LAFAYETTE — The financial pain felt by Louisiana’s oil patch from falling crude prices could extend through next year, say industry watchers who warn of a slowdown that will hit before prices rebound and produce the healthy profits producers are accustomed to.
On Friday, the price for West Texas Intermediate was $55.73 a barrel, $1.72 more than Thursday but far less than the $106 price it fetched in late June, according to Bloomberg. That’s a 47 percent price decline in less than six months.
“When you go into these pricing extremes, it really stresses the system and exposes vulnerabilities,” said Dale Doucet, an energy trader for Brock Investor Service in Lafayette.
Doucet said the price of oil could fall further from its current level. But he predicts that the coming cut in production coupled with rising world demand will raise oil prices by the second half of 2015.
Record oilfield-to-oil market flows in the United States, made possible in the last few years by innovations in extracting oil and gas from shale rock, have produced a worldwide glut that since the summer has hammered prices.
Already, layoffs have been initiated by service companies like Halliburton and Hercules Offshore. And oil producer ConocoPhillips pared its 2015 drilling budget by deferring drilling in America’s shale developments. Both announcements, made in December, likely will be followed by news of other companies cutting back.
The pain — job losses and disappointing income statements — will be uneven.
It’ll be felt least in the Gulf of Mexico’s deepwater, where a single project can cost billions of dollars and take up to 10 years to plan, drill and start producing, said Eric Smith, associate director of the Tulane University Energy Institute, a division of Tulane’s A.B. Freeman School of Business.
The area of the industry that will be hit the hardest will be the sector that brought on the oil glut: drilling in the shale formations, commonly called unconventional plays, Smith said.
In unconventional plays, wells are drilled down and then sideways in a long layer of shale rock. Water, mixed with sand and chemicals, is blasted through the shale in a high-pressure process that releases the oil and gas. The cost of shale drilling varies, depending on the geology, but it’s still expensive compared to conventional drilling. And the volume of oil or gas flowing from unconventional wells drops off far faster than in conventional ones.
Despite the high cost, companies attracted by the $90 to $100 price that oil was commanding produced enough to greatly increase U.S. output over the last five years.
According to the Energy Information Administration, U.S. oil production went from almost 5.6 million barrels a day in late 2006 to nearly 8.9 million a day in September, the last month in 2014 for which the EIA has tallied the totals.
Smith said the millions of surplus barrels produced each day are hitting a world market where demand is falling due to recessions in Europe and elsewhere. The combination has resulted in a glut that is driving prices down.
“We’re in a rough environment for a period of time,” Smith said. “It’ll start clearing up after a couple of years.”
Smith said that in the long term, oil companies and those who make their living from them are positioned well. He said large companies, like ExxonMobil, plan projects with 30-year horizons and are not panicked by plunges in oil prices.
In Louisiana, the oil service companies that employ tens of thousands are starting to think of ways to cut expenses if business slows, said C.L. “Rusty” Cloutier, chief executive of MidSouth Bank in Lafayette.
Cloutier said that over the last month, he’s talked to the service companies, which make up 20 percent to 25 percent of MidSouth’s loan customers.
“I think what you’ll first see is a cut in hours. The workers will feel it first,” Cloutier said.
He said that in the last few months, he’s met with the men and women who run the service companies. They said they’ll wait until after the holidays to make the decisions.
Cloutier also said the price of oil is based on market pressures that react to real-world events, which can change things quickly.
“We’re one Scud missile from it being $120 a barrel again,” he said, describing violent possibilities in the Middle East.
“If somebody over there — ISIS, Iran — puts a Scud missile in a tanker, or if they put a Scud missile in a well in Saudi Arabia, watch the price take off,” Cloutier said.
Louisiana economist Loren Scott, an LSU economics professor emeritus, said that in the short term, companies drilling in the Tuscaloosa Marine Shale could face challenges. TMS, as it’s called, cuts a wide swath across Louisiana’s midsection, through southwest Mississippi and into areas north of Baton Rouge. Independents like Goodrich Petroleum Corp. and Halcon Resources Corp. have labored, with some success, to drill profitably there.
“The first negative (from low prices) is going to be activity in the Tuscaloosa Marine Shale,” Scott said. TMS has an estimated 7 billion barrels of oil embedded in its shale, but its geologic makeup makes it a hard — and so far expensive — place to produce economic quantities of oil.
Scott sees oil prices rising in the second quarter of 2015.
There are benefits to low oil prices — low gasoline prices.
“They’re like a big tax break for the average consumer out there buying gasoline,” Scott said.
On Friday, regular gasoline in Baton Rouge averaged $2.26 per gallon; in Lafayette, $2.30; and in New Orleans, $2.28, according to AAA. In June, regular gasoline in Louisiana averaged $3.67.