Houston’s oil and gas industry faces years of lower demand and slower growth in the aftermath of the coronavirus pandemic, leading to a smaller industry employing fewer workers.
The International Energy Agency warned Tuesday that global energy demand will not recover to pre-pandemic levels until at least 2023 and possibly 2025, setting the oil and gas industry on its lowest growth rate since the 1930s.
“The COVID-19 crisis has caused more disruption than any other event in recent history, leaving scars that will last for years to come,” the international body said in its annual World Energy Outlook.
The sour outlook comes as oil and gas companies face a march toward renewable energy, slowing growth plans and a renewed focus on shareholder returns, all of which portend a slow return to prosperity in the aftermath of the global pandemic.
Oil and gas companies this month are set to release third-quarter earnings, which analysts expect to be better than those of the second quarter. The industry is still far from full recovery, however, as crude prices have recovered to around $40 a barrel, 27 percent less than at the start of the year when it was $55.
“Most companies have returned to production, and revenue, especially on the price side, have gotten a lot better,” said Tyler Hoge, senior research associate for Austin-based energy research firm Enverus. “But the industry is not out of the woods yet.”
Oil and gas companies are staying afloat because they have slashed spending and laid off more than 107,000 workers nationally. Companies have largely resumed production at existing wells as well as wells drilled but not completed after the pandemic swept the country. Drillers are benefiting from oil-field service company bids to extract crude that are lower than in the past.
The current situation is not sustainable over the long run, because shale companies must drill new wells to continue raising production and revenues. The number of oil and gas rigs operating in the U.S. bottomed out in August at 244, and has rebounded to 269 rigs last week, 60 percent less than a year ago. Crude prices remain too low to make a profit on most new shale wells, Hoge said.
“$40 oil isn’t going to be sustainable for the majority of companies,” Hoge said. “You need $55 to $65 oil.”
In the past, oil and gas companies could rely on cheap capital from investors willing to bet on the world’s growing thirst for crude. But years of disappointing returns exacerbated by recent oil busts have turned off Wall Street, forcing some energy companies to restructure debts in bankruptcy court.
Some companies, such as Pioneer, Parsley and Marathon, are promising shareholders a greater return on their investment by tightening capital spending. That means production — and employment — could remain nearly flat.
“Before 2018-2019, companies focused on growing production before returning cash later,” Hoge said. “Now that we’re in a downturn, operators have to focus more on returns.”
In addition to the challenge of low oil prices, the industry faces a transition to renewable energy. Many countries and corporations have promised to set net-zero carbon emissions targets, balancing their fossil fuel emissions with the use of with wind and solar energy, biofuels and hydrogen power. The IEA predicts oil demand will peak within the next decade, with solar power taking off as the “king of electricity markets.”
To reach net-zero emissions targets by 2050, the IEA said 70 percent of electricity would need to come from low-emissions sources by 2030, up from 40 percent now. And more than 50 percent of new vehicle sales would need to be electric, up from 2.5 percent now.
But the decline of crude is not expected to be fast either. Forecasts that project a rapid decline in oil demand could prove faulty if government policies and consumer behaviors change slowly.
“Without a large shift in government policies, there is no sign of a rapid decline,” said EIA Executive Director Fatih Birol. “Based on today’s policy settings, a global economic rebound would soon push oil demand back to pre-crisis levels.”
paul.takahashi@chron.com
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