By Younas Chaudhary
Have you ever sat on a seesaw that not only fell but sank into the ground? When oil recorded negative prices for the first time in history on April 20, 2020, falling from $17.85 at the start of the trading day to negative -$37.63 a barrel by close of that day, that is exactly what I experienced.
I have experienced volatile oil prices, which went from $8 per barrel in the 1980s to $160 per barrel in 2008, for over four decades. But I never thought my hard-earned product would be worth less than zero!
That slump was profoundly shocking to me, and I immediately sought the advice of my team on how to handle not only the immediate impact but also the long-term implications. Inside our offices, the mood was somber, and the looks on everyone’s faces were dour. As a leader of the team, it was my responsibility to restore confidence based on my lengthy experience with this notoriously volatile commodity. Thus, instead of fretting, fuming, and consuming ourselves with news reports, I had us shift our focus to rapid, rigorous cost-reduction. That meant delaying projects and renegotiating terms with vendors, pumpers, and other oilfield services providers. It also meant shutting down unprofitable wells, making existing ones efficient, and carefully scrutinizing every dollar that was spent. We were all in this together, and the best thing we could do was immediately recalibrate the multiple variables that would impact our bottom line.
The explanation for this slump was logical; a global pandemic was wreaking havoc on every corner of planet Earth. Livelihoods were being destroyed, entire industries were being wiped out, and the economies of every single nation were being impacted. Suddenly, we were foregoing all unnecessary flying, driving less, manufacturing less, consuming less, and working remotely.
Prior to COVID-19, the world consumed on average 100 million barrels of oil per day, but by March 2020 that number had slumped to 30 million barrels of oil per day. Our hopes for stronger oil demand in the summer of 2020 were shattered as countries universally imposed lockdown measures; and to make matters worse, geopolitical tensions between Russia and Saudi Arabia further depressed oil prices to around $20 per barrel.
On a practical level, I had always felt that this historic slump in April 2020 was going to be temporary. My prediction was that in a few months oil would get back to the $40s-$50s range, because it is a global commodity and large economies like India and China are heavily dependent on it, despite America’s self-sufficiency in oil production.
Today, based on my personal experience, I believe $50 per barrel would yield a decent payout for those investing in vertical wells. However, it will not be as profitable for the horizontal shale well, because they typically cost at least five times or more as much as a vertical well, so it takes a lot more consistent oil production with less decline to provide a decent payout to the oil producers.
Many energy companies who invested exclusively in horizontal wells could not withstand the fall in oil prices. This exacerbated the challenges already posed by those wells’ decline curves. Even if those horizontal wells initially produced 500 barrels of oil per day, with sharp decline, they frequently slumped quickly to 100 barrel a day or even way less, and the continuing downward curve was such that payout expectations would be stretched far into the future.
Admittedly, there are a few highly productive horizontal wells drilled in the Permian Basin that can payout quickly, in around 3 months. But in South Texas, applying a conservative outlook, vertical wells producing at $50 per barrel or less seem to make more sense, provided you do a prudent cost analysis and keep a close eye on wasteful expenditures.
I believe oil prices can stay in the $40s and $50s for now, absent any imminent geopolitical threats of war or other disruptions.
Over the next few decades, though, we will see less oil demand and less production, spurred by the global interest in renewable energy and a cleaner environment. Mergers among big oil companies will continue, and the sector will shrink, as major players aim for consolidations. Lots of energy lenders are also leaving the energy lending market.
According to The Houston Chronicle, the consulting firm Accenture predicts that eventually, 8-12 companies will control over half of the country’s onshore assets, down from 17 now.
I believe that once vaccines are available to most people, we will see an uptick in demand for oil and gas. People will start to move freely again, and hopefully this coming summer, oil prices will see a stable increase.
Here are a few tips for you to handle volatile oil prices:
- Remember that oil is a global open trading commodity, and geopolitical concerns, pandemics, and global economic decisions impact its prices. These are external forces which we cannot control.
- Control the way you do business by doing it with care, diligence, consistency, hard work, and patience and always keeping an eye on every dollar you invest.
- Control, watch and reduce all your field costs and all your G&A costs as much as you can.
- Make sure you have adequate consistent monthly cash-flow to keep and maintain your existing operations.
- Never forget: What comes down will eventually go up! I have never seen a flatlining of oil prices for any long period of time.
- Recognize that oil is here to stay at least for a few more decades, despite the ongoing push towards renewables and a cleaner environment. Deal in volatility with confidence, and do not worry about the near-term, though keep an eye on other future divestiture ventures.
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You can read more by purchasing my best-selling memoir “From Dirt Roads to Black Gold.” Note that 100 percent of the proceeds from the sale of this book will help people in need through my foundation, the YBC Foundation.
The views, thoughts, and opinions expressed in this article are my own and do not represent the opinions of any entity with which I have been, am now, or will be affiliated. Further, I make no warranty regarding the accuracy or effectiveness of my recommendations, and readers are advised to consult other advisors as well as their own judgments in making business decisions.