Oil company officials who operate in West Texas say they have not fully recovered from the worst market downturn in modern history despite President Trump’s visit to the area Wednesday, during which he touted “restoring energy dominance.”
“I wouldn’t say we are out of the woods yet, but this is a much better feeling than earlier in the year,” Stephanie Reed, a senior vice president at Parsley Energy, a mid-sized, publicly held oil producer, told the Washington Examiner.
Reed said her company is in a better spot than other producers in the Permian Basin, the most productive oil field in the world before the coronavirus-fueled oil crash, which saw U.S. prices briefly drop below zero for the first time ever in April.
Parsley is “one of the lowest cost operators,” she said, and is on its way to maintain its normal production level of about 110,000 barrels per day after curtailing about 26,000 thousand barrels per day of production in May. It reduced its spending for 2020 to less than $700 million from less than $1 billion.
“Companies like Parsley that are well-positioned are in a different place,” Reed said.
More than 20 North American producers have filed for bankruptcy this year, including Chesapeake Energy, one of the pioneers of the shale fracking boom, after the pandemic worsened financial challenges that companies had been experiencing from years of taking on heavy debt with little returns.
Dan Eberhart, CEO of the oilfield services firm Canary, which does work in the Permian, said that companies in his segment of the industry require a $45-per-barrel oil price.
“It’s too early for a ‘mission accomplished’ speech on energy for Trump,” Eberhart, a Republican Trump donor, told the Washington Examiner. “We have a lot of ground to make up. It’s still early in the recovery.”
Trump, during a speech Wednesday afternoon at an oil rig in Midland, Texas, said his actions have helped “save” the oil industry.
“We are OK now. We are back now. We are just going to keep expanding,” Trump said.
Prices have been stuck for almost two months in the $40-per-barrel range. While economies across the world have opened up, bringing drivers back to the roads and some people back to offices, the recovery has been fragile due to continued outbreaks of the virus, including in Texas.
“Oil has gotten a bit ahead of itself in the low $40s given the overall macro stresses going on in the economy with COVID-19 reasserting itself and unemployment continuing to grow,” said Frederick Lawrence, an oil industry economist.
Oil producers credit Trump for helping ignite some of the beginnings of the price rally.
He intervened to mend a price war between Saudi Arabia and Russia that worsened the demand-driven price crash, as the two top producers outside the United States flooded the market with excess oil it didn’t need.
“The administration has been behind our industry all the way,” said Jim Wilkes, president of Texland Petroleum, a small, private producer in the Permian.
Bob McNally, president of Rapidan Energy Group and a former top oil official in the George W. Bush administration, said a continuation of the price war would have “been an extinction event for our producers.”
Texland Petroleum was able to survive with the help from a loan it received from the Small Business Administration’s Paycheck Protection Program that allowed Wilkes to keep paying employees. Wilkes said he had to cut employees’ salaries because he has struggled to make a profit, which he said can’t happen unless prices rise to at least $50 per barrel.
“We all shared in the pain,” Wilkes told the Washington Examiner. “We told employees don’t expect this to go back the way it was anytime soon.”
His company, which has about 1,200 wells in the Permian Basin and employs 73 people, shut down all its production in April after multiple customers for its crude canceled or curtailed purchases. It has since restored most of its production but is not making new investments, Wilkes said.
“$40 per barrel per oil is a level most people can tolerate,” Wilkes said. “If you don’t have debt, you can live.”
Even so, it’s unrealistic to expect oil demand to return to pre-pandemic levels this year because the world economy is still hurting, with continued outbreaks of the virus and long-term questions about people’s transportation habits.
On top of demand concerns, Saudi Arabia-led OPEC and Russia are set to phase out their historic production cut agreement in August just as producers in the U.S. are restoring output, actions that could create a global supply glut for the next four months, according to research group Rystad Energy.
“While uncertainty remains, in the long run, we are confident that the world is going to continue to demand more energy, and oil and natural gas will continue to be essential to fueling the nation’s economic recovery,” said Frank Macchiarola, senior vice president of policy, economics, and regulatory affairs at the American Petroleum Institute, the largest industry trade group.
