2016 to be brutal. Then, dreams of “potential spike in oil prices”
An engineer in the oil industry, who’d sold his house in Houston and bailed out after finding work in another state, just told me this:
A young civil engineer that I am working with is looking for more permanent, stable work. He talked with a head hunter today. The head hunter suggested that the young engineer stay where he is. He said he had 30,000 resumes in his database of engineers who were looking for work right now. Just amazing. I don’t know how many engineers there are in Houston. 200,000? 300,000?
I then called a friend of mine who works for Jacobs. Well, he no longer works there. He was laid off. A very seasoned engineer. He said he was glad I left Houston and that things were looking grim. Fluor and Technip had also laid off a lot of engineers. He said he heard that Fluor, which goes after megaprojects, had laid off 30 Process Engineers – which is what I am.
This is a bad indication. We are the first line of engineers on a project. Then, as the project moves forward, instrument, estimating, electrical, and structural engineers are brought on. If process engineers (chemical engineers) aren’t being used, that means there are fewer projects coming up to keep them busy.
So what happened to the hopes for a recovery?
Three months ago, Paal Kibsgaard, CEO of oil-field services giant Schlumberger, figured the oil industry in the US had bottomed out. But on Friday during the earnings call, he changed his tune.
The business environment “clearly got worsened in the third quarter,” he said. It’s going to get even worse in the US in the fourth quarter. And 2016 is going to be very tough. He doesn’t see a recovery until 2017.
As other players in the sector, Schlumberger was hit hard: global revenues dropped 33% year-over year; in North America, revenues plunged 47%, “as customer budget cuts and service pricing erosion impacted results,” he said, “still in the midst of what may well turn out to be the most severe downturn in several decades….”
So, in this worsening environment, the company will “take further action”:
- M&A, funded by Schlumberger’s free cash flow – more than $1.7 billion in the third quarter, Kibsgaard pointed out.
- And layoffs. To account for this “further round of capacity and overhead reductions” and “additional headcount reductions,” there will be another routine one-time restructuring charge in the fourth quarter.
He sees “two clear trends”: First, fears in the global oil market of reduced growth in China coinciding with fears of additional oil exports by Iran. And second, “additional reductions in activity and further pressure on service pricing.”
Oil and gas drillers, a year into the oil bust, are “now exhausting available cash flow.” So they’re cutting their exploration and production budgets for 2016 even further – the second year in a row of cuts, “which is the first time since the 1986 downturn…”
Kibsgaard saved the most dismal prognosis of the US oil & gas sector for the Q&A after his prepared remarks (via transcript of the earnings call by Seeking Alpha):
Most of the small companies are free-cash-flow negative. They are under significant financial stress, and maybe some of them will go bankrupt in the coming quarters or in the coming year.
But there is still massive overcapacity and even these small companies that go bankrupt will likely be picked up by other investors, and their assets will be returned back into the market. So, I think the overcapacity is going to be with the industry for quite a considerable amount of time.
Now there are new hopes.
He hopes for a “tightening of the supply and demand balance,” as global demand is growing gradually while the draconian cutbacks in investments will eventually “start to take full effect” on oil production. But this isn’t going to happen right away; drillers are taking “more short-term actions to maximize production” – despite the cutback in investment – “which might actually have a negative impact on a long-term recovery.”
I think there is only a limited period that this can be done. While the various players exhaust these type of opportunities, if investments aren’t increased, I think you will see a further acceleration of the drop in production.
As this plays out over time, it is expected to bring up oil prices. But even if prices rise next year, he sees the “increasing likelihood of a timing gap between higher oil prices and a subsequent increase in investment in drilling:
So I think the market is probably overestimating how quickly the industry can respond, whether it’s in North America or internationally. Now, four quarters into very low oil prices, the financial strength of many of our customers has significantly weakened and their appetite to invest is also a bit down. Any improvement in oil prices, I think, is going to go towards strengthening their balance sheet. And then the oil companies will likely assess how sustainable these increases in oil prices are before they start investing.
This creates a delay between higher oil prices and the decision to increase drilling budgets. Once the decision is made to increase budgets, “there is going to be a further delay” before these increased budgets translate into more drilling. And then there’s another delay between more drilling and higher production, he said.
“So I think the market is underestimating how long this period is going to take,” he said. And if this plays out as he envisions, and if drilling doesn’t pick up in time, “we even have an increasing chance of a potential spike in oil prices.”
That’s precisely what everyone has been dreaming about. And they’ve been dreaming about it with regards to US natural gas ever since its price collapsed in 2009.
Now Moody’s, after removing the beaten down energy sector from the equation, comes out and frets about the overall US economy. Read… Moody’s Warns “of Jarring Slowdown” in Jobs, Jumps on Recession Bandwagon
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The fundamental assumption that underpins industrial modernity is using petroleum creates wealth (without ‘wealth’ ever being defined).
