Sunday, March 15, 2009

NYT: As Oil Prices Plunge, a Frenzy of Drilling Ends

It is quite amazing to think about how different (and in some ways the same) things were a year ago. Fall backwards 12 months and oil was booming ever upward, and among the hottest (if not THE hottest) sector - we were loaded to the gills with oil service stocks and even the Petrobras (PBR). [May 20, 2008: Boone Pickens - Oil to $150 by End of Year] Now? Daytrader like to run in and out for a few days but a lot of the movement is churn - and people trying to create a trade. The Oil Services ETF (OIH) has essentially been trading in a range since mid November - each uptick causing excitement among those who see oil moving up as a testament to their theory that an economic rebound is "just around the corner". Personally I hope as the world is in a L shaped recession, and oil is sitting on tankers in ports throughout the world with no place to go.... oil doubles from here, which steals the last piece of life from the world consumer. And then speculators [Jan 11: 60 Minutes - Speculators and Oil] can say "not us! that's just the natural law of supply/demand!" ;) I actually think that would happen, if not for the little problem that hedge funds are seeing mountains of redemptions and hence do not have the same money they once had to play these reindeer games.

However, one day the global economy shall recover from the disease the United States transmitted to it. And this period of underinvestment shall lead to another era of much higher prices in the commodity space... again. Frankly if you had a 5 year time horizon and could withstand the volatility and potential losses in the near term, loading up on commodities is the thing to do with an eye towards 2012+ But for now ... I only hear echos of Sarah Palin (Drill Baby Drill!)
  • The great American drilling boom is over.
  • The number of oil and gas rigs deployed to tap new energy supplies across the country has plunged to less than 1,200 from 2,400 last summer, and energy executives say the drop is accelerating further.
  • Lower prices are bringing to an end an ambitious effort to squeeze more oil from aging fields and to tap new sources of natural gas. For the last four years, companies here drilled below airports, golf courses, churches and playgrounds in a frantic search for energy. They scoured the Rocky Mountains, the Great Plains, the Gulf of Mexico and Appalachia.
  • But the economic downturn has cut into demand. Global oil prices and American natural gas prices have plummeted two-thirds since last summer. Not even an unseasonably cold winter drove down unusually high inventories of natural gas.
  • The drop has been good news for American consumers, with gasoline now selling for $1.92 a gallon, on average, down from a high of $4.11 in July. But the result for companies is that it is becoming unprofitable to drill. The reversal of fortune could have important implications for the future health of the nation’s energy companies, for consumer wallets and for national aspirations to rely less on foreign energy sources.
  • One reason companies need to make cuts is that the cost of drilling and servicing operations, while falling, is still roughly double the 2005 level, while the prices oil and gas companies earn from their production are suddenly below the 2005 level. Meanwhile, the cost of borrowing money for exploration and production has soared recently in the credit crisis.
  • The drilling cutback has been particularly stark for natural gas. Gas exploration had soared in recent years after technology advances enabled the exploitation of gas trapped in huge shale beds found around Fort Worth, western Pennsylvania, upstate New York and elsewhere. But that boom has created such abundant supplies that companies are not only drilling less but also deciding not to pump from wells already drilled. Thousands of oil and gas workers who migrated around the country to work in new fields for fat salaries have been laid off.
  • The big bonanza is over,” said Jay Ewing, the completion and construction manager for Devon Energy in the Barnett Shale field here, where so far this year his company has brought its rig count from 35 to 8. “Everyone is really shocked how fast everything has turned.” John Richels, Devon’s president, said that if the slump lasted two years, it could then take 18 to 24 months for companies to reassemble rig crews. (another reason why when the global economy picks up, we're going to see price spikes that are going to cause consumer pain) That means a glut could rapidly turn to scarcity, sending energy prices soaring again.
  • Inevitably, the market doesn’t react; it overreacts and shoots itself in the foot,” said Adam J. Robinson, director of commodities at Armored Wolf, a California hedge fund.
  • Domestic oil production is expected to increase this year over last, for the first time since 1991, according to projections by the Energy Department. That swing is attributable in part to increased production in the Gulf of Mexico from two giant new platforms that were years in the making.
  • Many energy executives had thought the drilling renaissance, coming after years of declines, represented a new era, particularly for gas production. Domestic natural gas output rose by almost 8 percent last year from 2007, the biggest annual jump in more than a generation.
  • “When everybody sobers up after the first quarter and sees what their real cash flow is going to be,” said G. Steven Farris, chairman and chief executive of the energy company Apache, “people are going to be very discouraged about how much capital they have to spend and that will depress the rig count even further.”
Areas reliant on energy were BOOMING in 2005-2007 and pretty much shook off 2008. But they will get hit with a lagged effect, even though it won't be as bad of a hit as some other parts of the country of course
  • So far economists say the energy patch is still doing better economically than the rest of the country. The surge of drilling and leasing poured enough money into communities with oil and gas resources that they did not begin to feel the pain of the recession until the end of last year.
  • However, a slowdown appears to be coming in local tax revenue and businesses like restaurants that cater to oil workers. Residents here who receive monthly royalty checks for gas pumped through long horizontal wells tapping gas deposits deep below their homes say their payments are getting smaller or disappearing altogether.
  • Perhaps most nervous are the rig workers themselves. With the rig count in the Barnett Shale field down to less than 100 from a high of 227 in October — and expected to go as low as 60 before the year is over — thousands of gas field workers have already lost their jobs here.
[Sep 23, 2008: Chesapeake Energy (CHK) to Pare Drilling for Natural Gas]
[Dec 22, 2008: Oil's Crash Stirs Unrest in Russia as Slump Hits Home]

Companies Cited Apache (APA) Devon Energy (DVN)

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