Oil, gas markets set for growth as prices recover

When looking at activity in the oil and gas sector, there's more than one way to interpret things. And both are distinctly different.

First is the traditional manner. How is the price of a barrel of oil trending, and what is the impact on the rubber and polymer component and material companies supplying the industry?

From that standpoint, the answer is much better than March and April of last year, with the price of crude oil up substantially. That translates to improved business for the rubber-related firms with a major stake in the sector, with reasons for optimism that those conditions will continue through 2021 and, hopefully, into 2022.

Of course, that's the short-term focus, and one that is necessary for those companies that make a living producing a variety of hoses, seals and other rubber goods for both the offshore oil rigs as well as the onshore oil and gas fracking wells situated in a variety of U.S. regions.

Then there's the long-term outlook of how an industry that depends on fossil fuels will be shaped years down the road, with the transportation industry speeding up the long march to one that relies on electric power, rather than the gasoline that feeds an internal combustion engine. To gauge the forecast from this perspective, it might be better to use a telescope rather than a microscope.

And those who keep tabs on plans to slash greenhouse emissions and who forecast when "net zero" may be achieved say 2020 may be seen as a watershed year. They say this because the pandemic caused a reset in terms of how much energy was used, and other factors contributed to what they see as a slow but definite step toward the future of energy.

Soaring oil prices

Rewind a year, and the oil and gas sector was looking down a double-barrel shotgun. First was an oil war involving Russia, Saudi Arabia and others that flooded the market with oil, driving down prices to precariously low levels.

That was followed by the start of the global coronavirus pandemic, which caused oil and gas usage to plummet just as the market was glutted with supply. Brent and WTI crude oil prices, at one point in April 2020, dipped below $10 a barrel, according to data from the U.S. Energy Information Administration.

While those prices were nice for motorists who were filling up at the pumps, they were disastrous for suppliers to the industry.

Crude oil prices began to recover through the rest of 2020, and they have skyrocketed since the start of 2021, with Brent crude near $70 a barrel and WTI around $65.

"That's a solid $10 higher than most people thought," said Neil Mendes, CEO of Fort Worth, Texas-based Alpine Polytech, a material and equipment testing firm. "Based on pure supply and demand, it really shouldn't be that high."

OPEC Plus, particularly in Saudi Arabia, has pulled a lot of barrels of oils off the market, including another million barrels a day on its own accord, helping to boost oil prices, he said.

In addition, the shale players in the U.S. have not been putting many rigs back into operation, further bolstering prices. Government data shows there were nearly 800 onshore rigs in operation in the U.S. at the beginning of 2020. As the pandemic took hold, the number dropped to as low as 237 in August 2020, and still was just 358 in January.

"Because of capital discipline, I think there is reluctance for people to lend money, especially to the smaller oil companies," Mendes said.

Even with the number of rigs at roughly 40 percent of the number that were operating pre-pandemic, the shale wells that are drilling may be producing 65-70 percent of the oil and gas produced by onshore rigs before the slowdown.

"Everybody is operating their best equipment, and have their best crews in their best fields," he said. "You get a lot more production per crew, which is an efficient way of making money at the end of the day."

Despite the recent spike in oil prices, though, Mendes said banks and private equity firms aren't rushing to put money into shale fields like they were some years back. Past hopes of unlimited profits have been replaced with the reality that, at the end of the day, the shale plays haven't come close to reaching expectations.

"People that are drilling—and everything is paid for and everything is going at $70 a barrel—you're making good money, maybe even great money," he said. "But if you have to buy leases, get equipment, get crews set up, drill—do the whole thing—it's pretty expensive to get everything started back up again."

And when crude oil drops below $50 a barrel, in most cases there is no money to be made.

"Shale does not produce per man hour, per rig, nearly the amount of oil and gas that offshore does," Mendes said. "Offshore takes years to get set up. Out in the Gulf of Mexico, it's a seven- to 10-year process. Once the wheels start going on those, they're not shutting those things down. Once they're producing, it probably costs $20 a barrel (to produce) from an existing rig."

Suppliers' prospects improve

When somebody asks Roy Pyle whether the drop in 2020 in the oil and gas sector was caused by dropping oil prices or because of COVID-19, he simply says, "Yes."

The vice president of distributor sales in North America for the Ammega Group of companies, which includes the Jason Industrial hose business, said the sector started its downturn because of dropping oil prices. But then the pandemic shut down airline travel to a trickle and cut down on miles driven as well.

Pyle said his sales staff, in normal years, drives an average of 20,000 to 40,000 miles a year. In the last year, they averaged next to nothing.

Talking to distributors to which his firm sells, Pyle said the consensus was the industrial hose sector was impacted more than others, such as hydraulics. But starting in the first two months of 2021 and continuing into March, he said he's seen a bit of a shift on the industrial side in businesses related to oil and gas.

Shale fields in the Dakotas and Pennsylvania started perking up in January and February, with those in Texas starting to show an uptick since mid-February, according to Pyle. That means Jason hose lines that move water and chemicals related to fracking operations, along with tank truck and hydraulic hose, have benefited.

"I'm not going to say it's robust, but I've seen it move up, and there's a little more activity, especially compared to last year," he said.

