Oil prices have bounced off a 12-year low and the U.S. drilling rig count is up for two straight weeks, but there’s no celebrating in Louisiana’s oil patch just yet, only guarded optimism that prices can stick.
“It’s a little early to tell about inspiring confidence,” said Frank Fink, the economic development director for oil-dependent St. Mary Parish.
In fact, the two-week rise in the rig count and potential for more U.S. production was enough to spook oil markets on Friday.
Crude had just topped $50 per barrel last week for the first time in nearly a year before falling by about $1.50 Friday. Still, that price is almost double the $27 a barrel oil stood at in mid-January. The problem is that it’s far below the $100 mark topped before an avalanche started in 2014. Prices were driven down by advanced U.S. drilling technology that unleashed a glut of oil into a sluggish world economy that weakened demand.
At this point, oil sustained in the $50-per-barrel range would be cause for guarded optimism, local experts said.
Credited for the uptick since January are global supply disruptions, rising demand and reduced domestic oil production.
The numbers and global situations tell the story but don’t necessarily instill the confidence Fink and others seek.
U.S. crude production averaged 9.4 million barrels a day in 2015, falling to 8.7 million in May as oil’s low price took its toll on drilling activity, according to the U.S. Energy Information Administration.
The falloff in U.S. production wasn’t enough to ease the worldwide glut. Global oil supplies continued to climb in April, according to the International Energy Agency, the Paris-based agency for oil-consuming nations.
That’s why even the hint of a rebounding U.S. drilling rig count and production spooked oil markets Friday, even though the 414 active rigs are still at a historic low and less than half the 859 drilling a year ago.
So what’s caused prices to rebound?
Among the factors: wildfires in Canada, striking oil workers in Libya and Nigeria, the closure of an Iraqi Kurdish oil pipeline and ongoing production issues in Kuwait, Brazil and Ghana, the Energy Information Administration reported last week.
On average, the worldwide disruptions cut 3.6 million barrels a day from May’s global oil production, the federal government said last week. That’s the highest monthly figure recorded since the government began tracking such disruptions in early 2011.
Loren Scott, a longtime LSU economist who has tracked the region’s economy for decades, warns that most — if not all — of the disruptions will be short-lived.
“I wouldn’t put a great deal of confidence in this latest $6 to $7 increase in prices until we see what the impact is going to be of resolving those issues,” Scott said.
For the year, federal forecasters expect oil will average $43 per barrel before rising to $52 per barrel in 2017.
But some worry there’s plenty of uncertainty between the two figures.
“I don’t see oil prices going much above $50 this year,” Fink said. “I think we’re going to have some heartache between $40 to $50 a barrel, and we hope it can hold in that area.”
“This market still hasn’t reached the bottom,” Todd Hornbeck, head of Covington-based Hornbeck Offshore Services, said at this month’s Louisiana Energy Conference in New Orleans.
Hornbeck’s firm has been hit hard by what he described as “an unprecedented market.” It reported a net loss of $7.5 million for the first three months of 2016, compared with a $35.9 million profit for the same stretch a year earlier.
Hornbeck has idled 42 of its offshore support vessels, with four more expected to be stacked at the end of June — up from 33 at the end of last year.
Even that’s not enough: As many as 35 more vessels in the Gulf need to be idled, Hornbeck said, “to try to get some semblance of equilibrium.”
Hornbeck is expecting it to be “a pretty long time” before deepwater drilling regains momentum in the Gulf.
“Everybody was excited that we’re back (to $50), and I think we’re far, far away from capital flowing back into our space,” he said.
Reduced sales and income tax collections have forced tight fiscal planning in oil patch areas like Lafourche Parish.
“I do worry about it, but I can’t dwell on it,” said first-term Lafourche Parish President Jimmy Cantrelle. “Hopefully it gets to $60 a barrel, and hopefully it stays there for a while, and hopefully a lot of folks go back to work. I think that would solve all of our problems, or at least take a big chunk out of solving our problems.”
In St. Mary Parish, officials are thinking twice about making some planned expenditures. “It’s definitely caused us to slow down on big projects that we may have anticipated undertaking in 2016,” said Henry “Bo” LaGrange, the parish’s chief administrative officer.
At 9 percent in April, St. Mary’s unemployment rate was among the highest in Louisiana and more than 3 percentage points above the statewide figure. It didn’t help matters when Danos and Curole Marine Contractors’ fabrication division said last month that it will lay off 80 workers at its Morgan City facility in July, citing an “ongoing downturn in the industry.”
Elsewhere across the state, the impact of the latest boom-or-bust cycle is being felt after nearly two years of tumbling prices set off initial waves of industrywide layoffs numbering into thousands.
Louisiana had 1,979,000 nonfarm jobs in April, which was about 16,000 fewer than a year earlier, according to the Louisiana Workforce Commission.
The hard-hit oil sector lost 8,900 jobs — down 18 percent — over the 12-month span. Nearly half of those jobs were in the Lafayette area, which lost 4,000 energy jobs — about 20 percent of the sector’s total there — out of 7,700 total that disappeared during the same span.
Despite the heavy job losses, many state leaders and regional economists have resisted comparisons with the state’s devastating 1980s oil bust when, Scott said, employment numbers dropped “like an unopened parachute.”
From 1982 to 1987, the state lost nearly 148,000 jobs, he said. “We’re not anywhere near what it was like back during that time period,” he said.
Three decades later, many say, Louisiana’s economy has diversified and is less reliant on oil and gas drilling.
An abundance of cheap natural gas has led to tens of billions of dollars’ worth of investment in industrial projects in Louisiana that are planned or being developed. That’s creating a demand for workers — particularly in the Baton Rouge and Lake Charles areas — that has helped keep some laid-off energy workers employed.
Given the uncertainty about the price of oil, though, some companies behind the projects have tapped the brakes, which has delayed new investment.
Most notably, South African energy giant Sasol temporarily shelved plans last year for a proposed $14 billion natural gas-to-liquids plant in the Lake Charles area, the largest planned expansion in the state’s history. The company has moved forward with an ethane cracker and chemical complex at Westlake, which is under construction and expected to open in 2019.
Even spending on that project was slowed because of low oil prices. The extended schedule, along with construction delays caused by heavy rains, higher labor costs and some higher-than-expected bid contracts, increased the cost of the project by $2 billion, to $11 billion.
For the proposed gas-to-liquids expansion to be economical, oil’s per-barrel price would need to be 16 times higher than natural gas — meaning about $42 per barrel at minimum — Sasol head David Constable told the Mail & Guardian in 2013.
“There’s still a lot of action out there. It’s not like they’ve gone moribund,” Scott said of Louisiana’s industrial expansion. “They’re still putting together packages. They’re just kind of out of the side of their eye watching that oil price to see where it’s going to end up.”
Many companies are proceeding slowly about decisions to commit new capital, said Eric Smith, associate director at the Tulane Energy Institute.
“Everybody’s hoping against hope that $50 is going to hold and that it represents the natural price-point for the industry to take stock,” he said. “But of course, we all remember that the price went up before and it came down about 25 percent in three weeks, so there is that concern.”
Follow Richard Thompson on Twitter, @rthompsonMSY.