Fracked out of a job | News | DW | 19.01.2015
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Fracked out of a job

After a 50-percent decline in oil prices since last summer, debt-laden US exploration firms have been under mounting pressure. Oilfield services company Schlumberger has had to cut 9,000 jobs - more will likely follow.

It's pretty cold in Lorain, Ohio these days. The city on Lake Erie is located in the middle of the US Rust Belt. They've been making steel in Lorain since 1895. Tall smokestacks frame the city with a population of 64,000.

The city's U.S. Steel plant has enjoyed several strong years making seamless pipes and tubes for the domestic energy industry. But that's come to an end. Now the plant is to be 'idled' - and 600 workers will receive their pink slips.

"Those people were getting paid a good wage," Lorain Mayor Chase Ritenauer said in a radio interview.

"They had money to invest in the local economy," he said. "Houses don't get sold without those types of jobs. Automobiles can't be purchased without those types of jobs."

The list gets longer

The Lorain plant produces pipes for oil fracking firms, but these now have to cope with oil prices less than half of those six months ago. Investments and production are being curtailed because of the uncertain environment.

Oil has been trading below 50 dollars per barrel since the year began, but much of the hydraulic fracturing, or fracking, exploration in North Dakota, Texas, Pennsylvania and Wyoming is only profitable at prices of at least 70 to 80 dollars per barrel.

Oil companies first started to get nervous three months ago, when the oil price slipped below 80 dollars.

Their fears have become reality: Schlumberger, the world's biggest oilfield services company, wants to cut 9,000 jobs. Competitors Halliburton and Baker Hughes already announced in November they would merge. Conoco Phillips plans to spend a fifth less on exploration this year compared to 2014. WBH Energy, one of many tiny shale oil and gas producers in Texas, has filed for bankruptcy protection.

The shakeout is here

On top of that, US oil exploration firms are loaded with debt. Energy firms make up around 13 percent of the 1.3-trillion-dollar market for junk bonds, which offer high yields to compensate for extremely high risk. The energy sector's overall debt is some 435 billion dollars, according to financial advisers Dealogic - and that means trouble if oil prices keep falling.

"They are not going to be able to meet debt governance if they cut back production too much," said Deborah Rogers of the Post Carbon Institute, a think tank. "I think we will see a pretty major shakeout in the industry."

Fracking in North Dakota Photo by Andrew Burton/Getty Images

North Dakota has been experiencing an oil boom thanks to fracking

And that is looking increasingly likely. It seems the US has lost a game of chicken against Saudi Arabia. The kingdom, and the other members of OPEC, have refused to cut production levels to stabilize prices.

It was, after all, the US that kept up energy production when international demand, especially in China, slowed down. The International Energy Agency says worldwide crude production declined from 75 million barrels a day to 73 million between 2013 and 2014. But the US increased production by 4 million barrels a day during that period.

A 1980s revival

The slump in prices harks back to the 1980s. Between November 1985 and March 1986 the price of crude plunged by 67 percent as OPEC stood by and watched. It took nearly two decades for oil prices to rebound to the pre-bust levels and remain there.

Nowadays even veteran oil traders are uncertain. "Sustained low prices will ultimately bring the market into balance," Andrew Hall wrote to investors in Astenbeck Capital Management, the energy derivative hedge fund he runs. "But it is unclear how long that will take and what the new price equilibrium will be."

A key difference between today and 30 years ago is the new technology used in oil exploration, which has drastically shortened he oilfield investment cycle.

Back then, it could take a decade to get crude moving from the North Slope of Alaska to market. But nowadays, drilling and fracking a well in Texas or North Dakota takes only a few days to a few weeks. That means oilmen can quickly respond to a boom - or a short to medium-term bust.

An extra trillion to spend

In the meantime, most other industries and consumers welcome the lower fuel prices. Citigroup analysts calculated that the drop in gasoline prices have much the same effect as a trillion-dollar stimulus package.

"A typical household buys 1,200 gallons of gasoline a year," said Beth Ann Bovino, US chief economist at Standard & Poors. Because the gas price has dropped more than a dollar over the last year, "that means 1,200 dollars more for households to spend elsewhere."

But a further bust would likely affect the US job market, Bovino said. "We saw the strength in employment in regions that focus on the energy sector," she said, citing North Dakota's unemployment rate of less than 3 percent compared to the nationwide average of 5.6 percent. "We could very well expect to see the job gains in these regions start to revert."

In Lorain, Ohio, Ritenauer is trying to stay optimistic. "We are also looking ahead in terms of diversification. We continue to work with U.S. Steel on some deals with potential expansion here. It could serve a different part of the market."

Reports suggest the United Steelworkers union and plant representatives will meet in the next weeks to discuss the future of the Lorain plant, whose fortunes have fisen and fallen with the price of oil.

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