We Pulled the Plug': As Oil Prices Plunge, Drillers in the Gulf Shut Off Wells
April 22 2020 - 8:53AM
Dow Jones News
By Collin Eaton
Offshore oil drillers have begun shutting off wells in the U.S.
Gulf of Mexico following a collapse in crude prices due to the
coronavirus pandemic, and some executives worry that the region's
production may take years to fully recover.
A historic decline in energy demand that has led refiners to
make less fuel and caused storage tanks to fill up with crude is
pushing gulf producers to shutter high-cost wells in both shallow
and deep federal waters. The offshore oil sector accounted for
about 15% of the nation's production, or nearly two million barrels
a day last year, a record level.
Their response to the crisis is expected to have longer-lasting
impacts on the region than the pullback in onshore plays like the
Permian Basin of West Texas and New Mexico. Offshore shut-ins and
other oil-company cost reductions are among the factors pressuring
oil-field services companies such as Schlumberger Ltd., Halliburton
Co. and Baker Hughes Co. to cut jobs in recent days. Many offshore
producers rely on service companies to provide contract
workers.
Offshore producers pay comparatively high costs to produce and
transport crude oil to onshore refineries and storage facilities.
They typically offset those costs by collecting premium prices for
barrels delivered into Gulf Coast trading hubs in Texas and
Louisiana, supported by high demand from U.S. refiners.
Richard Kirkland, chief executive of shallow-water gulf producer
Cantium LLC, ordered his company around 1 p.m. Monday to shut in
all production as U.S. prices went negative. By 6 a.m. Tuesday,
almost all of it was shut.
"We pulled the plug," he said. His fields producing 20,000
barrels a day will be shut for at least two months, possibly four.
Gulf Coast refiners told him they would substitute gulf crudes with
Saudi barrels from two tankers sitting offshore.
"This could very well be the peak for years," Mr. Kirkland said.
"We've got to survive with our hedge money and cash in the bank.
We're not getting much help from anybody."
Gulf operator Fieldwood Energy LLC decided to immediately
shut-in the vast majority of its 100,000 barrels a day of
production after oil plunged into negative territory this week,
Chief Executive Matt McCarroll said.
"Storage is full. Refineries are full. They don't want the oil,"
Mr. McCarroll said.
Offshore drillers and allies including Sens. John Kennedy and
Bill Cassidy of Louisiana have asked the Trump administration to
waive royalty payments for gulf oil production for a year. But so
far, the administration has been reluctant to issue any blanket
royalty waiver for producers. On Tuesday, President Trump said on
Twitter that he had directed his administration to look at aiding
U.S. oil-and-gas companies, but details of the plan were
unclear.
The Interior Department and Sens. Kennedy and Cassidy didn't
respond to requests for comment Tuesday.
Major oil companies such as BP PLC and Exxon Mobil Corp. held
about 54% of deep-water leases in the gulf and produced about 89%
of the region's crude in 2017. Smaller companies held 95% of the
leases in shallow waters, and produced 11% of the region's crude,
according to a November study by the Bureau of Safety and
Environmental Enforcement.
In the previous downturn about five years ago, gulf operators
worried about storage and a global oversupply of crude, and though
drilling slowed, few ever shut in production. But the industry has
never run up against storage limitations like those that have
caused prices to crater this week, executives said.
Older production platforms are at risk of being shut down and
removed, and if there is no regulatory relief, a lot of oil and gas
buried under the ocean floor will remain undiscovered, said Tim
Duncan, chief executive of offshore producer Talos Energy Inc. "In
offshore, we don't shut in fields, we shutter them. You begin the
process of leaving them forever," he said.
Last month, Talos said it would cut capital spending about 34%
from the prior year, and expected to produce up to 67,100 barrels
of oil equivalent a day.
While oil hedges have protected much of the company's output
from the volatility, Mr. Duncan acknowledged current prices have
given him pause.
"There's an oil price where you always consider the option of
shutting in, and we seem to be staring at it," he said.
Write to Collin Eaton at collin.eaton@wsj.com
(END) Dow Jones Newswires
April 22, 2020 08:38 ET (12:38 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
Halliburton (NYSE:HAL)
Historical Stock Chart
From Aug 2024 to Sep 2024
Halliburton (NYSE:HAL)
Historical Stock Chart
From Sep 2023 to Sep 2024