You could see this bumper sticker, in one form or another, all over the oil patch after the price bust of the 1980s:
Lord, Give Me One More
Oil Boom And I Promise
Not To Blow It Next Time
Today, the industry has gone through one of its biggest boom-bust cycles ever.
A reminder (as if everyone needs it): West Texas Intermediate crude hit $145.38 a barrel on July 3 last year and then nosedived to $30.81 on Dec. 23. It was the end of another boom, and we had promised not to blow it.
How did we do this time?
According to the experts: Not too badly, overall.
Tom Wallin is president of Energy Intelligence, which publishes both Oil Daily and Petroleum Intelligence Weekly and other energy market-related publications.
“People were more measured and more careful,” Wallin said.
“There are a lot of similarities, but the industry has handled this one differently. Companies haven’t been venturing off outside their comfort zone, buying Montgomery Ward or going off – with a lot of government encouragement – into things like oil shale,” he noted.
(Editor’s note: Mobil bought Montgomery Ward in 1976 and in 1988 was taken private after massive losses.)
The industry has shown both its resilience and its self-reliance, said AAPG member Larry Grillot, dean of the Mewbourne College of Earth and Energy at the University of Oklahoma.
Grillot came to the university after a 30-year career at Phillips Petroleum Co., where he held several management positions, including international exploration manager and president of Phillips Petroleum Canada.
“The point I would make is, no one is having to bail out the oil and gas business yet. We’ve always taken care of ourselves,” Grillot said.
“It’s been painful – we’ve had to have cutbacks and layoffs,” he added. “But we didn’t have to go hat in hand to the government and say, ‘Save us because the price went down 75 percent.’”
Lessons Learned
The oil and gas industry was criticized for several missteps during the previous boom-bust cycles.
One of the harsher complaints said oil companies hired too many people far too quickly in the up-cycles, then seemed far too eager to dump employees as prices fell.
That led to the widely recognized “age gap” and “crew change” challenges facing companies today.
“Essentially, many of the companies in the industry ceased hiring, to the point where a lot of petroleum engineering departments went out of existence,” Grillot observed.
“I believe they’re trying to manage that better, even as we speak,” he said. “They know that hurt them the last time.”
But Wallin noted that the down-cycle in the industry has just begun, and said “the jury’s still out” on long-term employment effects.
He warned that another significant period of mergers and acquisitions could lead to increased layoffs.
“I think there’s a strong possibility we’re going to see consolidation in the industry. It just gets to be irresistible when share prices are beaten down to these levels,” he said.
The industry seemed better prepared to handle success in the 2003-08 boom, not using extra cash to expand too quickly or to diversify into other businesses.
“This time they said, ‘We’re not going to go off and buy mining companies and get into areas outside our expertise,” Wallin noted.
Major oil companies and other big energy players managed to keep their bearings despite pressure to overreach, according to Grillot. “There were a lot of politics being played” with significant political urging to drill recklessly, he noted.
“The markets and the analysts and Wall Street were really dinging these companies that weren’t going out there and making these exotic investments,” he said.
As a result, the industry should be better off in the down-cycle this time around.
“Most of the majors, even though they’re getting hit, still are maintaining good balance sheets,” Grillot noted.
Wallin said oil companies “were trying to be more prudent than they were in the last cycle,” when they obviously learned some lessons.
“I think most companies, with a few exceptions, are better prepared to handle the downturn this time,” Wallin said.
“There’s going to be a period here where there’s a readjustment that has to work its way through. The major oil companies are going to be in a stronger position than other industry players,” he added.
He also sees strength in some large national oil companies, including Petrobras, Petronas and StatoilHydro. But companies like PEMEX and PDVSA will be challenged, he said.
“Their countries are going to be after them, to get everything out of them they can,” Wallin explained.
“Also, I think the Russian companies are in a jam,” he added, “because they have relied too much on financing.”
Make More, Spend More
For some in the industry, “promising not to blow it” implied grabbing as much money as possible during the boom times. They’d forgotten that costs go up concurrently with prices.
In recent years, the industry made more – and paid more.
“Now we’re on the other side of that bell curve or that spike, and we’re starting to see costs come back into line,” Grillot said.
But Wallin doesn’t expect costs for the industry to drop as drastically as oil and gas prices have over the last nine months.
“Will costs come down as much as energy prices have? I think that’s unlikely,” he said.
The brightest spot for the industry might be the tremendous advances in technology made since 2000, both onshore and offshore.
And the effect on public perception in this cycle could be a draw, at worst.
People who were irate that “the greedy oil companies raised prices sky-high” should be completely confused by the huge price drop.
“The politicians don’t do us any favors,” Wallin noted. “It’s very hard for them not to go into this sort of populist, anti-oil position.”
Grillot judged the public’s current perception of the industry as “same as always,” which is not positive. He also chastised the government for its mixed message of energy independence, conservation and anti-industry rhetoric.
“Simultaneously with that, our policy is to keep gas prices as low as possible so people can drive anywhere they want,” he said.
What About Tomorrow?
If the oil and gas business has come out of the boom-bust cycle in relatively good shape, can we expect easier times ahead?
Not so much, according to Wallin and Grillot.
High prices and increased demand during the boom strengthened the position of governments in relation to multinational oil companies.
In regard to oil supply, the industry faces a problematic future “with the whole cost structure having gone up, and the demand projection we see, and the failure to replace reserves in any big way,” Wallin said.
“From our numbers and the way we look at things, we just don’t see that much additional supply from non-OPEC sources, even if you add in Brazil and things like that,” he added.
Multinationals will face “much more exacting terms and conditions and much more restricted access to reserves,” he predicted.
Grillot agreed that “multinational companies have had trouble with worldwide build because of lack of access, as much as anything.”
He also worries about the industry’s commitment and ability to invest in infrastructure upgrades.
“Our infrastructure is long in the tooth,” he said.
Just like other booms, the latest boom had its own silly season. Look at day rates in the Gulf of Mexico. Or lease bonuses in the Haynesville Shale play. Or predictions that oil prices would soar past $200 a barrel.
“It was probably starting to be typical of, ‘This is going to go on for a long time,’” Grillot said.
But this time around, the whole industry didn’t go off the deep end.
“I would say ‘blowing it’ would be too severe. I think many companies were being very conservative in their investments,” Grilllot said.
“They were just starting to get more aggressive at the end of the year – at the end of the cycle,” he noted.
When oil prices passed $125 per barrel and the whole world said prices were bound to stay high, the industry’s leaders surely thought, “We’ve been here before.”
“If you think about it, the people who were running the oil companies now were all young executives in the 1970s and ‘80s. They probably learned from some of the things that have happened in the past,” Wallin said.
At this point, the boom and bust cycle is a comfortable reality for the industry. Prices are sure to go up. Then lots of experts will give lots of reasons why prices will never go down. Then prices will fall quickly and deeply once again.
And then someone, somewhere, will write an article asking the question:
How did we do this time?