Boomtown Follow-up: The One-Two Punch | Chapter 12


o-man what a day breaking news on the financial markets right now stocks around the globe have tanked due to concerns over the corona virus. The Dow falling record two thousand points a conflict among oil-producing nations suspect crashing oil prices collapsed thirty one and a half percent at the start of trading this plunges remarkable folks zone reports that Saudi Arabia slashing prices and increasing supply this after talks with Russia collapse. The world's top oil producer agreeing to cut nearly ten million barrels a day a tenth of the global supply. The situation in West Texas tonight is dire. The price of oil continues to fall. An industry experts warn that it could be months before we see any kind of relief on March eighth one week after the first confirmed. Us death from the corona virus and three days before the World Health Organization declared the outbreak of pandemic Saudi Arabia and Russia went to war over the price of oil. The Russians vowed to pump more of their all into the market and the Saudis retaliated by slashing their prices the global market was already awash with cheap crude in large part because China the world's largest importer of oil had come to a standstill other countries around the world. Were beginning to issue. Travel bans and stay at home orders. Meaning the demand for fuel was rapidly decreasing when the stock markets opened on Monday march. Nine the price of crude plummeted thirty percent it was the largest single-day drop since the Gulf War in Nineteen ninety-one overnight the mighty shell boom in the Permian Basin of West Texas and southeastern New Mexico evaporated into thin air prices had hovered around fifty dollars a barrel now. They lingered around twenty bucks looked like things couldn't get any worse but then something unprecedented happened on Monday April twentieth the price per barrel of West Texas intermediate crude went live for the first time in history. I'm crucial walls. And this is a special bonus. Episode of our first eleven episodes documented the boom that made the US the world's largest producer of crude oil. Today we take a look at how biggest boom the permian basin has ever experienced suddenly turned into a historic bust. This is the one two punch crazy couple of weeks. My kids have been safe. Hey I'll tell them all at the lowest you've ever seen it now back in eighty five. I remember from a Exxon on a property. I had wing for ten dollars and sixty cents and now I'm going to remember this forever. It was negative thirty four dollars unable twentieth when the price of all went negative for the first time in history. I called Midland Oilman. David Errington as you might recall from episode three David I came to west Texas during the eighties amid a terrible bust. He since made his fortune and four decades later he's weathered plenty of ups and downs in the patch but negative will was something that was hard for even David to imagine can. Can you just kind of walk me through your day today? Like what were you doing as this was happening? Yeah Crazy Day so you know we started out in the price. All was filling the alley hours. Get ready to leave the house by thing. I started getting texts. You know a Brussels get low and all that and I was on a in a bunch of calls today at one long call. I think I wrote it down the process oil. Whip from Hand ten dollars and fifty cents to a dollar nineteen this morning just while I was having a phone call but it just fifty thousand foot view is that you know we've just had demane instruction and we're Mike do much all. That's you know that that story whenever. The price of oil makes national headlines. You'll often see articles run photographs of an electronic sign in downtown midland. The sign is right outside. The Chase building were David's offices at he owns the sign. Actually he owns the whole block. Despite the misery being felt by all men on April Twentieth David turned to humor with his sign. So I'm GonNa put you on speaker but but I just changed the board. Let me take some pictures while we're talking Oh God this Larry Psoriasis. Negative oil with the question mark in another Houston. We have a problem. And then the other one says uh-huh Spaghetti O's and then World Trade Oil for toilet paper. At least you have a sense of humor about this. Well you know you. You don't really have a choice due to understand how all of this came about. I turned to Bethany McLean. Hi Bethany great to see you again here from you where you calling from today. I am Michigan Michigan. Okay at home with your your kids and your Doberman. I am at home with my kids. And My doper MINNEAP. I spoke with Bethany for episode nine of boomtown while reporting her two thousand eighteen book. Saudi America Bethany found that despite the record amount of being pumped out of the Permian Basin and elsewhere many of the largest publicly traded fracking companies. Weren't actually making money. The show boom she said was built on historically low interest rates and an influx of private equity after the great recession but the business model of fracking was flawed a year or so after well as fact the amount of oil it produces begins to drop off much more quickly than a conventional will to maintain their production levels fractures to constantly drill more wells. It's a treadmill