In reality, using petroleum destroys wealth (that being the petroleum itself).
Burning the wealth bankrupts the user leaving him (her) unable to bid … unable to support the cost of extracting the wealth. Because using does not create anything positive, the users must borrow … this is ‘fake wealth’. The end game arrives when the credit regime breaks down under the weight of its own costs … as is taking place right now under everyone’s nose.
Petro-prices cannot ‘spike’ because nobody can borrow. As a result, the petroleum extraction and consumption industries are insolvent. A vicious cycle is taking form with users less able to consume => fewer able to meet drillers’ borrowing costs => drillers less able to extract => fewer customers still, less able to consume.
The outcome is energy deflation: where the cost of fuel reflects the actual economic return on the use of the wealth rather than the ability of the users to borrow. That credit-free number is likely to be negative.Think of what houses would cost if mortgages were unavailable.
http://www.economic-undertow.com/2013/01/23/net-energy-end-game-theory/
Good thing we can’t burn gold otherwise we would really be in trouble.
“Petro-prices cannot ‘spike’ because nobody can borrow.”
You might not want to bet on that:
“ExxonMobil’s biggest advantage over any rival isn’t just its size but its access to capital. It’s triple-A credit rating is better than the U.S. government, meaning it can borrow as much cheap money as it needs. That’s pretty clear after the company recently tried to raise $7 billion in debt only to see demand so strong that it ended up increasing its ask to $8 billion. That cash gives it quite a war chest that it can use to buy out weaker rivals. If it ends up needing even more cash it can easily expand its balance sheet because the company carries very low leverage as we see on the following slide.”
A major consolidation is coming. Big fish will eat little fish. And if the Arab OPEC companies can’t beat the North American oil companies, they will buy them:
“Chevron made waves in the business world when it announced its October 6 sale of 30-percent of its holdings in the Alberta-based Duvernay Shale basin to Kuwait Foreign Petroleum Exploration Company (KUFPEC) for $1.5 billion.”
Won’t that the perfect example of classical irony, if Arab owned Canadian oil starts flowing through the proposed Keystone XL pipeline, through the US continent, out of the Gulf of Mexico, and into Chinese ports. We don’t hear our international oil lobby owned elected officials talking that possibility up.
The strongest hands will end up holding everything, and, when that happens, oil prices will skyrocket.
Using petroleum does create wealth, look no farther than the trucking industry for evidence of that. In fact even trains these days use it too. It’s no accident that as a society becomes wealthier it will use more and more energy especially in the form of petroleum. We can see this all around the developing world and there have been no exceptions, the only countries that haven’t increased their petroleum usage have been places like North Korea with stagnant economies.
Yeah… but I think I see Steve’s point too: to your example, the trucks and everything they transport, ultimately created by oil, is temporal: all that stuff starts to decay and requires maintenance, etc. In X years it will be all gone. The oil was burned, it was a one time shot.
So far this hasn’t played out in modern history, because of ever-increasing oil production. We burn some “wealth” but that’s ok because we replace it with ever more “wealth” being hauled out of the ground. That is the basis of economic growth: get to the bottom of it, and it is (was) simply an expanding energy base. As the energy base ceases to expand and even contracts, it becomes clear that the energy (oil) was the wealth, and the growth will cease and the debt-based economy built on the expectation of growth will malfunction.
For now, the definition of wealth is in the eye of the beholder… the existence of the trucking industry is a fine one. Up to you.
The problem is, when an economy like China coming out its low energy usage under the old Maoists starts using petroleum and increasing its coal usage it grew at 10% or more a year. Japan after WW2 was more fluctuating = sometimes over 10% but mostly between 6-10%, Then in the 80’s it basically reached an equilibrium between 3-5 % then it neeeded debt to goose it and now debt growth economy enhancers have reached an equilibrium and its mostly around 2% and will probably far further because of demographics and the World economic system flailing. China too will be heading for 3 to 5% equilibrium and soon will have demographic problems as well, it is already using debt to goose its economy. The US muddles along as it is still the worlds reserve currency having lost its manufacturing advantage since the 70s. It also helps to be the reigning world Empire. Sometimes there are technological advances like computers and the internet that can goose the economy but since the 70s these havent’t been shared with the workers and since the 90s they haven’t been shared with the American middle class.
Oil is wealth and it is burned up stupidly with the American military the biggest transgressor. In these times of low oil prices (the market can be irrational longer than you can stay solvent- Keynes) one forgets the valid part of the Peak Oil thesis – the easy to pump great lakes of sweet crude have been found and are being used up rapidly. This is why the BP Gulf Oil disaster happened. It is now expensive to extract the harder to get to 0il. So at some point the availability of oil will decline because of increasing population and the now decreasing new projects for extracting it. Imagine what this will do to the muddling along economies of the developed world.