"When oil gets above $50 a barrel, the hose markets tied to it are better. Below $50, it just doesn't make sense for them to do a lot down there, and that impacts us."

Pyle also sees more positive signs starting to take hold. His firm is getting more inquiries and his sales staff is able to travel a bit more.

"It appears that the trend is up and the mood is good and better than it was, so that has an impact on it as well," he said. "We see patterns and trends of things that are headed in a good direction. If people start traveling again, demand for oil and gas will go up again. It's a domino effect."

Mendes said almost all of the seal firms he's talked to have seen business start to pick up. Some component makers even are seeing a scarcity of some of the higher-end elastomers, such as HNBR, FKMs and FFKMs.

"I wouldn't say it's devastating, but I would say the lead times are longer," he said. "People are used to ordering on a shorter period of time, and they're finding that to be a little more difficult than it had been in the past."

On the testing front, he said Alpine Polytech has seen robust demand from sealing companies, chemical suppliers and OEMs. "That's a precursor a lot of times, people getting things tested and approved for what they think is going to be an uptick in the market," he said. "We're fairly optimistic on what to expect this year. Nobody likes to do testing. They only do it when they have to."

The fact that shale hasn't bounced back as much does not greatly affect his firm, according to Mendes. That's because the shale is shallow and the pressures and temperatures aren't nearly as severe as those seen in offshore rigs.

The larger oil companies require a lot of testing, to make sure their people and tools aren't exposed to such substances as hydrogen sulfide, which is dangerous and degrades tooling and materials.

"The tools don't function as long or as well as they are anticipating, which costs them a lot of money. So they are really pressing on that, quite significantly," Mendes said.

Alpine Polytech moved into a new facility not long before the pandemic took hold. "We had a couple months without the phone ringing much because nobody was at work," he said. "But once people even started working from home, the phone started ringing, things started picking up, and really since late summer, business has been pretty robust and continued to improve."

What the future holds

While the pandemic impacted those in the oil and gas market, it also may have helped redirect the timeline to what the future of energy might look like.

The first thing that must be done is to define the terms of the future, according to Jim Burkhard, vice president and head of research for oil markets, energy and mobility for IHS Markit.

He said the term "energy transition" simply means the decarbonization of energy consumption.

"Where are we in the energy transition? On one perspective, looking at the global composition of primary energy demand, there has been zero progress over the last 30 years," Burkhard said on a panel during the World Petrochemical Conference, which IHS Markit held virtually March 8-12.

That's because going back to 1990, fossil fuels accounted for about 80-81 percent of global energy demand. Now in 2021, the percentage remains virtually unchanged, he said.

While Europe was the single major region to see a significant change in its energy demand mix, especially over the last 10 years, fossil fuel growth elsewhere—such as the non-developed parts of Asia—erased those gains.

"Fossil fuel demands have gone up, up and up, along with greenhouse gas emissions," Burkhard said.

But that's the past.

"We are at a point in time where the energy transition is going to move beyond slow motion, where it is accelerating. And 2020 was a pivot year," he said.

And there are a number of reasons for that. One factor was a resetting of demand at a lower level than in the past because of the pandemic. "Does it mean fossil fuel demand is not going to grow? It has grown from lows (we) saw last April and will continue to grow this year and perhaps for many years into the future," Burkhard said. "But that overall level of future demand is probably taking a hit."

Another positive factor is one of simple economics: Follow the money. There is a lot more money, he said, going into renewables and less into oil and gas.

Because of that, "E-Day" is getting closer, Burkhard said. That's the term used to describe when the cost of an electric-powered car will be comparable to an internal combustion engine car.

"There won't be a singular E-Day for everyone, but for small- to medium-size sedans, that E-Day is approaching," he said, probably in about five years or so. "That doesn't mean everybody is going to start buying EVs at that time, but it's another factor that will support future growth in electric vehicles in the future."

The fourth and perhaps most important point is green government plans.

"When the pandemic began, it was not preordained that green policies, net-zero policies would thrive," he said. "But that's exactly what happened.

"We saw China, Japan, South Korea, announce net zero targets. The European Union tied a lot of its stimulus spending to green plans. The U.S. elected a president who has altered U.S. energy policy and is aiming for a net zero target for the U.S. as well."

Now having lofty aspirations doesn't mean such goals will be met, but it makes it likely that significant progress will be made. "All policies we've seen in place over the last 20 years hasn't altered the global energy mix yet, but they are beginning to assert themselves," he said.

Market projection for 2030 calls for the share of fossil fuels to fall below 80 percent, which is significant, according to the IHS Markit vice president.

That doesn't mean the oil industry is going away anytime soon. But Burkhard said the plateau in global oil demand may come in the next 10 years. Even in 2050, oil demand may be at the level it was in 2000, still necessitating a large, viable industry.

Mendes said a lot of forecasts see 100 million barrels a day as the point where oil demand will peak. He said that's probably accurate, and from there it will be a slow decline.

"It will be a slow process," he said. "In the developing world, to put those technologies there, economically it's going to be tough to do. You'll see those countries still burning a lot of oil and gas. No matter what your politics are on climate change, it's just the fact of the matter."