of cash. Going into the ground with very little coming back to the Investors Bethany posited that this was a looming financial crisis a disaster not just for the shell companies but for large swaths of the economy that have dependent on the shell boom now her dire predictions about fracking's debt. Bubble are coming true. Well let's talk about what's happened over the last few weeks really. I guess over the last month in oil and gas. Are you tempted to say at this point? I told you so I mean. Of course there's a little part of I told you so at work because I do feel like the the the shaky fundamentals of the fracking industry are part of what his lead to. Where where we are today but when you look at why the collapse came as quickly as it's come. And then the human cost in terms of people losing their jobs at probably the worst possible time in history It's really hard to seal to feel any delight in that. And I think about this in a slightly broader perspective and that the rise of fracking is one of the reasons that we came out of the global financial crisis not painlessly. Oh my God. But perhaps less painfully thin. It would've been otherwise because fracking helped provide employment in a lot of places and the fact that that avenue of of employment is getting devastated. Right now is just one of many things that this is going to be much worse than that was. I mean we're talking. Like ten million oiling gas jobs in this country and as we were talking about just a minute ago something like fifty thousand jobs shed already. And that's probably an under estimate actually WEATHERFORD INTERNATIONAL. Shed six thousand jobs in a single day last week how loud that is just that staggering and you think of the human cost of that is Almost unbearable so let's talk a little bit about some of the things that have happened. Can you just talk a little bit about what happened with Saudi Arabia and Russia on March eighth? The kind of started a snowball downhill right. So I think a snowball was already rolling downhill. Because as we talked about investors had gotten really fed up with the fracking's inability to produce free cash flow. And you can look at the amounts that fracking companies were able to raise in the equity markets They're all sorts of measures of this. You can look at the performance of publicly traded fracking stocks and you can see that investors were saying. We don't want anything more to do with this until you can prove that you can. You can make money so so. The trend was already in place but then to have these two events hit once one being total demand destruction as a result of corona virus. And it's obvious but it hadn't really occurred to me that in most cases if the price is collapsing. You've got a little bit of elasticity and that people will start driving more and using using more gasoline and now you've got exactly the opposite happening because of crown of virus so the obvious responses to cheaper oil have not kicked in so that's one huge factor and then of course on March eighth you had Saudi Arabia and Russia. The worst possible moment. Play this game of chicken where they both emerged losers because they both refuse to cut to cut production And you know the deal. That president trump helped negotiate recently. I mean at blunts the edges of that but it but it doesn't do much at this point. We're I believe the last estimate I saw was were overproducing by about thirty million barrels a day their plan to curb production amounts to about fifteen million barrels So we're we're still over supplying twice the amount that they've promised to curtail and in the meantime we've had hearings on probation. The Texas Railroad Commission our state agency that regulates oil and gas. Despite its name. They had a hearing last week to discuss whether or not they would begin pro rating in the state making producers curbed their production to a certain level which they did from the Nineteen Thirties until nineteen seventy three. And then just yesterday after you know. They heard arguments last week on those who are for and against or neutral on the position and pretty passionate arguments made on both sides and as of yesterday. They've announced that they are going to defer making a decision. So in the meantime we still have all of this oil coming onto the market with no place to go which leads us to what happened on this past Monday April twentieth. Could you maybe talk a little bit about that from your perspective? What you saw that day. Sure where will you have? The price of futures go sharply negative part of that was simply exactly as you just mentioned the storage issue because people got so afraid of being stuck with the physical delivery of oil and May that they said I'll pay somebody else to take physical delivery of this stuff because there's nowhere to put it because storage capacity is full and so it's going to be even more fall. Asleep continued over produce at the rate at the rate. We're going so people would rather actually pay somebody else to take take oil when it's time to take physical delivery than risk having to take it and not having any place to put it So it's you would never seen this before in history. I mean there are many things that are happening right now. That have never happened before in history. But you can't overstate the magnitude of the craziness