Colorado’s oil and gas industries — no strangers to booms and busts — have experienced historic disruptions due to COVID-19.
Demand is down because people are staying put instead of traveling and additionally, the drop in the price of products is making it uneconomical to drill.
As a result, wells are shut down and thousands are out of work. It is accelerating consolidation in the oil and gas landscape and experts don’t believe there will be recovery, until at best, the middle part of 2021, with worst case scenarios, not into 2024.
According to Scott Prestidge, director of communications and public affairs for the Colorado Oil and Gas Association, the downturn came as a complete surprise.
“There’s no way we could have predicted the sweeping impacts of COVID-19 on the global economy,” Prestidge said. “Of course, you always have contingency plans and plans to address and overcome a variety of different challenges that might occur but trying to prepare for a pandemic or predict the impacts of a pandemic, it’s an impossible challenge to prepare for in advance.”
According to the Colorado Department of Labor, the oil and gas sector lost 8,425 direct jobs from March through the third week of November 2020. Prestidge says this does not include about 230,000 jobs at companies that are supported by the oil and gas industries like suppliers and hotels and restaurants.
He also added that in the summer of 2020, only four rigs were operating in the state, compared to 31 during the summer of 2019. That number is up to five now. Even though the industries have received $276 billion dollars in government relief, such as loans through the CARES Act, tax breaks and reduced royalties, the industries are still struggling.
The December Colorado Business Economic Outlook from the University of Colorado Leeds School of Business reported that statewide, oil and natural gas values are down more than 40 percent in 2020.
“Colorado’s total oil production is valued at an estimated $5.3 billion for 2020 — 47 percent lower than 2019. The value of the state’s natural gas production in 2020 is roughly $3.9 billion compared to $5.3 billion the previous year. Combined, this represents a 43.2% decrease in value from Colorado’s 2018 peak. In addition, new drilling permits received by the Colorado Oil and Gas Conservation Commission in 2020 are on track to be down by more than 50% from 2019 and 80% from 2018,” the report stated.
The impacts of COVID have accelerated bankruptcy, layoffs and consolidation plans in the industry. Extraction Oil and Gas, Colorado’s third largest supplier, filed for Chapter 11 bankruptcy protection in June.
Whiting Petroleum became the first publicly traded shale producer to file for Chapter 11 in April. The company, however, emerged from Chapter 11 bankruptcy in September after a financial restructuring,
Numerous companies have cut jobs including Halliburton, Liberty Oil Field Services and Basic Energy Services. Industry experts expect to see more consolidation in the field. Anadarko Petroleum was recently acquired by Occidental Petroleum and Noble Energy, which is Colorado’s second largest producer, has been gobbled up by Chevron.
Putting additional pressure on the oil and gas industries are new regulations. Senate Bill 181, also known as the “Protect Public Welfare Oil and Gas Operations” bill passed the legislature in 2019 and was signed into law by Gov. Jared Polis. It creates new regulations that prioritize public health, safety, welfare, the environment and wildlife over industry practices. It also changes the role of COGCC’s mission from “fostering” the growth of the oil and gas sectors to “regulating” it.
The impacts of the downturn are also expected to ripple across Colorado. In a July article for Colorado Politics, Susan Fakharzadeh, Vice President of Corporate Communications and Government Affairs at Great Western Petroleum, wrote that “tax revenue from natural gas and oil production accounts for a large portion of our state’s operating budget. COVID-19 losses, particularly from energy operations, are projected to decimate state revenue this year and for the foreseeable future.”
Fakharzadeh asserted that the most pronounced impact will be felt in Colorado’s education budget, where corporate taxes paid by oil and gas companies are major funders.
A May report by McKinsey and Company concluded that financially stretched companies are hanging on by cutting capital expenditures and operating expenses and even distributions to shareholders.
COVID-19, however, has also forced companies to innovate by scaling up technology, digital and Artificial Intelligence, leading to more efficiency in the short and long-term. Companies are rethinking how they operate in the field, in the supply chain and in the office and the remote workplace.
“Oil and natural gas field employees are deemed part of critical staff that has to exist to maintain safety compliance to meet inspection protocols,” Prestidge said. “Lots of remote work can occur and is occurring. There are a number of innovations that have been taking place in the oil and gas industries for a number of years. COVID has required a significant amount of adaptiveness and it has accelerated our remote working capabilities.”
As for when the industry will bounce back, Prestidge is unsure, but he believes in the resilience of the commodity and the ability of the oil and gas industry to be nimble and adapt to these challenges.
“The long-term economic fundamentals remain sound. Oil and natural gas use is still expected to increase in the decade to come,” he said. “If the economy is improving that means demand is improving. As demand improves, the commodity prices should reflect that and we’ll see some positive growth.”