The technological breakthroughs that sparked the Lower 48 oil and natural gas revolution jolted economic activity across the Permian Basin, but the efficiencies reduced the need for people, creating a conundrum of sorts, according to the Federal Reserve Bank of Dallas.
Business economist Garrett Golding and research analyst Sean Howard of the Dallas Fed, as it is known, recently illustrated how productivity has improved in the Permian across West Texas and New Mexico. The Eleventh District monitors economic activity across the energy heartland that includes Texas parts of New Mexico
However, fewer people are needed to keep the wells drilled and rigs running, even as production has increased.
“The region’s oil and gas firms employ fewer people today than at the beginning of the shale oil boom 11 years ago, even as oil production quadrupled,” the researchers said.
As domestic oil and gas production surged from 2010 to 2014, “so did hiring” across the Permian.
More than 900 rigs were running across West Texas and New Mexico during the first half of 2014 as the benchmark West Texas Intermediate (WTI) oil price “held above $100/bbl.”
Exploration and production (E&P) companies, along with their brethren in the oilfield services (OFS) sector, revved up activity in the biggest basin of all. An estimated 330,000 people were employed across the Permian over the four-year period beginning in 2010.
The job market has been in a bit of freefall ever since. First came the commodity price crash that began in late 2014. By 2015, drilling activity and capital spending had collapsed in the Permian.
An estimated 289 E&Ps and OFS companies went bankrupt, taking down around 120,000 energy jobs. “The rig count plummeted below 200 by mid-2016,” the Dallas Fed researchers noted.
E&Ps and the OFS operators in turn unleashed a slew of improvements. Rigs became more productive. Costs began falling in 2015.
“This lowered the breakeven prices for shale wells and allowed production to recover quickly after the downturn,” Golding and Howard said. “Texas and New Mexico oil production grew 14% between December 2014 and December 2017, while industry employment dropped 29%.”
Still, investors were unsatisfied. Demands grew to improve free cash flow and return capital to shareholders. That led to payrolls shrinking further. The rig count declined through 2019. “Counterintuitively, oil production surged,” the researchers noted.
WTI and Brent crude prices crashed again last year, with demand evaporating because of the pandemic. In addition, there was an oil price war last spring between Saudi Arabia, which leads the Organization of the Petroleum Exporting Countries, and frequent cartel ally Russia.
Those events in turn led to a “wave of industry consolidation,” and even more cost cutting, the Dallas Fed researchers noted.
There is no doubt that jobs have begun to return as the pandemic has eased and travel has escalated. Recent data compiled from the Texas Workforce Commission suggested last month that the state’s upstream oil and natural gas employment expanded by 1,600 jobs in May month/month, expanding a recovery that began last fall.
Still, it’s nowhere close to what it was pre-pandemic.
“Technology is redefining operational roles,” said Golding and Howard. “Though automation is in the early stages of deployment on drilling rigs, it is decreasing personnel requirements. Remote monitoring of wells and other facilities, which proliferated with Covid-19 workplace restrictions, further lessened employment needs.”
The adaptations have shifted the role of people working for the energy sector. It has also upended the cost structure of the companies.
For example, in Golding and Howard’s analysis of 14 independent E&Ps, the general/administrative costs fell in 2020 to an average $2.10/boe from $2.96 in 2018. These same expenses had exceeded $4/boe on average at the start of the 2010s, they noted.
“Job opportunities in the oil patch face a compounding squeeze,” the researchers said. “Companies require fewer employees for more output, while a slower pace of field activity takes hold.
“However, since most companies are as lean as they have ever been, another period of low prices is unlikely to yield further widespread job losses. Conversely, if prices surge higher, few operators are expected to act as aggressively as they would have in the past and drill more wells and hire more workers.”
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