Column: U.S. shale supply chain will emerge smaller from price war, pandemic

LONDON (Reuters) – Slumping oil and gas prices as a result of the pandemic and the volume war earlier in the year between Saudi Arabia and Russia have slashed employment in the U.S. oil and gas fields at some of the fastest rates on record.

Oil and gas-related employment is split across several different categories in the federal government’s statistical system, making it hard to track changes in total oilfield and gasfield employment.

But one of the largest and most visible categories is “support activities for oil and gas operations”, covering a wide range of ancillary activities from exploration, site works, casing and tubing to cementing, fracking and acidizing.

Total employment at support firms fell by 54,000 jobs (20%) in just three months between February and May, according to the U.S. Bureau of Labor Statistics (“Current employment statistics”, July 2).

Employment has shrunk by 86,000 (30%) compared with its recent peak in October 2018 and is now back to the low level reported in the aftermath of the previous volume war in 2014-2016.

Even more job losses are likely to have occurred in June and July given the continued drop in the number of active rigs reported by field services firm Baker Hughes since the end of May.

Layoffs have had a devastating impact on employment in the oil-rich Permian Basin with the total number of jobs in both the Midland and Odessa metro areas down by more than 10% compared with a year ago.

The combined impact of the coronavirus epidemic and price slump have produced the worst job losses in the area for more than thirty years.

(Chartbook: tmsnrt.rs/2PeIB6R)

SUPPLY CHAIN

The slump is putting intense stress on the entire supply chain, the ecosystem of large and small contractors, skilled and semi-skilled labour that underpins oil and gas production.

The supply chain’s extraordinary flexibility and responsiveness fuelled three shale booms in gas (2004-2008) and oil (2012-2014 and 2017-2018).

And it has proved resilient, with drilling and completion activity bouncing back rapidly when oil prices climbed back above $50 per barrel after the 2014-2016 slump.

But the longer prices remain low, the greater the risk some supply capacity will be lost permanently, limiting its ability to expand again when the next cyclical upswing begins, causing long-term scarring in output.

Some rigs will likely be dismantled and scrapped; drilling, fracking and site preparation crews disbanded; and smaller businesses closed.

OPEC REACTION

Saudi Arabia, Russia and their partners in the expanded OPEC+ group of oil exporters will be watching developments in the U.S. supply chain closely.

In 2017/18, when OPEC+ reduced production to lift prices, the supply chain recovered more strongly than anticipated, leading to a renewed surge in output, creating conditions for the next price slump in 2019/20.

Russia, in particular, will want to avoid a repeat of the earlier mistake of lifting prices prematurely and too high, throwing a lifeline to U.S. shale producers.

Over the last decade, U.S. shale producers captured between two-thirds and three-quarters of all growth in global oil consumption, doubling their market share, at the expense of rivals, which is not sustainable in the long run.

OPEC+ will likely want to keep prices low enough for long enough to encourage some capital and capacity to leave the supply chain permanently, though for diplomatic and legal reasons it is unlikely to make this goal explicit.

For Russia, and perhaps for other OPEC+ countries, the aim will be to see a smaller shale sector with less capacity to ramp up production quickly if and when oil prices rise during the next cyclical upturn.

John Kemp is a Reuters market analyst. The views expressed are his own.

Related columns:

– Oil producers will fight for market share as consumption growth slows (Reuters, July 6)

– Oil prices likely to average less than $60 over next cycle (Reuters, June 17)

– OPEC+ must plan exit strategy (Reuters, May 27)

– OPEC and U.S. shale drillers are on collision course (Reuters, June 15, 2017)