HOUSTON—The current oil and gas boom cycle may differ from past up markets, but the industry must improve how it manages the cycles.

A unique set of circumstances paved the way to the upmarket the industry is enjoying, but supply chain tightness and inflation are a large part of the picture. At the same time, operators are concerned about maintaining competence of rig site personnel through boom and bust cycles, speakers said during the IADC Drilling Onshore Conference and Exhibition on May 19.

The current upmarket in oil and gas is completely different than the one the industry was riding in 2007 and 2008, according to Ian Macpherson, senior research analyst at Piper Sandler. 

Back in 2007 and 2008, “we were into a well-lubricated growth mode” with the expectation that prices would be “stronger for longer,” he said. “What we have now is the opposite of that in every way.”

Piper Sandler projects $100 WTI through 2025.

DUC Piggy Bank

One reason is that global oil demand is currently over 101 million bbl/d and expected to climb to 104 million bbl/d by the second half of this year or sometime next year. The key variable, he said, is when China’s reopening spurs increases in demand.

At the same time, supply was tight even before Russia—which had over 10% of the supply stack—invaded Ukraine, he said. Now, supply deficits are “too wide to fill with shale” and other sources, Macpherson said.

Yet shale is expected to grow by 500,000 bbl/d this year over last year’s production, he said. 

“Shale activity is surging, but production growth will be labored,” he said.

A major problem is the DUC well deficit.

“We robbed the piggy bank of DUCs” which “significantly depleted our DUC inventory,” Macpherson said.

At the same time, companies want to drill. 

Rig counts are going up, but that is causing its own knock-on effects. 

According to Piper Sandler data, rig counts for the Lower 48 in March 2019 were 1,013, in March 2020 were 750 and in March 2021 were 377. March 2022 rig count was estimated at 614, and March 2023 counts were estimated to be 709.

“We’re going to consume most of our reserves of good quality rigs stocks that can be reactivated,” Macpherson said. 

And if enough can’t be reactivated, newbuilds will be up for consideration, he said. That, however, is not necessarily appealing because they will bring “a different level of sticker shock than what they’re seeing now.”

As such, he said, “there’s only one way for prices to go from here,” Macpherson said. 

If day rates for a super-spec rig are currently $30,000, he projected they’ll be at $35,000/day by the end of the year. A newbuild would likely need a multiyear contract with a $40,000/day rate to be considered viable, he added.

“That’s not a conversation that’s happening now, but I think it’s a conversation that’s going to emerge starting next year,” he said.

Good Supply Chain News

Supply chain disruptions should create upward pressure on commodity prices, which is good news for the oil and gas sector, according to Russell Evans, executive director for the Economic Research and Policy Institute at Oklahoma City University. 

His expectation is that commodity prices should remain up in the near term, and that the industry will make it through 2022 without a recession. 

“Our probability of making it through 2023 without a recession is going down daily,” he added.

The world is “coming off a period of exaggerated economic strength,” Evans said, and “the economy on its own is not as strong as the numbers” suggest. 

The reason, he said, is that trillions of dollars of economic policy have influenced current market conditions.

That approach was used back in 2010 when the world was coming out of the Great Recession.

“It was a unique policy to offset economic weakness,” he said of the decision to help “bump personal incomes” through an until-then “unfathomable” trillion-dollar policy. Criticism at the time was whether it was enough to move the needle, he added.

Then, with the COVID-19 pandemic, even larger trillion-dollar packages funneled money into household balance sheets, he said. Personal incomes were going up, stock markets were returning 20% and real estate was up 25%, he said. Capital looking for returns sought out cryptocurrency and non-fungible tokens (NFTs), he said.

“That was only possible against the backdrop of the policy environment we were living in,” Evans said.

But that strong economic policy meant a lot of extra capital that was seeking out fewer goods due to supply chain disruptions, he said.

“Inflation was really the only thing that could happen,” he said.

The resulting inflationary period will likely persist throughout the rest of this year and into 2023, he predicted.

“There’s no fast way to move that inflation out of the system,” he said.

But he does expect supply chain behavior to change moving forward and for companies to reconsider vertical integration.

Companies may be willing to “pay a little extra for inputs in the supply chain if they can get it from a trusted partner,” Evans said.

‘An Industry of Cycles’

And when it comes to supply chain issues, Kyle Eastman, drilling operations manager, Chevron North America E&P Co., said operators aren’t just focused on making sure they have a rig available for drilling. 

“Do you have the stuff you need to construct your well? Oil country tubular goods (OCTG), cement, mud, directional drilling equipment, sand, perforating charges and trucking?” he said.

As prices for goods and services rise, Eastman said, different groups have to “compete for capital within our own company” as the operator focuses on capitalizing on current energy prices while mitigating against future market adjustments.

At the same time, he said the industry needs to do a better job of improving the work experience for the field-based workforce. This is important, he said, because of the costs of turnover from safety and training perspectives as well as the potential effect it can have on barrels of production that may be delayed or foregone.

Part of that answer may lie in technology, which “is not a means to necessarily eliminate labor” but to “allow you to more effectively use the labor on site and to get more consistent results with less experienced people,” Eastman said.

John Willis, vice president of drilling and completions at Occidental Oil & Gas, said more mechanization on a rig will mean the need for more people, not fewer, on a rig site.

“You’ve got the same amount of work and it’s crammed into fewer days,” he said, so more people will be needed to help carry out tasks like getting casing ready and handling logistics.

But it’s also important to remember that the oil and gas industry is an industry of cycles.

“We’re going to be up for a while, and we’re going to be down for a while,” he said. This is particularly true with shale plays, which have such fast declines, he said. “We need to look at how to better go up and down even more than we used to in the past.”

Capturing knowledge in automated systems could make it possible to scale when rig count rises, and not lose the knowledge when counts decline, he said. 

Relying on remote experts could also mean fewer people that would need to be retained during downturns, he added. This might mean changing the competency profile of people who are on the work site, he said, such as making sure they have some management experience.

Such an approach might also make it “not a disaster for them when they get laid off,” Willis said. “We can be better skilled at managing the ups and downs in our industry.”