The massive fall in the price of crude oil means hundreds of thousands of people are no longer working in the energy business and many small and mid-level energy companies are in a footrace against bankruptcy.
While many oil fields have a seen oil production fall, the Permian Basin of west Texas, the nation’s highest-producing oilfield, is still increasing production.
Sam Sledge showed me through a field in Midland Texas that had been transformed into pipes, trucks, 2500 horse power pumps and dozens of scurrying workers. “This is the heart of the operation right here,” he said. He is Technical Operations Manager at Pro Petro, a drilling services company based in Midland.
During the oil boom, when the price of crude jumped to more than 100 dollars plus per barrel there were approximately 30 fracking companies working this oil field. Today that number is less than 20. Sledge says the market may be hurting that but the technology of what’s called the “horizontal play” – drilling down deep into the earth and then sideways – is still working here.
“It’s just been trial and error with this new horizontal play in west Texas over the last 5-10 years, to just dial it in to where we’re going to get the most out of the rock as possible,” Sledge explained with respect to the increasing efficiency of the technology.
Sledge showed me a trailer arrayed with computers and real-time charts monitoring the flow in the pumps connected to the well.
“14 different pumps on location, shift gears, throttle up and down. All of that is where you can control the horse power from, right here,” said Sledge.
As an industry, drillers are improving their efficiency. One example is 3D seismic readings, physics and software that pin down exactly where oil is which means more fracks are successful. So despite low prices and a plummeting number of rigs working the Permian Basin, as of April oil production was still rising. This time last year there were 255 rigs here. Today, just 120. Yet production is higher, from 1.8-million barrels per day in April 2015 to two million in April 2016.
The U.S. Energy Information Agency predicts that production in the Permian will begin to fall next month, in May, catching up with other oil fields such as the Niobrara in Colorado or the Bakken in North Dakota and Montana, which have already seen a dip in production.
Fewer companies are doing the work. But those that remain can benefit because of those that have left.
“Right now it’s a pretty simple battle for market share,” continued Sledge, who has an MBA from Baylor University.
“It’s in our interest to survive because the companies that are going out of business are going to in turn give us their business when we turn back around.”
Until then, survival means slashing costs, said Russell Gold, Senior Energy reporter at the Wall Street Journal and currently a Fellow at the Energy Institute at the University of Texas at Austin.
“The first thing you do is you get on the phone with everyone you do business with and you try to get a cut-rate,” he said as he laid out possible defensive strategies companies deploy in a downturn.
Gold is also the author of “The Boom: How Fracking Ignited the American Energy Revolution and Changed the World.”
“You make the case that, look this is a major recession for the oilfield and everyone’s got to cut.”
He said banks are also scrambling.
“There are a lot of regional banks right now that have a lot of oilfield loans out there. They don’t want to see everyone go belly up. So they’re going to be in the business of selectively cutting some deals. You’re going to go to your banker and say,’ Please, please give me more time, let’s renegotiate, let’s work this out.'”
I spoke with Dale Redman, Pro Petro’s CEO in his office in Midland. He is charismatic and exudes enthusiasm for the energy business even as it is buffeted by headwinds.
“It is going to work itself out. It is a cycle,” he said. “And just about the time everybody says it’s over, it comes back.”
Redman takes the long view.
“You have to look at this as a marathon, not a sprint,” said Redman as he explained his take on the long term view of an always cyclical business.
He said that downturns mean companies like his need to forge an even deeper partnership with oil and gas customers who have financial woes of their own.
“You have to be in tandem with what they’re trying to accomplish and you better understand what their internal rates of returns are to get those costs down.”
Many people wonder why producers don’t cut production in the US to restrict supply and thereby raise prices. Russell Gold explained many of these companies live under a mountain of debt and don’t have the luxury of that option.
“They need to have cash coming in the door to pay off their loans. They can’t just simply stop drilling. If you stop drilling, the cash stops coming in.”
Critics have called the current energy predicament a “drilling treadmill.” What that means is that even in the face of an oil glut and low prices, those who want to survive later must try to stay in the game now.