Oil Pain Spreads Beyond Permian to Small Towns Across America
(Bloomberg) -- The oil market turmoil sparked by Saudi Arabia and Russia is threatening U.S. jobs even in Cut Bank, Montana, and Magnolia, Arkansas -- relatively obscure communities in the world of energy.
In such places, mom-and-pop outfits run so-called stripper wells, which generate no more than 15 barrels a day. After crude’s crash in 2014, they were forced to reduce jobs and shrink costs just to keep afloat. Now, as prices plunge to 18-year lows, they’re doing it again, but this time there’s little left to cut, according to Darlene Wallace, who heads Columbus Oil Co. in Oklahoma, the operator of 21 wells.
“Most of us in 2015 cut back severely, and have continued to in the last five years,” said Wallace, who is also the chairman of the National Stripper Well Association, by telephone. “Many of us have been in the business and have seen more than one shock like this. But none of us dreamed it would fall so far. We now have lots of hard decisions to make.”
While America’s shale boom over the past few years decreased the importance of such stripper wells, they still account for 6%, or about 850,000 barrels a day, of U.S. output, according to data provider Enverus. Now, as vaunted fields in regions such as Texas and big drillers like Exxon Mobil Corp. are rocked by oil’s rout, these smaller private operators are facing an uncertain future.
While not all stripper wells will go off-line, over 500,000 barrels a day of output could be at stake if low prices continue to persist, with most in the Permian and Anadarko basins, RBC Capital Markets said in a report. Shut-ins could begin in the next month or even sooner, according to the March 18 note.
Additionally, there’s a risk of job losses, with over 400,000 stripper wells employing about 143,000 workers across the U.S. That’s at a time when jobless numbers are already soaring and economic activity around the globe is being curbed by efforts to contain the spread of the coronavirus.
Wallace likes to say her late husband named his oil company after Christopher Columbus because the explorer didn’t really know where he was going when he discovered America, and he did it all on borrowed money.
As oil prices plunge, stripper well operators like Wallace and her partners are unsure what the future may hold. Already the percentage of America’s crude they produce has shrunk from 10% since 2015.
Operating and transportation costs for stripper wells generally run between $15 and $30 per barrel. With oil selling in New York for less than $24 a barrel, that means many could be producing at a loss, according to RBC.
That’s another problem for stripper wells, where production costs are typically higher than they are for other onshore drilling. While shale output is feeling the heat from oil’s rout, prices aren’t yet at levels forcing large-scale shutdowns. Rystad Energy AS estimates that U.S. tight-oil wells become at risk as soon as benchmark U.S. crude falls below $15 a barrel.
Wallace is worried that at least six, or maybe even half, of the wells she operates may potentially be shut if low prices persist. It’s a discussion she will need to have with her 13 partners, she said.
“I don’t know any stripper well member that has a million-dollar income,” Wallace said. “We don’t make the kind of money that the bigger companies do, and that’s okay cause we are more even keeled. This may be over quickly, but it might take a while.”
In the meantime, her group is seeking methods that will help members lower utility bills or defer payments -- anything that can help lower or eliminate debt with margins already so tight.
It’s also asking member companies and other trade associations to fill out surveys so they can lend support to the anti-dumping investigation into the actions of Russia and Saudi Arabia that some U.S. senators have backed.
Meanwhile, stripper well operators aren’t alone in their suffering. It’s been a tough year for every part of the oil industry. Several drillers in the shale patch have announced cuts in spending.
Others are suspending employee benefits and adjusting salaries. In Canada, record low prices on their heavy benchmark crude means that virtually every barrel of crude produced in the oil sands will come at a loss.
Still, even with the combination of some Canadian pullback, stripper wells going offline and announced shale cuts, that may not be enough to stop prices from going lower as demand craters and supply from OPEC means major increases in stockpiles in the second quarter.
“If you are small family-owned E&P, you will exit if it is no longer economic,” said Artem Abramov, head of shale research at Rystad Energy.
©2020 Bloomberg L.P.