Amid Price War, Texas Oil Patch Is Coming Up Empty
Thousands of workers wonder if the coronavirus shutdown will be the worst oil bust of all.
Andrew Olguin woke up on March 13 in Carlsbad, New Mexico, and prepared to drive into Texas for a night’s work loading explosives on a cable lowered deep into the ground to blast into dense shale formations. But before he could get out the door, his manager at MBI Energy Services entered the company-rented house with unhappy news.
“I said, ‘What are you doing here?’ and he said, ‘It’s not good,’” said Olguin, 31, who works the 6 p.m. to 6 a.m. shift as a wireline hand. “Just seeing him I kind of knew what was going on at that point.”
Olguin was one of 12 MBI employees, out of a total of 60, laid off that day. Within a few weeks, six more would face the ax. More drastic layoffs soon afflicted companies across the oil industry; Halliburton announced it would furlough 3,500 employees as a result of plummeting prices, and top extractors like Apache Corp. down to more boutique outfits like MBI have furloughed thousands more.
Across the Permian Basin, a swath of oil-rich land sprawling through western Texas and parts of New Mexico, rigs are groaning to a halt as massive layoffs sweep the industry. It’s ground zero for the fallout of the oil price war that erupted one month ago, ignited by a Saudi-Russian spat and turned into an inferno by the economic shutdown caused by the coronavirus and the subsequent lockdowns of entire countries.
U.S. President Donald Trump has repeatedly called for an end to the price war but to little avail. Markets bounced back briefly on April 2, when Trump said he had reached an agreement with Saudi Arabia and Russia to cut production, only for prices to fall again when it was clear the announcement was little more than bluster. Absent a deal, the low price of crude could rip away the United States’ newly attained status as a net oil exporter and make the kind of frenzy that has fueled U.S. production for a decade unfeasible.
More immediately, the collapse could mean that workers on the ground who are being sent home may never return to the patch. The Permian Basin has seen downturns like this before. But after this year, things might never be quite the same again for the most productive oil field in the country.
“I kind of saw it coming. I just didn’t expect it to happen to me,” Olguin said.
Oil work has always been dangerous, both in terms of workplace safety and economics. The worst crash to hit the Permian Basin oil patch was in the 1980s, when the oil price dropped throughout the decade, and fell by half just in 1986. Timothy Snyder, an economist and the founder of the Texas-based Matador Economics, was a commodities broker visiting Midland, Texas, at the time of the crisis.
“I was in a hotel on Wall Street in Midland and watched on I-20 as a constant line of vehicles was moving out with personal items, leaving the city,” Snyder said, referring to the major interstate that runs through the city and across the southern United States.
The Permian Basin eventually rebounded. The innovation of hydraulic fracturing and horizontal drilling at the turn of the 21st century was a boon for Texas shale, and in the span of 15 years Texas almost tripled crude oil production to 3.6 million barrels per day by March 2015, according to data from the U.S. Energy Information Administration.
Then a familiar problem tanked the market: a supply glut. Fueled by a combination of aggressive production in the Permian Basin and a lack of restraint by OPEC countries, prices for crude started falling in late 2014 and would eventually fall by more than 70 percent. Smaller U.S. drillers, already operating on thin margins, were forced into bankruptcy.
At the time, it was the worst oil bust in the Permian Basin for a generation, threatening the livelihoods of thousands of workers in the industry. Only the lifting of a 40-year ban on U.S. crude oil exports in 2015 and innovations to bring down costs in the basin helped lift the industry out of its downturn.
Isaac Herrera, 30, weathered that storm. In 2015, Herrera was working for MK Transfer assisting with water transfer work and saw many of his friends get sent home when oil prices nosedived.
“That one, it hit pretty hard and pretty sudden,” Herrera said.
MK Transfer was able to float on existing contracts during much of the crisis, and Herrera told Foreign Policy that he was laid off only for about a month, a relatively fortunate fate. That year, Texas alone cut about a fifth of its energy workforce, or 60,000 workers.
Many workers considered never coming back. Christiane Spitzmueller, an industrial organizational psychologist at the University of Houston, surveyed more than 500 oil and gas industry workers during that crisis and found that 55 percent of workers surveyed planned to leave the industry. Many of them were unskilled laborers who were replaced by more technical workers once the industry picked back up.
“The most vulnerable are always the most severely affected when things go downhill, and you see that here,” Spitzmueller said.
Today, economists are bearish on the industry’s future in western Texas. A recent report by BloombergNEF estimated that oil needs to cost $47 per barrel in order for drillers in the Permian Basin to break even, noting that “today’s producers are leaner, with less room to improve operations and reduce costs” than they had during the last downturn.
Indeed, before the storm of 2020 hit, exploration and production companies were already having a tough time selling Wall Street on the returns from their new drilling. As far back as October 2019, media outlets like the Houston Chronicle were reporting that U.S. shale production may have “already peaked” as industry leaders like Halliburton and Schlumberger said the industry’s best days were behind it.
In its “Oil 2020” report, the International Energy Agency said China accounted for more than three-quarters of global oil demand growth last year. Within weeks of the outbreak of the novel coronavirus in China, though, Chinese oil demand fell by 20 percent. Airlines began cutting back flights as the virus went global, further depressing demand.