in the oil market. So what happened on April twentieth this historic price clubs? Dat was partially due to the fact that The may futures contract was expiring. Yep and so. What did that mean to investors the kind of triggered just this historic drop in oil to to go negative? That meant that you had to get out of that contract. If you didn't want it so you had to either. You had to sell it. You had to get rid of it or you had to face the risk that when it came time for the expert of that contract that you would be able to get out of it if you couldn't get out of it then you'd have to take physical delivery of oil so people started to panic looking at storage and realizing that it was full and that storage was gonna cost them a great deal of money and they got scared about being in a position in. May where they would have to take might have to take delivery of oil because they wouldn't be able to roll the contract. Offer that point so there was panic selling so we're talking about these basically traders in New York or wherever they are staring down The fact that they could literally have to take these barrels of crude oil and typically. They'd have no problem offloading this to cushing Oklahoma or some other commercial storage facility but now these places are filling up. Even the pipelines to the refineries are are filling up and we have tankers out on the ocean right now just going making figure eights while they wait for place to unload their crude dynamic and typically. It's it's interesting to because we've thought of for a long time for so long. The physical trading physical oil has been almost associated detached from From the financial instruments that oil has become right so a lot of people who trade oil as a financial instrument. Don't even think about it in physical terms anymore because you could always just roll the contract right find somebody else to find somebody else to sell it to maybe take a loss but but but but it was a financial instrument and now all of a sudden near staring down the barrel of this thing you thought of as a financial instrument becoming actually this physical of physical thing and I find that I find the way in which those two things became disassociated the way in which our current time. They're they're the physical and the financial are being linked back together again is really interesting for a while. Opec plus has been curtailing their production to keep prices stable and in the meantime we had. Us Shale producing more oil than we ever have before and while Russia and OPEC were curtailing their production to keep prices not great but stable in the fifty five sixty dollar range American oil. Now that's being exported starting to eat up that market share and so when Saudi Arabia comes in and asks Russia to curb another two million barrels because of the pandemic and the and the economic slowdown happening around the world. Russia basically says we're not going to do that and in fact the opposite happens in a weird way. It's it's global game of chicken right and you can see it as a personality play Between these two these two powers. But there's a more complicated dynamic going on Which is that both Saudi Arabia at least understands that oil's future is not infinite right and so they have been trying to transition their economy away from one that is completely dependent on oil into one that that is not and now you cannot again. You can't overstate how dependent Saudi Arabia's economy is on oil that's where most of the government's the kingdom's revenues come from and it is social stability in fact the break even price. The fiscal break even prices around eighty dollars a barrel. Meaning that if Saudi Arabia's getting eighty dollars a barrel. They're not able to balance their budget and they're not able to spend the money that has kept the peace in the kingdom for all these decades if not longer so they've been playing this game where they've been not game but trying to balance these two competing principles which is knowing that oil isn't GonNa last forever and yet trying and trying to get as much money from the sale of a barrel of oil as as you can today. I think what happened at the people have always cautioned me against ever thinking that you can know what went on in the minds of of of the kingdom. Because you you you don't know as an outsider an American. But you can see that what happened. Could have been. This is going to Helena handbasket. And we'd better get as much money as we can right now because this is never coming back. Then what's the point in trying not to pump if we're just going to get less and less and less per barrel oil you might as well pump all UK at right now before it's gone right? So that was the trade off today. Were making that. They could hold off that day of reckoning and once that day came where they saw that they were just GonNa get less and less and less for a barrel of oil. They were always going to say. Well we're just gonNA pump now because what's the point right. So this is layered into this is the future of oil. That's part of what happened here because on the other side of this I mean we have to imagine that demand will come back to pre cova levels. Maybe eventually that may take a couple of years. I've seen some estimate saying we're not GONNA see the same fuel consumption until twenty twenty two and you know