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Rig drop continues as signs point to more layoffs

Producers cut 21 rigs after several stable weeks

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Posted: Friday, April 17, 2015 6:00 pm

The Permian Basin released six oil and gas rigs in the past week, but despite the soft drawdown in drilling, signs emerged this week that the region should brace for further layoffs in the oil services sector.

Executives at Schlumberger, the largest oilfield services provider in the world, announced plans Friday morning to cut another 11,000 employees globally and further trim capital expenditures in anticipation of lessening activity.

The company did not detail how many employees would be affected by the layoffs in specific regions. But Schlumberger CEO and Chairman Paal KibsgaardCQ pointed to North American activity as troubled.

"The pace and magnitude of the activity reductions, particularly in North America, has been almost unprecedented and we have to go back to the mid-1980s to find anything similar," Kibgaard said during a conference call with investors Friday morning. “And while we thought we had adequate plans in place going into the quarter, activity declined even faster than expected which required us to revise our plans accordingly.”

Baker Hughes reported 258 rigs still running in the Permian Basin. That is less than half the peak of 566 reached in November, before already sliding crude prices began to plummet.

Nationally, the oil and gas rig count fell by 34 to 954 rigs.

Crude prices bobbled this week, with the regional Plains-West Texas Intermediate benchmark ending at $52.25 on Friday.

The most recent layoffs from Schlumberger bring the company’s layoffs this year to about 20,000. Analysts expected more announcements to follow in the coming week as service companies report their quarterly earnings to investors.

“We have eliminated the wells you should drill below $80 a barrel, but the wells we are currently drilling won’t produce enough to offset a rig count that by this summer is 40 percent of what it was in the fall,” said Steve Pruett, CEO of Elevation Resources. “There will be more oilfield services layoffs. There will be more operator layoffs, too, as our reduced activity takes hold and dominos through the chain of oilfield services.”

Determining just how many oilfield workers in the Permian Basin have lost their jobs remains difficult, as not all companies have to report such layoffs to the state. But industry insiders and workforce officials believe several thousand have been laid off.

The falling rig counts boost hopes that oil companies’ cuts will soon start to relieve a supply cut with a drop in production. The Energy Information Administration on Monday forecast a national drop in production of about 57,000 barrels a day.

The EIA predicted those losses would largely come from other areas such as the Bakken of North Dakota, the Eagle Ford of South Texas and Niobara of Colorado and nearby states. Drops in those areas were offset in March by Permian Basin production.

And the EIA reports Permian Basin production as still growing, with new wells expected to produce on average an additional 25 barrels of oil per day to an average 265 barrels. Total production for the region is projected at about 1.99 million barrels per day.

But producers such as Pruett expect that to fall in the months ahead.

Schlumberger expected North American exploration and production investments to fall by more than 30 percent this year and that drilling activity will pick up more slowly than previously expected as producers turn to their inventory of uncompleted wells drilled and start to re-fracture wells, or go in an stimulate them again to extract more oil.

Most new drilling will focus in areas like the Permian Basin will be in core areas, Schlumberger forecast. Indeed, the Baker Hughes count showed more than 74 percent of drilling rigs active in the Permian Basin focusing on more expensive and higher producing horizontal wells.

“We are saying that given the cash flow constraints, we don’t expect that rig counts are going to come back to the previous levels of around 2,000” nationally, Kibsgaard said. “It’s going to come back to somewhere between the current levels and where it was. And for the service industry that means that the pricing concessions that are currently being given, we are unfortunately going to live with for a while because it’s going to be a pretty significant over-capacity for all sorts of services given the lower level of activity that we are going to recover to.”

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