Because oil has been able to find trading support at $43+ and has not retested its August low of $38+, I began to doubt the Goldman Sachs prediction of a $20 bottom. But the analysts at Goldman are really much too good to bet against. It is best to see how this plays out, especially since the long awaited addition of Iranian oil to world supply is close.
You know the oil business is bad when Florida Power & Light is advertising there will be a 10% rate reduction in January. They were quick to raise rates, but have taken forever to roll them back.
I would assume that’s probably based more on the prices of natural gas and coal (rather than oil), which have totally collapsed. About 2/3 of US power generation is from coal- and gas-fired power plants. Oil is rarely used to generate electricity (New England does some of it in the winter when it runs out of gas).
So NatGas drillers are in far worse shape than oil drillers. Utilities (and occasionally even consumers) get to benefit while it lasts. But NatGas drillers are going bankrupt, and production has peaked. So it might not last that much longer. Enjoy the rate reduction while it lasts.
I agree with your take on US natural gas.
For what its worth I expected US Natural gas to bottom at about 2.20-2.30. It is not far away from that price. Of course, it might not get there.
Wolf, florida is exceptional …. the state has traditionally had less access to either natural gas or coal than most other states in the US, and consequently their electric power generation has always employed far more oil than anywhere else … I’d have to look up the percentages but I remember its always been this way …
Thanks John. You finally made me look it up and get a grip on the data :-)
I’m not sure where you got your info, or if it is outdated, but 96% of Florida’s electricity production comes from natural gas, coal, and nuclear. The remaining 4% is likely renewables and biofuels. Oil appears to play no role at all. Here is the US EIA for 2014:
“Florida was second only to Texas in 2014 in net electricity generation from natural gas, which accounted for 61% of Florida’s net generation; coal accounted for almost 23%, the state’s nuclear power plants accounted for 12%, and other resources, including renewable energy, supplied the remaining electricity generation.”
http://www.eia.gov/state/?sid=FL
Rates for utilities are regulated. They get a fixed return on capital investment and other costs are just passed through. Rates go up when they ask their regulatory body for an increase due to increased/planned capital outlays to maintain/upgrade/replace infrastructure (for example). They aren’t really allowed to make more money than what they are allowed (a fixed-size piece of the pie), which is why they always focus on growing their user/capital base (the pie). Fuel is a variable where they just pass the cost along. Usually this is a component in the details of the bill.
It might vary some state to state, but the premise is generally consistent IIUC.
I am not saying they are well managed or that you are wrong, but it usually isn’t such a goat rope like you see in other sectors.
Just my two cents.
Regards,
Cooter
The EIA has a lot of data online, including electricity prices, generation sources, etc by many measures including state. Here is Florida for 10+ years:
http://www.eia.gov/electricity/data/browser/#/topic/7?agg=0,1&geo=vvvvvvvvvvvvo&endsec=vg&linechart=~~~~ELEC.PRICE.FL-RES.M&columnchart=ELEC.PRICE.TX-ALL.M~ELEC.PRICE.TX-RES.M~ELEC.PRICE.TX-COM.M~ELEC.PRICE.TX-IND.M&map=ELEC.PRICE.US-ALL.M&freq=M&start=200101&end=201507&ctype=linechart<ype=pin&rtype=s&pin=&rse=0&maptype=0
Seems flat, but that doesn’t mean you don’t have local price volatility … this is a state average.
Regards,
Cooter
The price of crude is not $20/bbl mostly because a great amount of it comes from the politically unstable Middle East and there has to be some way of compensating for all that uncertainty.
Oil collapsing -> consumers having more savings -> more money spent elsewhere -> stock market going up.
Well you know what, let’s just skip to the end and guess how much the stock market will go up come tomorrow?
Can’t say that technical monkeys – technicians, engineers, logging truck welders, pipefitters, helicopter repairers etc. – don’t have it coming.
They’ve become so enormously, bloatedly wealthy the past decade or more because their employers were coddled by government. Government gave them monopoly access to publicly-owned natural resources at next-to-no cost. Money-printing, deficit spending and stimulus policies puffed up resource prices. Government protection of union membership, licensing, ticket, and training requirements and extensive social welfare programs keeps potential lower-cost job competition out of those fields.