of course. There's a lot of people saying well right. Now is a great time to invest in renewables and but even at that there will still be demand for jet fuel gasoline. Natural gas these things but yeah I mean in the meantime Saudi Arabia can maybe fight back some of that market share that they've lost previously to America in the last few years and so I think I'm not sure that what happened was so much about crushing American shale is it was about Saudi Arabia trying to operate in its own best interests. Because if you do. The the widespread belief has always been. Once we see the the dawning of the age of renewables. The price of oil goes into decline. It may bounce up and down over time but it's GonNa go into a long term secular decline right. Saudi Arabia has to get what money at camp before before that happens and if you believe that. Kobe nineteen is that the demand for oil isn't going to come back for a few years. Then you're making if you'RE NOT GONNA PUMP TODAY. You're making a gamble that by the time that demand comes back. Renew the Donna. The age of renewable still isn't going to be here and I don't know that anybody has a clear answer on that but the but that's a gamble right. I know it's very unwise to make predictions. But what do you foresee For the show industry on the other side of this so before I say anything. I'm just going to offer. A caveat offered the floor. Which is that the one thing. I learned in the hipster while I was researching my book that the history of making predictions about whether the oil industry is basically littered with everybody. Got It wrong right so I don't know the industry has come back before. Not Not from this. I think some of it depends on what the government ends up doing. And if there is federal aid for shale companies but I think in large part it depends on the dynamics. That were already played before all of this happened. How much of the really good oil producing regions does the? Us have left. What's left in the sweet spots in? What's the real break even cost and those have always been the questions right in can new technology Lower that break even costs to a point where it makes sense to get oil from the non spots and I don't know the answer those questions. I become more and more skeptical of it over the last couple of years. Because a lot of the technological innovations that were touted That were miraculously got lower. The the break even price of shale to the point where the industry was going to make money didn't prove to be true. I think the key word is cheap oil. You know because you know. There's a millions of barrels left in the Permian. But it's very expensive to get to and as you've spoken about in your in your book and your recent op Ed for the New York Times. You're skeptical that that private equity the money that has been poured into these shell companies previously to access. That oil is not gonNA be there this time around. They've learned their lesson. They've been burnt once or twice a now and that's the key difference it it is. I think although interest rates aren't going higher anytime soon right cheap debt. His fueled financial insanity in the past and it could fuel financial insanity in the future. So it's we're just in uncharted territory. All all over the place I think investors have been burned enough by fracking. At this point that it would be difficult to imagine it coming back. The absence of some kind of technological breakthrough that really transforms the break even costs. But as I said. Just never underestimate the craziness that that can ensue. When when money is basically free right and there we do have the government walled colored here which you've alluded to but even if you filled up the strategic petroleum reserve. It barely moves the needle on this thing so it seems like there's only so much the government can do at this point as well. Yeah I would think that there would be a lot of rage if there's a really whole scam bail out of the fracking industry Given where the money where. The money has gone in in the past in the sense that he had a lot of executives in a lot of Private Equity Honchos. Make a lot of money from this. And the underlying business hasn't made money and has arguably been environmentally destructive That said let me offer a caveat here to have had a lot of landowners make make a lot of money too. So it's not like this is bed. This has been a one-sided extraction rate. It's been a little bit more. It's been a little more than that but I think at wholescale bail out of of the industry is Politically quite fraud. The you can hear some of the I found. Scott Sheffield's commentary on this Sea of pioneer his commentary on this quite interesting because he said a couple of things that are almost at odds with each other when he's in his public comments on this one was when he basically admitted an interview. I think it was on. Cnbc your Bloomberg that the industry has done nothing but destroy capital But then he also said in another interview that if trump and Bailey industry out he was going to lose the energy states when it came time for the election in the fall. So that's another wild card that gets thrown in here you know. There's nothing like a crisis to turn a good capitalist into a socialist But if of course the other component here which we've touched on is is the renewables