The oil downturn is over! Or is it?

Last week was good for the oil and gas industry. Despite oil prices falling nearly 4% to a two-month low, the CEOs of the industry’s two largest oilfield service companies declared that the bottom for this cycle had been reached and better days lay ahead. Moreover, Saudi Arabia’s oil minister, the supposed perpetrator of the war on high-cost U.S. shale producers, declared that the oil glut was over. Supporting this was the Baker Hughes rig count, which added a net 15 rigs last week – 18 more on land, but three fewer offshore rigs.

Over the past eight weeks, the land rig count increased seven times, adding nearly 17% more rigs. During the same period, the offshore rig count rose in only one of those eight weeks, and has shrunk from 24 to 19 active rigs. The industry continues to announce layoffs – service providers, oilfield equipment manufacturers and oil operators. Employment is traditionally a lagging indicator of a market’s development, something often forgotten as optimism about the future of a business runs ahead of the reality for workers.

On Schlumberger’s second quarter earnings call, CEO Paal Kibsgaard said, “…in spite of the continuing operational and commercial headwinds, we have now reached the bottom of the cycle.”

The issue for offshore workers was Kibsgaard’s comment that “in the U.S. Gulf of Mexico, activity was weaker as additional deepwater exploration rigs were released and the move to development activity slowed.” That was supported by the nearly 21% drop in active Gulf rigs in the past two months.

Moreover, Kibsgaard noted, “Pricing remained under massive pressure in all land and offshore markets in North America.”

The optimism for better days ahead was captured by Kibsgaard’s comment that “…signs have started to emerge of customers recognizing that pricing levels have now fallen to unsustainable levels, leading to a growing risk of destroying capabilities and capacity required in the future.”

Kibsgaard’s observation had been preceded by comments from Halliburton CEO Dave Lesar that “…there was a growing survivor mentality out there, and you can’t underestimate the positive change in attitude that we’re seeing in our North American customers. There is a spring in their step that I didn’t see earlier in the year and in almost every case, they are talking about adding rigs, buying assets or doing something value accretive. In short, they are getting back to business.”

After 20 months of industry devastation – about the average of the worst past industry downturns – it is not unreasonable to think that the worst of the downturn is over. We tend to side with the optimism of Kibsgaard and Lesar. The problem is that workers may still be at risk, especially in the offshore business due to its very long business cycle and high-cost structure. Solving those two issues will take longer than the land market, thereby extending the pain for workers, but the skies are brighter.

About the author

G. Allen Brooks

G. Allen Brooks is a 40-year veteran of the energy and investment industries, serving as an energy securities analyst, an oilfield service company manager, a consultant to energy company managements and a board member of several oilfield service companies. He is the author of the highly regarded energy newsletter “Musings From the Oil Patch” that interprets trends within all sectors of the energy business.

2 Comments

  1. Avatar

    Workers ‘may’ still be at risk? They’re still laying off hundreds of workers at companies all over the place and this article says workers “may” be at risk?
    When the companies stop firing people and start hiring, that is when workers still ‘may’ be at risk. It looks to me like we’re a long way from that point. Workers ARE still at risk!
    I’ve been laid off since last September, after having my wages more than halved. I’ve been through the hard times offshore in the 80’s and since, but NEVER has it been anywhere near this bad!
    Especially considering things from the point of a MARINER vs oilfield hand. In earlier times, we mariners could go find a job in some other part of the industry. That has been all but eliminated as a possibility due to changes in the licensing rules. Used to be if we got laid off in the oilfield, we could go to work on a tanker, or a tug boat. Or even go ashore for a while to wait for things to get better.
    How can we do that now?
    USCG now requires a mariner to have a tanker man PIC to work on tankers, something you’re NOT going to qualify for if you’ve been working in the offshore oilfields. Same goes for working on a tug. USCG now requires you to have a towing endorsement on your license. Again, something you’re NOT going to qualify for if you’ve been working in the oilfields. And if you have to go ashore? Forget about it! You’ll very possibly lose your documents to work as a mariner at all, and have to start all over again!
    With all the new requirements for ‘training’ by both USCG and any company that might hire you, you need to spend hundreds or even thousands of dollars and weeks of time to keep your documents in shape so that you COULD go back to work at sea IF a job ever comes up that you’d like to apply for. What job ashore pays enough and allows enough time off for you to get all your documentation back in order?
    I HOPE the article is correct in that things are picking up in the oilfields. The price of oil was down again to under $43 today! Can the offshore drillers afford to start working again at that price? I don’t think so.

  2. Avatar
    Kairi Gainsborough on

    It is really interesting that many companies are adding more oil rigs on land while deactivating offshore rigs. I wonder if it is more cost effective to operate an oilfield than it is to operate a deepwater rig.
    If that is the case, and more companies are moving oil production to land, then that may be contributing to the end of the downturn. What do you think?

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