The Plains-WTI oil price closed at $52.25 per barrel on Tuesday, deepening uncertainty for many local producers now selling their crude for almost half of what they were at the peak earlier this year.
The price of oil has yet to find its bottom as a slowdown appeared under way.
“People are canceling rigs today, but it’s going to get more and more fever pitched after the first of the year if the price holds in the 50s like it is,” said Kirk Edwards, the president of Latigo Petroleum who planned to release his only rig, operating in the Panhandle, and expected a “shutdown” to start in January and February. “History has shown us that operators will come to an almost standstill until the economics get back in equilibrium.”
Edwards, like many of his peers, said service companies need to cut costs but are deterred for now because of work already lined up.
Production at about 1.85 million barrels per day in the Permian Basin is expected to continue growing for the next few months before it plateaus.
“A large number of wells in the area are not economic to produce,” said economist Ray Perryman of the Perryman Group, adding it is difficult to predict where prices will settle but that the price is
“certainly” near the lowest level that is sustainable. “This situation will clearly have some effect on the local economy and result in a slowing of recent growth patterns.”
One potential effect if low prices continue could be layoffs in the oilfield services sector that is among Odessa’s top private employers.
The price plummet follows signs of oversupply resulting in part from surging shale production and a decision by the Organization of Petroleum Exporting Countries not to cut production in an effort to defend their market share.
The energy investment bank Tudor, Pickering, Holt and Company recently reported the United States could lose 25 percent of the rigs targeting oil next year, finding “a dramatic and swift rig count downtick is indeed possible.”
At the same time, the drop might not be as extreme as late 2008 or early 2009, when the country lost about 180 rigs a month until hitting its nadir of 876 in June of that year, according to the bank.
But Tudor, Pickering still expects an average drop of 44 rigs every four weeks in the first quarter of next year and then an 80-rig drop per month in the second quarter, hitting as low as 1,400 rigs before recovering in 2016. The oil rig count has grown by about 300 percent in the United States in the past five years.
A Permian Basin breakdown was not available Tuesday.
But last week, rigs targeting oil in the United States fell by 29 to 1,545. And 20 of those rigs were in the Permian Basin.
Most of the rigs released in the Permian Basin last week were vertical rigs. Those have less cycle time than horizontal rigs and generally operate without the same term contracts.
The horizontal rig count is expected to fall later.
“In the business we are in, you are almost just taking it a day at a time right now,” said Jimmy Davis,
director of oil and gas operations for Fasken Oil and Ranch, which focuses on vertical drilling in the Permian Basin. “But it’s tough to watch it fall a buck or two every day. The other thing is, we are still one worldwide event from going up again. But to be prudent, we all have to gather up and say, if it’s going to be at $50, we’ve got to plan out business like that.”
Fasken, a private company, plans to decrease their rigs running from five to four next year and move a horizontal rig from New Mexico to the Eagle Ford in south Texas. The others would stay in the Permian Basin.
That is less of a reduction than some of their peers, such as Clayton Williams, who said he plans to halve the 14 rigs running in the Eagle Ford and Permian Basin.
Many of the public oil companies focusing on the have announced delays in announcing their capital plans for 2015, including Concho Resources, Pioneer Natural Resources and this week, Encana.
Fasken mostly drills less expensive vertical wells in the Permian Basin and does it on land belonging to the company, which frees them of some financial pressures such as royalty payment obligations.
“Everything costs so much and people are leveraged so much trying to get it done,” Davis said. “Then a third or half of their income is gone. Boom — that’s tough. And a lot of people don’t plan their business anticipating that it could happen that way.”
Contact Corey Paul on Twitter @OAcrude on Facebook at OA Corey Paul or call 432-333-7768.
(c)2014 the Odessa American (Odessa, Texas)