overlay and so maybe if there's any kind of silver lining to come out of this maybe it will yank us into the world the world as it's going rather than the world as as it was. I love that and that's probably a perfect note to end on because you've finally found the silver lining which has been very trying. I mean it's it's it's really hard and I don't want to minimize the pain that this is gonNA cost people. I think it's just think as I mentioned on boomtown before I grew up in a mining town where I saw how the fabric of the town changed as it went from a place where people could make a really good living working as a minor In the minds were a stable source of employment multigenerational employment right and I watched that changed. And how the fabric of the place fell apart over the ensuing decades and so. There's nothing that is pretty about these about these kinds of transitions are about these moments in history where it all comes. Crashing down falls apart It's incredibly ugly. The people whose livelihood as and that's that's where my heart hurts the worst those folks and You know like a mining town too. There's a certain like culture To to the to the industry and I I'd be lying to say that I didn't like some of that. Just tenacious tough. Let's roll up our sleeves and get after it. Top of work ethic and something I admire greatly and I know it's a big visual change but maybe some of that same culture and work ethic could be applied towards wind turbines and solar panels. And I mean it's we'll have to see right. I agree with you. It's a certain it's grit and an ability to go do physical work in it's a culture and its continuity between father and son usually particularly at least in the Minnesota iron rain probably in the prominent Permian Basin as well but it also provides a type of equality that is missing in today's society when you have families who can make really good wages and have a really good middle class income from that kind of gritty heart heart hardcore job. I I think if you've got a better society than one where where people can't earn living obviously and that's a change that just I have trouble seeing how it's good and that's adds. Perhaps the most crushing blow of the price collapse has been to the workers while industries across the world are feeling the crunch from cove in nineteen. The oilfield has been absolutely crushed since the beginning of last year. The oilfield services sector has dropped some fifty thousand jobs about thirteen percent of its workforce WEATHERFORD international a Houston based Oil Company and now on April sixteenth that it was shedding six thousand jobs. Many oil companies have slashed their budgets by half and said they'd rain in their work in the Permian Basin. Fracking is set to face. Its worst year ever and by July first at least half of all fracking. Projects are expected to end the domino effect across a wide range of companies will be far reaching many of those. I've talked to in the patch. Have taken steep pay cuts and just about. Everyone knows someone who's been laid off. Pay Crosses my buddy who works on Frat crew and wrote the theme song for Boomtown. Recently completed a two week kitchen the patch. He stayed in a man camp in pay caps and another in midland and Erie place to call home during a pandemic but he was grateful to still have the work then. The price went negative on April twentieth. I caught up with him two days. Later how man? It's kind of hard to think of where to start because we've been talking for the last Few weeks you know you've been keeping me updated on how things are going for you and in your part of the patch and what you're seeing and let's. Kinda start with early March. How're things before? Like everything. Just kind of went to shit man? Things were good. My my company hired like three or four people in on March fourth. I've got a two dollar raise in motion so things were going good busy. I started going out doing jog. Yeah we were rolling going looking forward to a busy year that was March fourth. In twenty three days later we did a fifteen percent pay-cut company wide so all went from two dollars to three dollars aac then Two days ago they did a ninety percent layoff now so within forty two days. We went from hiring people in giving raises to letting everybody well. The trajectory changed harder than you could really imagine. Yeah it's crazy. It's just like it seems like a comedy of errors or something you know because not that the corona thing caused anything but definitely didn't help you know dislike weren't thing right on top of the other have been real quick so tell me what it was like being out in the patch while Appendi- is spreading. You're in a man camp in outside pace and also in out in Midland. What were those weeks Kinda like for the most part? It was like wire working. It's just normal yet. They weren't really precautious Sam stuff like If you feel sick I don't care what it is still sick. Call you manager get relief. We don't WanNA compromise the operation right so that was out in the field. That was kind of the idea. It was just businesses normal but it would be weird like calling home. It's like Oh yeah just in the boys and been in house for three weeks. Avent gone anywhere and then trying to get food in that kind of stuff. Everything would be shut down. But it wasn't really. I