The steep drop in US drilling is starting to hit home. Halliburton, one of the world’s biggest oil services companies, said on Monday its net income was $378m in the first quarter, down from $580m in the year-earlier period.
Dave Lesar, chairman, president and chief executive, noted the falling north American rig count and the price erosion that this was causing for oil services.
Halliburton is just one of many feeling the impact. Most hit are the small oil and gas companies that drill 90 per cent of US wells.
Fifty-six per cent of US natural gas and 59 per cent of US oil is produced from companies with under 20 employees, according to the Independent Petroleum Association of America.
And these companies expect to be hit even harder if the Obama administration and Congress carry through with plans to tap the oil and gas industry to fund alternative energy. The proposals are aimed at raising $31bn over the next decade by cutting tax breaks to the oil and gas industry.
Yet the industry fears the tax increases will hit the small companies when they already are down from the triple hit of the economic downturn, credit squeeze and plunging commodity prices.
Robin West, chairman of PFC Energy, the consultancy, notes, however, that transitioning from hydrocarbons to alternatives requires altering massive markets, which will take years and use technology that does not yet exist (such as cellulosic ethanol) or require massive subsidies to industries that are not economic.
President Barack Obama’s target is to cut US greenhouse gas emissions back to 1990 levels by 2020. They are now about 14 per cent above 1990 levels. By 2050, the administration wants to cut emissions to 80 per cent below 1990 levels.
“President Obama’s 2020 emissions goal would require a 1bn ton reduction in CO2 emissions. To meet that goal, America would have to shut down half of its coal plants and increase our nuclear capacity by 125 percent or our wind capacity by 900 per cent,” said Karen Harbert of the US Chamber of Commerce.
Given the enormity of that task, conventional production will be needed for years to come. Whether supplies will be sufficient will depend on the new tax initiatives.
As always, some are positioning to capitalise on the despair caused by the downturn.
In December, Mark Plummer, chief executive and founder of The Chestnut Group, bought $4.5m of oil and gas royalties that would not have been for sale two years ago, particularly at the prices paid. Parcels that would have sold for $3,000 an acre went for $200.
And the selling is only expected to continue.