‘Drill, Baby Drill?’ Lately, it Looks More Like ‘Downsize, Baby Downsize’

     A few of my colleagues in the oil & gas industry have recently reiterated that drilling in the U.S. is not expected to pick up this year. I would have thought that it would pick up soon due to more LNG being exported and increased demand due to AI data centers. That may still happen but right now it doesn’t appear likely in 2025, perhaps in 2026, or maybe 2027.

     Trump recently conveyed to Saudi Arabia that he would like to see oil prices in the $45/barrel range. As a buyer of gasoline, I would love that, but oil producers would be hurt very badly by such pricing. Saudi Arabia is no longer the world’s swing oil producer but with the full OPEC plus, they still have considerable leverage. Of course, U.S. WTI pricing is typically lower than Brent international pricing and Canadian crude is even cheaper than U.S. crude due to its quality. $45/barrel would sink a lot of oil producers since that is below breakeven on several important oil plays. That would bring pricing down to COVID levels and we can see in the graph below from NOVI Labs where pricing and horizontal drilling were then and since then.

     Chevron just announced a plan to lay off 15-20% of their global workforce, up to 9000 people. According to Reuters:

“Chevron is taking action to simplify our organizational structure, execute faster and more effectively, and position the company for stronger long-term competitiveness,” said Mark Nelson, vice chairman of Chevron, in a statement. “We do not take these actions lightly and will support our employees through the transition.”

     BP has just come under the influence of an activist investor who is focused on shareholder value.

“We now plan to fundamentally reset our strategy and drive further improvements in performance, all in service of growing cash flow and returns,” CEO Murray Auchincloss told the Wall Street Journal a day after news broke that activist investor Elliot Investment Management had purchased a major position in the company’s stock.

The investment company has a reputation for making radical changes to increase value for shareholders.

“In the letter, we would expect Elliott to illustrate both BP’s alleged shortcomings and a clear path to increase value (likely through some combination of reorganisation/cost reductions, divestment(s), significant debt reduction)," Read said. "Following those efforts, Elliott would likely expect BP to return significant cash to shareholders.”

BP has been plagued in recent years by safety issues, including the 2010 Deepwater Horizon disaster. It has also indulged in unprofitable investments in solar and wind in service to the energy transition. Other major oil companies that have invested less in renewables have fared much better. BP has managed to reduce its exposure to unprofitable wind and solar ventures and to refocus more on oil and gas projects. Forbes writer David Blackmon thinks it is possible that the activist investors will break up the company into pieces, making it easier for a more profitable competitor like Shell to scoop them up. BP also has plans to lay off 5% of its global workforce, up to 7700 people (if my sources are correct).

     Since Trump won the election, other companies have announced layoffs including Equinor and ExxonMobil, although the ExxonMobil layoffs may be due to the closing of their California refinery. Before Trump was elected, other companies announced layoffs, including EQT, Chesapeake Energy (now Expand Energy), and Enbridge.

     I have spent nearly 32 years working for the oil & gas industry through most of 2023 and I do not expect any job opportunities in the near future. Doing more with less is the cornerstone of efficiency and perhaps optimizing shareholder value. However, people need jobs too and there are many qualified people who have given up and moved on, me included. I do believe that more LNG exports in particular will spur some natural gas drilling, perhaps in 2026 and beyond, but oil demand is not expected to rise. The EIA does predict slight increases in oil production for the U.S. and Canada in 2025 and 2026 but prices are expected to drop.

“We forecast benchmark Brent crude oil prices will fall from an average of $81 per barrel (b) in 2024 to $74/b in 2025 and $66/b in 2026, as strong global growth in production of petroleum and other liqyuds and slower demand growth put downward pressure on prices and help offset heightened geopolitical risks and voluntary production restraint from OPEC+ members.”

“Ultimately, we expect lower prices will reduce drilling activity and investment in U.S. production of crude oil and other liquids, leading to a small increase in production in 2026.”

Those price predictions do not bode well for a drilling boom.

 

References:

 

BP Promises Big Changes After Attracting An Uninvited Guest. David Blackmon. Forbes. February 11, 2025. BP Promises Big Changes After Attracting An Uninvited Guest

Chevron to lay off 15% to 20% of global workforce. Reuters. February 12, 2025. Chevron to lay off 15% to 20% of global workforce | CNN Business

Complete List of Recent Oil and Gas Layoffs. Usearch. Complete List of Recent Oil and Gas Layoffs - Usearch

EIA forecasts lower oil price in 2025 amid significant market uncertainties. EIA. Short Term Energy Outlook. January 21, 2025. EIA forecasts lower oil price in 2025 amid significant market uncertainties - U.S. Energy Information Administration (EIA)