Storm clouds and a silver lining?
As Oklahoma’s oil and gas industry looks ahead, cautiously optimistic into 2017 and beyond, it seems there are reasons to be hopeful and still causes for worry. That dual reality has played out already in 2017 and especially within the past week.
As the Oklahoma state budget indicates, the oil and gas patch has been going through a very rough patch for the past few years. And as a country, American oil and gas production has remained steady, albeit more productive than the market can bear. Hence the oversupply and low-price reality exacerbating the industry these past few years.
Where have we been since the high of $110 per barrel of oil in 2014? Well it’s been a rocky road for sure. And 2016 can perfectly illustrate that bumpy journey.
At the beginning of 2016, the U.S. benchmark saw a nearly 13-year low with prices per barrel of oil falling below $27. Yes, that’s less than a quarter of the 2014 price high and no wonder many companies got slammed hard, including bankruptcies and reorganizations to survive. Then a rebound began, due in large part to optimism around production control announced by OPEC and its collaborators, as the rebound more than doubled the price of crude. 2016 saw the U.S. benchmark futures achieve the biggest annual gain in seven years, including an 8-percent gain in December alone.
And as the industry rolled into 2017, hope continued to build that the low commodity price storm clouds may be dissipating. Rig activity is building, some companies are announcing expanded capital programs and cautious smiles are beginning to reappear.
Volatility seemed to be leveling out, as oil traded within a $4 range over the past two months, creating the smoothest period for oil prices since 2014. But then a thunderhead popped up quickly and rained some doubt again for the industry, and prices tumbled for oil and for publicly traded companies directly involved.
Last Wednesday and Thursday saw oil futures fall over 7 percent in two days, sliding back under $50 per barrel as worries continue. Storage data revealed near record highs and suggestions that a rush to produce could further flood the market and continue downward pressure on prices. And an industry desperately in need of balance is being reminded that most factors impacting their industry are beyond their control.
What is more likely within the industry’s control, the cost of doing business, may be the silver lining in all of this stormy experience. Here’s what I mean.
Oklahoma producers have become all too familiar with feast and famine over the past decades. And the smartest amongst us seek out cost efficiencies through the drill bit at times such as these. Through deployed innovation and cost savings implemented structurally in the production processes, many Oklahoma producers are learning to create more with less. And as the industry picks up, with labor demands tightening, land lease prices increasing and energy service companies in growing demand, the exploration and production companies that have implemented price discipline in their own internal practices should weather any coming volatility. It is estimated that about one-third of a well’s costs are on the drilling side, with the remaining two-thirds being for the well’s completion costs. Oklahoma’s companies and Oklahoma’s SCOOP, STACK and the NW STACK plays are going to be laboratories for whether innovative producers can not only compete, but succeed in the new normal of external price pressures.
All of Oklahoma needs them to succeed.
Jim Roth, a former Oklahoma corporation commissioner, is an attorney with Phillips Murrah P.C. in Oklahoma City, where his practice focuses on clean, green energy for Oklahoma.