What’s going on with the oil industry? #FossilFuel companies offload wells and liabilities rather than drill new ones — @Land_Desk

Photo credit: Jonathan Thompson/The Land Desk

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The oil and gas industry is behaving, well, abnormally these days.

As you probably are aware if you’ve filled up your car or paid a utility bill lately, oil and natural gas prices are sky high. And every time that oil or natural gas prices have shot up for a sustained period of time in the past, oil companies in the U.S. have responded by stepping up drilling so they can have more goods to sell at a higher profit. Rig counts—the most accurate, real-time measure of drilling activity—follow the price.

This time things appear to be different. Oil companies are raking in the cash, but instead of investing it in new drilling projects, they are buying back stocks and lining the investors’ and executives’ pockets with the profits. Not only that, but many of them are bailing on entire oilfields altogether.

Let’s look at the data, but first, my apologies on the graphs below. They cover the same time span, which means they should align with one another. They don’t, however, because in Oct. 2014 I began to track rig counts monthly. So that means the bottom graph is kind of funked up in that it starts out as average yearly counts then jumps into monthly (or so) counts. My retired-statistics professor father-in-law is probably gritting his teeth at that one. Sorry.

West Texas Intermediate oil prices—the benchmark for domestic crude—started rising in the early 2000s, peaked briefly in about 2008, crashed (as a result of the financial crisis), then rebounded quite healthily. The biggest crash came in 2014, when OPEC decided to flood the market with oil, bringing down the prices and driving many a smaller U.S. operator out of business. Prices kind of recovered, but not enough to make drilling profitable in some places. Then came the short-lived pandemic crash, followed by a steep climb to where we are now, in the $100/barrel range. Source: Energy Information Administration
At first glance, I mean, after you figure out how to align these two graphs, it appears as if the rigs are following the price. But look more closely and you’ll see that today’s rig count is still lower than in early 2019, when prices were consistently below $70/barrel, which is barely the break-even price for most drilling. Source: Baker Hughes.

We’re not seeing a total decoupling of prices and rig counts: It’s still true that as prices climb, so does the rig count. However, the count is climbing much slower in relation to prices than in the past. It would be easy to blame the drilling slowdown on Biden’s purportedly restrictive energy polices. But that doesn’t mean it would be accurate, mainly because Biden’s policies aren’t restrictive. Yes, he put a moratorium on leasing, for a while. But that doesn’t have any short-term impact on drilling. And besides, the moratorium was lifted, leasing has resumed, and Biden has even upheld contested Trump-era leases on 45,000 acres in the Greater Chaco Region, prompting a lawsuit from Diné and environmental groups.

A better gauge of Biden’s policies would be to look at the number of drilling permits issued. Here it is:

At first glance, I mean, after you figure out how to align these two graphs, it appears as if the rigs are following the price. But look more closely and you’ll see that today’s rig count is still lower than in early 2019, when prices were consistently below $70/barrel, which is barely the break-even price for most drilling. Source: Baker Hughes.

From these data we can deduce that oil companies are sitting on a bunch of un-drilled leases and a pile of unused drilling permits. And not only are the companies refraining from drilling, but they’re also ditching their wells left and right, even though they are cash cows right now.

Mark Olalde reports for the Los Angeles Times that Shell and ExxonMobil recently sold 23,000 California oil and gas wells to a German asset management company. This transaction mirrors similar ones in the San Juan Basin in southwest Colorado and northwest New Mexico in recent years, in which corporate publicly traded majors sell out to smaller, often private companies. BP sold all of its extensive assets and abandoned its sleek Rocky Mountain Region headquarters near the Durango airport; it remains empty to this day. ConocoPhillips sold out to Hilcorp. WPX sold its San Juan Basin natural gas assets to Logos. The list goes on.

Of course, they’re not just offloading wells and infrastructure, but also the responsibility to clean up all those wells, which in the California case could cost $1.1 billion, according to Olalde. And since they’re selling them to less financially flush companies, the potential that the wells end up as orphans, with cleanup costs hoisted on the taxpayers, is now exponentially higher.

Actually, this is a great time to sell, because with oil prices high, potential buyers have a great reason to acquire some new wells, bleed them dry, and so forth. Here’s a great explainer:

Or maybe we’re being too cynical. Maybe Shell and ExxonMobil are short on cash so they figured they’d sell a few assets to help them pay the bills. Yeah, right.

Shell just reported a $9.45 billion profit for the third quarter of 2022. It was the second-highest ever for the company. The highest? The second quarter of this year, when the company walked away with $11.5 billion. And ExxonMobil made a measly $19.7 billion. Yes, that’s profit. In one quarter. A big chunk of ExxonMobil’s revenues came from their Permian Basin operations, which produced 560,000 barrels of oil—per day.

So, if you’re wondering why it costs so much to fill up the tank these days, that partially explains it. Oil companies know that their industry’s days are limited and they’re plundering the place on their way out the door. I guess now we know what’s going on with the oil industry.

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