On Monday, April 20, 2020, the world watched the price of a barrel of oil drop below $0 for the first time ever. In fact, prices reached a staggering $-37 per barrel, sending shockwaves through an economy that was already hurting due to COVID-19. Currently, the oil and gas industry is still struggling to find the necessary footing to mount a strong recovery.
That recovery will come, but it will require an understanding of how the historic April collapse happened—and how technology and efficiency will play a key role in the industry’s economic recovery. Fluctuations in the oil and gas industry are inevitable, but in the face of current economic conditions, rebounding and rebuilding calls for dedicated leaders capable of strategizing and executing on their visions.
How Did We Get to $-37 a Barrel?
The disastrous day of April 20 is most simply explained by Economics 101: supply and demand. Saudi Arabia, Russia, and officials at OPEC had been embroiled in a price war for several weeks before COVID-19 was officially declared a pandemic. Their disagreements over pricing and production led to a pronounced glut in supply that was already poised to cause oil prices to fall.
When the world went into quarantine to slow the spread of COVID-19, the shutdown created a drastic reduction in demand for oil. So, in classic market fashion, low demand combined with high supply to create low prices. Uncertainty around when quarantine might come to an end made the situation even worse.
In addition to oil prices trading at historically low numbers, the industry had “overbought” the market, leading to significant storage issues. When you buy a barrel of oil, you are actually buying a contract promising that the oil will be delivered at a later date. When the market is overbought, people have contracted to have oil delivered, but there is no place to store the oil when it arrives. This overbought market then leads to wells being turned off—or “shut in,” in industry parlance—for future production.
Thus, too much oil being pre-purchased on the market with nowhere for it to go meant that prices would eventually crumble. This chain of events wreaked havoc on midstream and upstream companies across Texas, causing companies to scramble and, in some cases, resort to layoffs. And unfortunately, things are not as simple as shutting down a well because a company needs to slow production for a moment and then flipping it back on. Once a well is reopened after it’s been shut in, it may not produce at the original levels, causing companies to invest more money just to get production back online.
All this means is that the industry is now faced with (a) a surplus due to overproduction earlier in the year and (b) a reduction in production due to lowered demand during the COVID-19 pandemic. It’s a unique double-edged sword that’s kept prices significantly low, and people uncertain what to do next.
How Can Oil and Gas Companies Create a New Future?
For an oil-and-gas rebound to happen, the economy must continue to open back up, and demand needs to increase. Moreover, storage capacity for purchased oil must become available again, even if demand decreases again in the future. Additionally, OPEC and leading oil-producing companies need to reach an understanding regarding production and pricing. In my opinion, based on nearly two decades in the energy industry, oil prices need to reach the mid-$40-per-barrel range for an average well to be profitable.
To increase our chances of a strong recovery and to improve the health of oil and gas companies’ bottom lines, industry leaders can take the following steps:
Digital technologies are transforming almost every industry’s operational landscape, and the oil and gas industry is no exception. Increasingly, technology solutions are boosting productivity, cutting costs, and streamlining everyday back-office work. Industry leaders must embrace these developments, including finding ways to automate invoicing, meter reading, POP statements, and other processes that manage crucial files and metadata for your company. Automated processes that leverage machine learning and artificial intelligence provide leaders with easier access to data analytics, empowering them to make sound decisions. To ensure companies optimize new software, decision makers must analyze their business at the core, identify gaps and pain points, and focus on distinguishing between critical items and “nice to haves.” The result is improved processes, greater insight, and more efficiency—and a new way of doing business, one that impacts the company’s strategy, culture, and vision.
Since the best technology solutions will be unique for every company, it is vital that leaders consider their options and future roadmap, selecting only what is needed to recover and grow their business.
Invest in Services
The old way of operating is not sufficient to thrive, let alone survive, in the oil and gas industry. To take the idea of new technology and solutions to greater heights, industry leaders must procure both high-quality cloud hosting and cybersecurity services. Your field agents and operational staff need stable and secure methods for obtaining the same information no matter where they are working. And your company needs protection from hackers, viruses, spam email, and other digital difficulties. Embracing these services will save you precious time and money spent trying to recover from the issues that come along with digital transformation.
Only select Texas oil and gas companies have survived the recent economic downturn without cost-cutting and layoffs. It is no surprise that those few companies were already lean and operated efficiently, which prepared them for combating such a crisis. Prioritizing efficiency means leveraging human capital appropriately and filling in the gaps in your essential processes where human intervention is not needed. These goals can be achieved by—again—leveraging the right technology and services.
Economic downturns and industry changes are inevitable, but investing in scalable technology solutions, eliminating inefficient manual tasks, and utilizing technology services will reduce debts, increase cashflow, and allow your company to become a leader in the rejuvenated Texas energy marketplace.