Over the past 40 years, the oil and gas sector has dealt with price collapses of massive scale. In the 1980s, low prices nearly brought an entire state to its knees, then between 2008 and 2016, producers dealt with two major crises.

But the collapse of 2020 may have surpassed them all, especially considering its speed and severity. In the span of weeks, U.S. independent producers cut their output by one-third or more and laid off tens of thousands of employees.

"We've been saying that the industry is accustomed to cycles, but I honestly believe this cycle is different," said Regina Mayor, KPMG's Global Energy head.

Many factors leading to the latest downcycle are the same drivers of past crashes: a collapse in demand, global oversupply and a large number of companies with unhealthy balance sheets. However, 2020 brought a new wrinkle as renewable energy emerges as a competitor.

"There's not going to be a return, a renaissance in fossil fuels. We're going to have to figure out our role in the energy transition and our place in a less fossil fuel-centered world," Mayor said. "It's the beginning of the end. The end won't come for decades, but this is the beginning of the end."

'A downturn of drastic, severe proportions'

Oversupply and demand destruction caused by the COVID-19 pandemic initiated the latest crisis, but the sector had been underperforming since its last downturn in 2014-2016, which only magnified the effects of the pandemic.

Between Feb. 20 and April 20, the price of West Texas Intermediate crude fell from $53.78 per barrel to negative $37.63/b, while unconventional production in the U.S. tumbled from 9.15 million barrels per day in March to 6.8 million b/d in May. Desperate to protect their balance sheets, producers cut staffing levels, some by a quarter or more.

"This was a downturn of drastic, severe proportions taking place in a very short time. It's very obvious; there's never been a demand drop that far in that short a period of time since we've had an oil- and gas- consuming economy," Amarillo, Texas-based energy economist Karr Ingham said. "The nature of production declines this time around — in '15 and '16, we had a production decline of 13% in an 18-month period of time. In 2020, we had a 20% decline in a two-month period of time."

Ingham said the U.S. rig count, which fell 70% from 796 on Jan. 3 to 244 on Aug. 14, hit its lowest level since 1944. It rebounded slightly in the following months but stood at only 320 as of Nov. 25.

"The industry was in contraction before COVID and had been for a whole year," Ingham said. "The rig count was falling and jobs were being lost. When COVID came around, the job losses and rig count entered a whole new game."

Deep history of downturns

The circumstances of the 2020 price collapse echo the crash of the mid-80s. OPEC, which was already oversupplying the market, refused to cut production, more than halving prices to under $10/b by mid-1986. U.S. oil producers struggling to keep pace with cheaper oil from the Middle East found their operations to be uneconomical. The nation's rig count, which stood at more than 2,700 rigs in late 1984, dropped to less than 1,000 by the spring of 1986.

"Folks that I've talked to in the Permian Basin that went through the bubble in the '80s, they feel it's like 1985. Then there were banks going under, the housing market collapsed. Everything fell apart," said Charles Beckham, a partner at Haynes and Boone LLP, a firm specializing in oil and gas bankruptcies.

Buddy Clark, a partner and co-chair for the firm's Energy Practice Group, said the most recent downturn is causing severe pain for producing states across the country but is also limited to the oil and gas industry.

"The '80s were more difficult regionally. Texas got hit a lot harder. This time, it's the impact on the industry itself," he said.

Ingham said the losses the industry in Texas suffered this year will likely never be recovered.

"I don't see a scenario where we employ 300,000 people in the upstream in Texas ever again," he said.

Still reeling from 2014-2016

A repeat of the 1980s scenario is unlikely, experts said. The Texas economy has become far more diverse since then, and so has the U.S. oil and gas industry.

By 2014, unconventional production had increased at remarkable rates in places such as Colorado, North Dakota, Louisiana, Pennsylvania and Ohio. So much natural gas was being produced that prices were pushed through the floor while oil production — and prices — were surging.

Then the floor once again gave out. The price of WTI crude, which topped $105/b in June 2014, had dropped below $30/b by February 2016. More than 100 producers filed for Chapter 11 bankruptcy in 2015 and 2016, and hundreds of thousands of energy workers lost their jobs.

"2014 to 2016 just went on and on," Ingham recounted. "The job losses were heavy, but the production losses were fairly tepid compared to everything else. In terms of rig counts, permits and things that are observable month-to-month, it was a really nasty deal."

Crude oil prices have not approached anything close to $100/b since 2014 but rebounded from 2017 to 2019, topping $75/b in October 2018 and staying in the high $50/b to low $60/b range into early 2020.

Hope springs eternal

Mayor said oil and gas companies will need to learn to adapt to a world where hydrocarbons take up less space in the energy equation as renewables become cheaper and more reliable. Even though she has told clients that they need "a good story" to tell investors in order to survive, some remain stubbornly optimistic that a rebound is coming.

"I have talked to some people that believe there is going to be another boom. They're convinced that they can see it two-fold: that there will be $5 [natural] gas and that, with the lack of development in 2020 and 2021, then there will be a rebound to triple-digit oil prices," she said. "I have one client who swears it will happen in the next two years. I am not bullish we will see this scenario. Some of my clients are grasping at straws. But hope is not a strategy."

But hope springs eternal, and some wildcatters remain ready to start drilling in the sands of West Texas as soon as they believe that the time is right.

"This has been more difficult than 2016-17 and more complex than 1985," Beckham said. "[But] the entrepreneurial spirit of the independent oil and gas producer still survives. They've taken some punches in the nose, but those people believe. There will always be independents who want to go down and explore and produce."