Frac Holiday' Means Prolonged Pain for Oil Industry
April 27 2020 - 2:27PM
Dow Jones News
By Spencer Jakab
"Tank tops" and "holidays" may conjure up images of a relaxed
summer barbecue, but they mean something altogether less pleasant
in America's oil patch.
Last week energy speculators got roasted by the plunge in U.S.
oil futures prices to negative $40 a barrel as they were forced to
take a loss rather than accept physical delivery. Those in the
industry already were aware that a crunch was coming.
Cushing, Okla., the delivery point for U.S. crude futures, was
"nearing tank tops" in which its 80 million barrels of storage
capacity was exhausted. Producers have been responding with savage
cuts to their capital expenditures. A long-watched measure of oil
and gas activity, the Baker Hughes rotary rig count, only tells
part of the story. As of April 24 it had dropped to 465 in the
U.S., down by 526 from a year earlier and 41% lower than the
average in the first quarter.
But that rapid collapse actually understates the pullback in
activity. Analysts at Citigroup note that the active frac count
compiled by research firm Primary Vision is down by a far sharper
73% from the first quarter average. Fracking wells is the last step
in releasing oil and gas from shale formations and "frac holidays"
are awful news for oil-field service companies like Schlumberger
Ltd., Halliburton Co. and Baker Hughes Co. on two fronts.
First, it means demand for things like fracking of
already-drilled wells has dropped a lot more. For various
contractual or business reasons, it sometimes still made sense to
go ahead with drilling.
It also means that many of those drilled but uncompleted wells,
or "DUCs" will be left idle. These represent supply that could be
brought online quickly with relatively modest outlays in the future
as soon as prices and demand recover. Before that happens, of
course, the world will have to work through massive amounts of
stored crude now building up.
The U.S. will feel disproportionate pain in this global glut
because of the heavy cash needs of shale production. Service giant
Schlumberger said 10 days ago that it expects customer spending to
drop by 40% in North America this year and by 15% abroad. People
and companies in the U.S. shale patch will have plenty of unwanted
leisure time for at least the next several months.
Write to Spencer Jakab at spencer.jakab@wsj.com
(END) Dow Jones Newswires
April 27, 2020 14:12 ET (18:12 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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