The Biggest Threats to Oilfield Jobs in 2017

The biggest threats to oilfield jobs in 2017, according to five industry sources, are summarized here.  Since 2014, oil prices drastically dropped and the oil industry has not fully recovered.

FUEL FIX

According to Fuel Fix, in December of 2016 are the continuing recoveries from the two year old oil price crash.  Oil companies had to reduce their operating expenses by half which meant a large reduction in their workforce.  On top of that, they had to continue to pay off their debts.

If oil prices can remain above $55 a barrel there can be hope that most oil companies will make a profit in 2017.  Rising prices will allow independent oil exploration and production companies in the U.S. to begin operations in 2017.  This is good for oilfield jobs.

Even if oil prices can average above $50 a barrel, investments could increase by 25%.  That would mean that 60 oil corporations can grow their production by 2% in 2017.  This is huge because spending on development was cut by over 40% from 2014 to 2016.  However, recovery will not be fast as a mere 2% growth in oil production is relatively small.

Oil companies will have to increase savings, cut expenses, and reduce debt while moderately increasing production.  On the other hand, big capital projects by major oil companies like Chevron, ExxonMobil, and Shell are winding down resulting in spending reduced by 8%.

One benefit of these situations is that those companies which become more productive while being leaner will attract corporation acquisitions and mergers in 2017.  The oil companies with financial strength will survive 2017 while looking to merger and acquire the weaker companies.

To summarize the Fuel Fix article about how oil companies will perform in 2017, a drop in oil prices will reduce the opportunities for oilfield job growth.

INVESTOPEDIA

Investopedia posed the five biggest risks faced by oil companies in 2017 in an article published in December of 2016.  Providing information for potential investors in the oil industry, Investopedia described these potential risks in 2017:

Geological Risks

Most of the easily available sources for oil are either tapped out or close to it.  Oil exploration is forced to move into unfriendly environments like constructing drilling platforms in the oceans.  While unconventional oil extracting methods exist which squeezed out product in areas which would have been impossible years ago, there are risks.

Geological risks include difficult extraction and the possible underestimation of accessible reserves in a deposit.  However, frequent testing by oil geologists minimizes the risks of underestimating available reserves.  Geologists often refer to “possible”, “probable” and “proven” to explain the confidence in their findings.

Political Risks

Politics can always result in the regulation of the oil industry.  In addition, while government regulations can limit extractions as to where, how and when; every state interprets laws and regulations differently.  The greater political risks occur when oil companies work on deposits in other countries.

A country with a stable political system with a history of approving and protecting long-term leases are is preferred by oil companies.  But, sometimes an oil company must go to a country where the oil is even if the country is not as politically stable as desired.  Their greatest political fear is being nationalized or limited by new harsh environmental regulations.  Other political risks involve a government changing its mind after negotiations conclude and the capital investment is made in order to gain greater profits for the country.

An unstable dictator or a country with a history of nationalizing foreign companies or countries which change the rules to favor their domestic companies are additional political risks.  The only way to mitigate these types of political risks is to do a thorough analysis of the political structure and build good relations with international oil partners who will be there long term.

The Risk of Supply and Demand

Oil companies often risk supply and demand fluctuations.  When prices go down it is not easy to temporarily shut down an operation because of the vast time and capital invested.  Oil prices are volatile due to the uneven nature of production.  Economic problems such as macroeconomic situations and financial crises can eat up capital.

Price Risks

A reserve can be economically feasible depending on the price of oil.  The greater in difficulty for extracting oil due to geological impediments, the greater the price risk of a project.  An unconventional extraction is more expensive than a direct vertical drill to reach a deposit.  Oil exploration companies try to mitigate the price risks by trying to predict future prices during the project before deciding to proceed.   However, once a project begins, price risks are always a concern.

Cost Risks

The biggest risk which the previous risks can affect is operation costs.  Projects become more expensive when facing difficult drills and strict regulations.  Combine this with fluctuating oil prices based on global production which are beyond the oil company’s control raises legitimate cost risk concerns.  During boom times, oil companies compete to recruit and retain qualified workers which quickly raise payrolls adding another cost to the project.  Such costs have forced oil companies to become a more capital intense industry leading to more failures.

2016 RISK FACTOR REPORT

The 2016 BDO Oil & Gas RiskFactor Report published in May of 2016 examined risk factors found in 100 of the largest publicly traded oil & gas exploration and production (E&P) companies in their SEC 10-K filings.  When oil prices began to drop in mid-2014 from $100 per barrel level down to the $27 level, most U.S. E&P companies were hurting.  The report noted that volatile commodity prices topped the risks cited by these 100 companies.  The future of unpredictability was mentioned by 89% of the oil companies.  The persistently low prices significantly influences the way oil companies approach further exploration and production.  Of these 100 companies, 10% declared bankruptcy, were acquired, or outright delisted from the U.S. stock exchanges.

The top risk factors cited by these companies were price fluctuations, supply risks, political regulations, natural disaster disruptions and unexpected weather conditions, and operational and E&P risks.  In 2015, 100% of the companies cited supply risks and were deeply concerned about their ability to find and replace reserves.

CNN MONEY

CNN Money published an optimistic article in July of 2016 subtitled, “100,000 oil jobs could be coming back”.  The article declared that Goldman Sachs believed the U.S. oil industry was going to make a big comeback in 2017.  More oil fields will be coming online with insufficient workers to do the drilling.  The oil price downturn cost 170,000 oil and gas jobs since late 2014.  Goldman predicts that 80,000 to 100,000 jobs would be created by the end of 2018.  This will require an additional 700 oil rigs supporting an average of 120 to 150 employees for each rig.

DELOITTE

The accounting firm, Deloitte, published its “Oil and Gas Industry Outlook 2017” with a cautious “slow path to recovery”.  The extended oil price downturn will affect people and capital allocation.

People

Finding quality talented workers was a large challenge for the oil industry prior to June of 2014.  Since then, massive layoffs have been the trend. Will there be an industry recovery in 2017?  Will workers come back in 2017?

Capital Allocation

Up to $620 billion in projects through 2020 were canceled or deferred because of the low oil prices.  There are questions regarding where supplies will come from by 2020 and whether there are sufficient short-cycle projects and will capital markets offer support for development of complex projects?

Deloitte’s John England’s Predictions 2017              

2016 was the year of tough decisions.  2017 is the slow road back.  While supply inventories are still high, and global demand growth is sluggish, the OPEC decision to cut production should lower worldwide oil supplies.

There are reasons to be positive and negative in 2017.  The resilience of the oil industry with bright and innovative people leads to his optimism for the oil industry in 2017.

CONCLUSION

The biggest threats to oilfield jobs in 2017 are lower oil prices due to oversupply and weak demand.   Only if oil prices average $55 a barrel or higher and increased demand requiring more supply can oilfield jobs increase dramatically in 2017.