The rig count has rebounded from the lows seen in late May, a small
indication that oil companies in the U.S. could begin drilling anew. Shale
drilling is a short-cycle prospect, requiring only a few weeks to drill and
bring a well online. Because of this, the collective U.S. shale industry has
been likened to the new "swing producer": low oil prices force
quick cutbacks but higher prices trigger new supplies. In essence, shale
could balance the market in the way OPEC used to.
While that notion was always a bit simplistic, one reason that U.S. shale
production won't necessarily spring into action in short order is because the
people and equipment that were sidelined over the past two years can't come
back at a moment's notice.
Oilfield service companies have gutted their payrolls and warm or cold
stacked rigs and equipment (temporarily or more permanently idling rigs). An
estimated 350,000 workers have been laid
off in the oil industry around the world, and the rig count in the U.S.
is a tiny fraction of what it was two years ago.
Bringing back all of that equipment and personnel is no easy task. The
Wall Street Journal, using data from IHS, estimates
that roughly 70 percent of the fracking equipment across the shale industry
has been idled. Also, about 60 percent of the field workers that are needed
to frack shale wells have been handed pink slips. It is not as if those
workers are sitting around waiting for the call to go back to work; many have
moved on to other industries and won't come back.
"It's scary to think what a drag and what a headwind finding
experienced labor is going to be this time around," Roe Patterson, CEO
of Basic Energy Services, a Texas-based well completion company, told the
WSJ. He also said that equipment suffers wear and tear over time even when
not in use. "Pop the hood on your car and let it sit for a year. I
guarantee the car won't be in the same condition."
Drillers could try to woo workers with higher salaries, and will probably
be forced to. And after more than 70 companies that offer services to oil
producers have gone bankrupt over the past year and a half, fewer are around
to meet industry needs. A tighter supply of services will drive up rates.
And that cuts at the heart of what some analysts have been saying for a
while about breakeven costs - if companies have to raise salaries to staff up
and pay more for rigs and services, their costs rise. In other words, the
cost "reductions" and "efficiency gains" that so many oil
companies have boasted about over the past two years may have been temporary
and even somewhat illusory. Costs could rise as drilling resumes - both wages
and rig rates could see upward pressure as activity picks up.
Aside from laid off workers moving out of oil and into other sectors,
Bloomberg notes
that there is a separate demographic problem related to the last oil price
downturn. When oil prices crashed in the 1980s, the same thing that his
happening today occurred in the industry then: companies went out of business
and workers were laid off. And because there were few job openings, very few
young people between the mid-1980s and 2000 went into oil and gas. As a
result, much of the workforce that stuck around is now aging and moving
closer to retirement, setting up the industry for a labor crunch, or the
"Great Crew Change," as some dub it. There are too few experienced
professionals to replace retiring workers.
The American Petroleum Institute said in a report
earlier this year that oil, gas, and petrochemical companies will need to
hire roughly 30,000 new workers each year over the next two decades to
replace retiring employees, with about half of those positions classified as
skilled or semi-skilled blue collar positions.
The industry has been worried about this longer-term labor problem for
years, but it could be the shorter-term issue of a scarcity of workers
because of recent layoffs and idled equipment that delays a restart of
drilling.
The expectation that shale drilling will resume once oil prices rise above
breakeven prices for drillers has led to analysts to believe that oil
production will begin to increase as soon as this year. But if drillers can't
start drilling right away, even if they want to, because of labor and
equipment bottlenecks, then the declines in production that the U.S. has
posted for more than a year will surely continue for a little while longer.