wasn't really noticing a slowdown as far as traffic or that kind of thing not yet not not in March not an early March and so in the meantime. You've just kinda been working as normal your your your two week. It one week off. That's what I had been doing from March two now in this past week they called me. Go ahead to stay at the. House for a few days. We'll give you a call you've been update on what's going on right now. There's no works statehouse. They sent out emails. Saying we're going to try to keep everybody working when you're talking to our customers. Were trying to keep everybody going suggests entitled doing that so that was this past week in the called me. Monday April Twentieth the April Twentieth the Doomsday of rolling. Yes so he could be easy to remember. Yeah we'll be. I thought about that or twenty. Twenty twenty two. I always eat breakfast with my family and I got from call from office was headed mop rations in sales so they seem emotionally now they a lot of people are upset about it and trying to make them out to be bad but there was nothing they could have done you now. I mean really. They said they were going to have to let me go and they were doing layoffs and I asked him like what kindly off we talk. We talk about six or eight guys. That just didn't make the cut or are we talking about company. Y in the head of sales said we're looking at about ninety percent layoff. Walk me through the rest of your Monday. After you got that phone call. You were at breakfast. What what is the rest of the day? Look like well a winning. The boys that are already done. Were already done eating so I sat down with. Jesse told me what had happened in. You know. I had already been home a week longer than I suppose so. Neither one of us were shocked. All surprise nitto inside and I got dressed went and talked to my father long. Save East work. Gm in in Detroit and so he's been through layoffs neck on stuff you know talk about side jobs cash jobs that kind of stuff onsite and does it signed up front was Monday so Tuesday morning. You Get up and you had to west Texas Just kind of walk me through yesterday a little bit more so I got a bit or forty five. Got Dressed it the room. I got there right at break. Times ten. And so the guys they kept. We're taking a break and I can tell they feel awkward. 'cause nobody said hello to me. I talk to my boss and it was like every kept six guys you know instead. It's like I think. They said they ended up letting go early. Four people in the dude was like almost in tears in just you know. He said he told me. I'd never thought that would ever get dispatched. We I don't know anyone ever did. If it ever has or will be that you know. That's insane so I went in peace paper When Outon Truck winter a checklist of everything. Was there so ahead. My uniforms thank goodness. 'cause they were charging like a hundred bucks in just left everything else in the truck Was I started to clean up a little bit like the the bed in my shop supervisor came up and he was like Dude L. Cleaning Truck. They just let you go. Groom go home so they so when they laid off they they did. The whole thing of doing this company will survive in as soon as things get back to normal. We're going to hire back the same guys in. I'm not sure if I WANNA go back just in are still talking about it. But I don't know I guess it's it's made more complicated by the fact that the world is so weird right now I mean we're talking on Zoom Corentin But you see it as like an opportunity to to try something else or what do you Yeah I do because that was definitely. Do it feels comfortable saying this or I definitely was not racist way but Unemployment mince their allies will suckle that government while I got it and in uses an opportunity to kind of just figure out. Maybe you know I can wait it out and see what happens with the whole of nineteen thing and then also in the meantime I can be working on my music as much as I can. On what else would I do? Besides oilfield yeah. Well you've got a new album coming out on. May First Right. Nee I on on Webs it is called Lord above double-blow cool smart so we did. I appreciate you taking the time and All our love to Jesse and the boys and yes stay safe. Stay Sane and talk to you on the other side of this one breath of the time. It's all we can do. I've been will and Hanker. In Hope and stagger in SAF stammering and smoke and God a Lotta Love Tattoo. Ben Mahar but it does no good women Dr. She Says No. Bring it home to me. Bishop the movie. The valid brought tears. My wheels started winding grinding gears. Sitting on the show coming up causing boomtown is a CO production of imperative entertainment and Texas monthly executive producer. Is Jason Hope? Produced and engineered by Brian Stanford who also wrote the score. Boomtown is edited by J K Nickel and Meghan cry reported by leaked stat. The Ultra Song. Today was breaking down. Monkey Cross I'm your host and writer Christa Walls. Texas monthly's parent company also owns interests in the midstream oil and gas industry. Among other diversified investments our editorial judgments are made independently of any such investments. Don't forget to tell your friends about boomtown and leave a review on apple podcast if you like the show follow us on social media and visit. 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