Deeper oil industry cuts could make rebound harder, experts say

With the oil industry set to cut spending even more this year, industry observers warn that the longer the downturn continues, the tougher it will be for explorers to ramp back up once commodity prices improve.

An International Energy Agency report released Monday stated that explorers cut their drilling investment by 24 percent in 2015 and are expected to slash it by 17 percent this year.

As a result, oil-field service companies that provide the drilling rigs and crews are cutting employees. And the longer they are without a job, the harder it will be to get them to return to those demanding jobs, said Ken Kirby, senior vice president of development for XTO Energy.

“The service companies are going to be the most damaged, and we’re going to have a lot of trouble coming out of this just because our service companies are so badly damaged,” said Kirby, who appeared at a TCU Energy MBA Board Forum at the Fort Worth Club on Tuesday.

“If prices go back up to $60 or $70 [a barrel] and we raise our hand and say, ‘Let’s pick up rigs,’ we’re not going to find the rigs,” he said. “The damage is going to be huge.”

In recent weeks, several companies have announced drastic cutbacks in drilling. Pioneer Natural Resources said it’s cutting its drilling activity in half — from 24 rigs to 12. Devon Energy is trimming its drilling by 75 percent and laying off 1,000 employees.

Fort Worth-based XTO, a subsidiary of Exxon Mobil, had about 15 rigs working in the Bakken in North Dakota a year and a half ago and is pulling back to two, Kirby said.

Plummeting oil prices may result in 20,000 oil-field-related job losses in Texas by the middle of 2016, meaning that the oil and gas field will have lost 80,000 jobs since January 2015, according to the Texas Alliance of Energy Producers.

The lower prices go, the tougher the rebuilding process will be, Patrick DeHann, a senior petroleum analyst for Gas Buddy, said last month.

“If oil prices suddenly went back up to $50, they could recall the workers or rip up the pink slips. But if it is a year from now, it is harder to get back together. Once you get out of oil, you ask yourself, ‘Why would I go back and have it happen to me again?’ ” DeHaan said.

The IEA report notes that while oil prices should start to rise gradually once the market rebalances, the availability of resources to be quickly tapped raises the risk for an oil spike later.

“It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall; the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not too distant future,” said IEA Executive Fatih Birol.

This story was originally published February 23, 2016 at 5:40 PM with the headline "Deeper oil industry cuts could make rebound harder, experts say."