Sometimes it seems the entire economy is a great big Potemkin Village…like something out of ‘The Truman Show’. The vast majority of North Americans collect entitlements, shuffle paper, provides “services”, works for government or government contractors, hide out in college or basements…while a very, very small slice of the population is actually performing productive jobs (and paying taxes) and even those are subsidized…
“very small slice of the population is actually performing productive jobs”
well that was the plan, no? Exporting all the well paying jobs offshore results in the local population unable to buy the very products the companies sell WITHOUT some sort of government subsidy…..
i see a dollar stores in almost every strip mall now……..it’s all us working stiffs can afford.
re Kred’s statement: “technical monkeys – technicians, engineers, logging truck welders, pipefitters, helicopter repairers etc. – don’t have it coming. ”
Technical monkeys? I’m a past welder and carpenter and can assure you I have certainly worked very hard for a living. Helicopter engineers (they are called engineers by the way)…..which also shows how little you know…are highly trained and worth every penny and are usually underpaid.
I also have a couple of advanced degrees and can assure you that most ‘technical monkeys’ are certainly a lot smarter than any prof I ever endured. I suggest you read some information on Howard Gardener’s Mulitiple Intelligence designations, which is a highly accepted theory of human intelligence.
“Technical Monkey”? I believe I have been dissed. Sheldon Cooper on the “Big Bang Theory” called my profession “geode loving gravel monkeys”. Geologists are people too!! And some of us have feelings. Just not feeling the love from Kred.
Seriously though, regarding the Schlumberger piece, oil industry workers have to make hay while the sun shines, so to speak. They have to make it during the good times, because most will be without work more than one time during their careers. And that doesn’t take into account all the sleepless nights when prices head south. Nothing like playing Friday Afternoon Roulette to see who will be coming in the following Monday.
#TECHLIVESMATTER!
Thank you Petunia. Kind of you to say.
“He said he had 30,000 resumes in his database of engineers who were looking for work right now. Just amazing. I don’t know how many engineers there are in Houston. 200,000? 300,000?”
How can that be when Congress and big businesses say we have a STEM worker shortage? I’d call 30,000 resumes a HUGE SURPLUS.
This is because of “synchronized job cuts”. I lived through this at a time when I was in Texas almost next door to Northern Telecom offices in Richardson, TX. When the s**t hit the fan, there were so many engineers on the market at the same time, it just overwhelmed the openings. When you own a house in this situation, it makes is VERY difficult because moving for work has such as steep cost. If one has too many payments for too many things, it wrecks the household.
If this is one sector of the economy, the other sectors can pick up bodies. However in a general downtown when many sectors are performing poorly, this pick up effect is quite muted. There is work out there, but these guys are going to have to get mobile and hustle for it.
Eventually folks find a home, but it takes a while. Gotta suck it up in the mean time.
FWIW, I took my foreclosure up front and have reduced my footprint to “all my stuff fits in my F-250 with a camper shell” and I stubbornly refuse to expand my worldly assets past that particular volume (exception for the second vehicle – the wife’s). If I find myself insecure in the future, I load it up, put it on a barge/truck to where ever I am going, fly there when it arrives, and drive to my new apartment job.
Problem solved.
Regards,
Cooter
My 2 cents. Because of the long lead time in oil sands projects there are still projects in the “nearly completed” stage. My best guess is in the 500,000 bbl/day range. We are at the burn the furniture and the wall paneling to keep warm stage.
But ultimately oil and all other commodities have been leveraged on the fulcrum of Central Bank printing/credit creation (pay back a loan ?- that’s so yesterday) and the learning by the Chinese communists about Central Banking. They, more than any other country have poured Monetary fuel to the fire.
It’s not for me or any other individual to say who is “overpaid”, “correctly paid” or “underpaid”.
That’s a job for free market interaction between an open supply of potential labour and of capital. The problem is that all people do tend to inflate their own irreplaceability, to kneejerk defend their own salaries, to deny government’s role as subsidizer of their employers and to maintain that their positions ARE subject to labour competition.
The resource industries are, however, highly subsidized by cheap money policy provided capital and by very generous and inexpensive protected access to public resources. This has enabled such immense profitability that minimizing wage costs is simply not essential.
Kred: I agree with your observations. I have friends who, in the late 80s, lost jobs in the oil industry, as I did. I took an entry level position to keep employment in the industry. My friends couldn’t bring themselves to do that. They said they couldn’t take a 50% pay cut. Of course, having no income, we had already taken a 100% cut. Some never returned to the industry and others were intermittently employed and have remained so. At the end of the day, we are all worth what someone or some outfit will pay us.
$20 oil possibilities and all aside, it seems to me it is in the interests of Russia, Iran, Saudi Arabia, the Shale Patch and it’s financiers (Wall Street), Houston, Iraq and most other producers, to “Do Whatever it Takes” to get the price back to triple digits.
And with the Russian military interventions going on in the ME right now, and Saudi military activity in the region, they certainly have the capability to do so, with a few well placed air strikes or cruise missiles. Even a false flag here or there. It would put them all back in the chips, and place the shorts in intensive care.