Meanwhile, OPEC, the oil cartel controlling oil production for a handful of big producers, has spurred an astounding supply glut. For almost three years, OPEC and nonmember Russia had restrained their own oil production to keep prices around $50 a barrel. Then Russia decided it had had enough of subsidizing U.S. shale. In early March, following Russia’s refusal to further cut production, Saudi Arabia opened the taps and discounted oil to undercut everybody else. In the last month, benchmark crude prices fell by as much as a quarter before bouncing back somewhat.
Even worse, the present crisis shows no sign of abating. Snyder sides with other economists in asserting that the standoff between Saudi Arabia and Russia can’t last forever, but it’s unclear when someone will give in. OPEC, Russia, and other big countries hope to meet later this week to arrest the slide.
“The Russians and the Saudis are playing a game of liar’s poker,” Snyder said. “We’re standing on the sidelines trying to figure out a way to interject ourselves back in.”
For the residents of Midland, Odessa, and other oil towns in western Texas, relief can’t come soon enough. Patrick Payton, the pastor-turned-mayor of Midland, was sworn in on Jan. 13. After one month in office, the price of West Texas Intermediate, a crude oil benchmark, had fallen by $6.66. After two months in office, the price had plummeted by almost half, to $31.33, and had yet to bottom out.
“Waking up here in the Permian Basin is sort of like waking up after a tornado every single morning,” Payton said in an interview with Foreign Policy.
The mayor has lived in his adopted home for more than 20 years and says he has never seen a worse crash.
“We’ve got economic disaster with our companies literally at a standstill,” Payton said. “I’ve talked to people who have been here since 1979, and they say they’ve never seen it this bad.”
Ordinarily, this would lead to the kind of mass exodus that Snyder witnessed in 1987, but with the double whammy of the coronavirus shutting down the U.S. and global economy, there is nowhere else for unemployed workers to go.
“Usually when we’re really good, sometimes the country can be not so good, and when we’re really bad, the country might be good,” Payton said. “The whole country is in the sack right now, so what’s affecting us locally is affecting everybody else.”
The long-term effects of the price war depend heavily on how long it lasts. Ramanan Krishnamoorti, the chief energy officer at the University of Houston, said the largest operators in the region, such as BP and Shell, would have trouble maintaining operations in the region after six months of depressed prices.
“If it goes on beyond six months, we’re going to have a problem, a massive problem,” Krishnamoorti said. “Texas would never be the same again.”
Krishnamoorti said that after that point, the amount of investment needed to revive the oil industry in western Texas would be so high that the money required would be better spent on renewable energy projects.
“When you’re looking at that, why would I bother doing that when oil would be dirt-cheap on the market and when I could invest in renewables?” Krishnamoorti said.
The effects on local economies may be similar to the “resource curse” effect typically applied to developing countries. According to a study by Columbia University’s Center on Global Energy Policy, state production tax and local property tax revenue decreased by more than half in both cases following the last oil crash, which caused major funding issues for school systems and local governments. It would also likely cause another exodus, as more diversified local economies elsewhere begin to recover from the current crisis.
For the moment, many oil workers are working in place, waiting to see if their old jobs return. In an updated survey in response to the current crisis, Spitzmueller, the researcher at the University of Houston, found that over half of oil and gas workers are concerned they’ll lose their jobs because of the pandemic. An additional 40 percent say they’re worried about their ability to pay mortgages and other expenses.
Since he got laid off in March, Olguin said he has spent more time with his family and found new side jobs in home remodeling and yard work.
“When I got laid off, it was kind of sweet relief, almost. I’d been doing it so long I felt like a robot,” Olguin said. “Hell, I didn’t do anything for a week, just watched movies.”
But Olguin has grown accustomed to the ways of the oil field. With wages at $10,000 a month, he was able to buy a nicer truck, an expensive watch, and spend money on plenty of nights out—and to build camaraderie with the rest of his crew in the oil fields.
Despite long hours and challenging work, Olguin said the demands of the job aren’t enough to keep him away from the oil field should he be offered his position back.
“It was all about me making a good living—that’s what it comes down to,” Olguin said. “And if you meet good people along the way, that’s just a bonus.”
In fact, the human element matters a lot to oil producers, too. Oil rigs can be surprisingly fickle beasts, and the individual crews assigned to them are the only people who understand how to make a rig work to its potential.
“They know all the yins and yangs of it. It’s a machine, but it’s got its own peculiarities,” Krishnamoorti said. “It’s almost art [rather] than science.”
But active rig counts in Texas are dropping faster than they have since the boom in the Permian Basin began. Some of those will come online when business picks back up, but others won’t, leaving rigs shut down permanently and their crews potentially out of jobs. It’s already clear to many that this is the worst crisis since the ’80s.
The demand for oil won’t disappear forever: Krishnamoorti predicts that if the price war is resolved soon, Texas could still reach 7 million barrels per day by 2025. But before that can happen, many of the smaller, more innovative drillers that created this boom will be forced out of business. The conditions that made the Permian Basin the most productive oil patch in the country are likely gone for good.
“The Texas industry will probably never return to that level of 2012, 2013, where it was an incredible booming era where you had the wildcatters coming back to be a force to reckon with,” Krishnamoorti said. “That is never coming back.”