Coronavirus in Oklahoma: Global demand slowdown, market war continues to weigh on Oklahoma's energy industry
Oklahoma set a new 21st-century low for numbers of working rigs in the state last week as the industry continues to retract.
Weekly average rig counts in the state that had been in the 50s during January slipped into the 40s last month before plummeting to 29 for the week ending April 3 — a decline of nearly 25%, week over week.
The numbers of working rigs have fallen both in Oklahoma and across the nation as energy companies slashed their budgets and capital expenditure plans during the past month, in part because of a slump in global demand for crude as the coronavirus continues to affect the economies of most countries in the Northern Hemisphere.
Markets for West Texas Intermediate and Brent crude were affected further in early March after Saudi Arabia and Russia began competing against each other to gain expanded shares on the global market for the commodity, dramatically underbidding market prices to reclaim business previously lost to U.S. exports.
Low numbers of working rigs in Oklahoma actually have been setting records since the week of Sept. 20, when the state’s count of 66 was one less than a previously observed low mark of 69 rigs set the last week of December, 2001, Baker Hughes records show.
Oklahoma cuts detailed
Oklahoma midstream and exploration and production companies have been busy adjusting their 2020 budgets as the pandemic and price war have unfolded.
The latest company to update its plans is Enable Midstream Partners, which announced April 1 it would cut its quarterly distribution by half, from 33.05 cents per unit to about 16.53 cents, saving it an estimated $290 million in cash flow on an annualized basis.
It also announced it planned to cut its capital expenditures for 2020 by $115 million, or about half of what it had planned to spend for the year, and announced other costs reductions for its business including a reduction in its maintenance capital for both 2020 and 2021.
Others that announced changes include:
• ONEOK, which announced a half-billion-dollar cut to its capital expenditure plans March 11.
• Devon Energy, which announced March 13 it was cutting its budget to about $1.3 billion, a decline of about 30%, and that it would prioritize ongoing drilling and completion work for wells in the Delaware Basin and the Eagle Ford Shale field. The company then announced at the end of March it was cutting another $300 million.
• Continental Resources, which announced March 19 it cut its capital expenditures budget from $2.65 billion to just $1.2 billion.
• WPX Energy, which announced March 17 it was cutting $400 million from its capital expenditures budget.
• Laredo Petroleum, which announced March 23 it had cut its capital budget by 36% to $290 million.
‘Day of reckoning’
Many oil producers are calling for the U.S. to punish Saudi Arabia and Russia for unfair trading practices they say are stripping away potential markets for domestic crude.
Others are calling for mandatory production cuts to improve prices.
But the CEO of the American Petroleum Institute, which lobbies the U.S. government on behalf of 650 corporations involved in production, refinement, distribution and many other aspects of the petroleum industry, said Monday he estimates current pricing has idled about 30% of production and that the real key to solving market problems is to restore global demand for crude.
“At the end of the day, this is really a demand problem,” Mike Sommers said. “Before coronavirus, you had about 100 million barrels of oil used every single day in the world, now we’re down to probably about 80 million barrels being used in a given day.
“That’s a huge, 20% decline in demand because people aren’t flying, they’re not driving, they’re not going to work. The only real solution to a demand problem is to get people back to work and get through the coronavirus issue.”
Brad McPherson, Enverus’ director in Oklahoma, meanwhile, called current business conditions a “day of reckoning” similar to what the U.S. energy industry endured in the mid-1980s after the collapse of Penn Square Bank.
But he was hopeful about the future.
McPherson noted that about 75 drilling permits for wells in Oklahoma were filed and granted within the state over the past 30 days as of April 6 and that its count of active rigs differs from Baker Hughes’ by two, showing 31 currently drilling.
He said Enverus data shows that rigs have spud seven new wells in the state just since March 29 and added that the inflation-adjusted price of West Texas Intermediate remains worth more now than it was during the depths of the 1980s oil bust.
“You really would like to see what 1983 and 1984 was like, because that was a valley, too,” he said. “But we lived through that, and we were stronger after than we were before.
“We were better managed and more organized, and the money we spent was real,” he said. “A lot of the companies at the time that were ridiculously leveraged disappeared.
“It was a day of reckoning, and that is what we are going through again.
”None of us really know what is going to happen in the future, but if you believe oil prices have hit the bottom and will continue to improve, then what that shows me is that we are learning how to work this way and functioning in a new normal.”