surface storage limitations, but rather to reflect costs of production versus sales prices. As we are all learning though, these two scenarios are very much related.

I get a lot of questions from readers of my articles, and students in my Reservoir Drill-In Fluids design classes about what happens with oil and gas wells that are shut-in. As discussed, there is a lot of this going on right now due to the oil glut we are experiencing. That answer is generally, that there are definite problems associated with doing this, but it’s not guaranteed they will occur in every instance. Sometimes you just get lucky. More often than not though, the sub-surface gremlins that reside in oil and gas reservoirs are going to get you. There is a reason that service companies earn billions of dollars annually pumping stuff down wells to fix perceived problems with production. So the question before us now is what are some of the mechanisms that cause problems restoring production to oil and gas wells after they have been shut-in?

https://oilprice.com/Energy/Crude-Oil/The-Oil-Wells-That-Will-Never-Recover.html

World Oil - Saudis’ 43MMbbl oil flotilla will clog more than U.S. storage tanks

WASHINGTON (Bloomberg) --A fleet of supertankers carrying Saudi oil will add to the growing congestion at U.S. ports in coming weeks at the same time producers are shutting in output as they run out of space to store unwanted supplies.

A total of 43 million barrels of Saudi oil is set to arrive on the U.S. Gulf and West coasts by May 24, according to Rystad Energy. The flotilla -- comprising 28 tankers, including 14 very large crude carriers, or VLCCs -- will join a queue of 76 tankers waiting to unload in U.S. ports as the greatest oil glut in history plays out.


Dozens of tankers are lined up off the two coasts with demand for motor and jet fuel destroyed by the Covid-19 pandemic. There are 34 tankers already waiting in line to offload about 25 million barrels on the West Coast, and 31 tankers lined up off the U.S. Gulf Coast.

https://www.worldoil.com//news/2020/4/30/saudis-43mmbbl-oil-flotilla-will-clog-more-than-us-storage-tanks