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2016 Outlook: Oil, Gas Industry Has a Tough Year Ahead

Already a few days into the New Year, it’s fair to say oil and gas executives are more than ready to leave the low oil prices, layoffs and bankruptcies of 2015 deep in the rearview mirror and begin looking ahead to what 2016 has in store. But it would be remiss to look ahead without first analyzing what happened in 2015.

 
Now to address the gigantic elephant in the room – the number of global layoffs in 2015 due to the oil and gas industry was high. According to John Graves, president of Graves & Co., a consulting firm based in Houston, the industry saw around 250,000 layoffs last year alone
 
Graves, who has been in the business for 34 years, the last 19 as a consultant, began keeping track of the number of oil and gas layoffs to better understand what was going on in his industry.
 
“I think our tally is conservative, and here’s why: while our numbers do reflect announced layoffs – meaning not all of the layoffs have taken place yet – some companies have made announcements that they will lay off employees through 2017,”  “Once we see the announcement, we record it based on intent.”
 
Graves also tracks the Baker Hughes rig count and applies a conservative number of personnel per rig, subtracting any drilling contractor announcements to avoid double counting.
 
“The majority of industry companies are private and don’t make announcements at all,” said Graves. “We are able to gain some insight into private companies, albeit limited, by looking at WARN Act notices. Just this fall, we started including WARN notices for oil and gas producing states besides Texas.”
 
However, Graves noted, it appears all companies are not complying with the WARN Acts. By U.S. law, if a layoff involves more than 50 people, an employer is supposed to inform that state’s workforce commission where the layoffs are occurring. At least one law firm has posted on their website about going after companies who didn’t comply with WARN Act notices on behalf of laid off employees, Graves said.
 
Tobias Read, CEO of global oilfield staffing firm Swift Worldwide Resources, told Rigzone that given the current trajectory, the views around the marketplace and the lack of capital investments, he expects the number of layoffs to continue to rise in 2016.
 
“It’s not necessarily a positive view, but a realistic one given the low-price oil environment – which is ultimately what’s driving this,” said Read.
 
Similar views are shared by many industry analysts. The “lower for longer” catchphrase has been oft-used to describe what the oil and gas industry can expect in the short- and longer-term future.
 
“We’ve seen some companies make high-profile cuts once, twice and some of them are actually going back for a third time,” said Read. “I think the reason companies have made multiple cuts is because this recession in the industry is far deeper and far longer than anyone expected.”
 
Read said without new capital expenditures (CAPEX), which he describes as “the oxygen that fuels the industry,” then there will be no new work.
 
“There needs to be a continuous flow of new work to fuel jobs with job creation and job growth,” he said. “There have been very few commitments of Final Investment Decisions (FID), to the degree that there are almost none
 
All companies are under pressure – from equipment suppliers, manufacturers and operators. Things will continue to get worse and the industry will not recover until the CAPEX cap is turned on, said Read. In order for that to occur, he said two things must happen:
 
The price of oil has to reach $60 per barrel
Prices have to stay there and remove the volatility from the market
“People need confidence, so there needs to be some price stability so that they can make decisions. At the moment, we are seeing quite a gloomy picture,” Read said.
 
And he doesn’t see a major turnaround anytime soon.
 
“Even if there was suddenly a major increase in the price of oil and confidence did return to the industry, it would still take several months for the industry to gear back up again,” he said. “Even an immediate price recovery would take until the latter part of 2016 to create more jobs and revitalize the sector. It’s going to be a very tough year.”
 
Much like 2015, in which the upstream sector fared far worse than midstream and downstream, Read said he expects very limited hiring in 2016 in upstream.
 
The industry “is still going to be in cost-cutting mode … as a matter of fact, a lot of companies are still tightening their belts and overhead for the second and third rounds of cost reduction,” Read said.
 
As everyone knows, the oil and gas industry’s business cycle ebbs and flows, and there will be a market recovery … but most agree it will not be in 2016.   
 
“I can classify 2016 as a tough year and we will have to ride it out,” he said. “The market is going to recover, but probably not until 2017.”