EDITOR’S NOTE: This story is the first in a series about the local economy that will assess the economic conditions of southeast New Mexico in light of a national downturn.

Copyright the Hobbs News-Sun, January 2009. Reproduced with permission.

By LEVI HILL

HOBBS NEWS-SUN

The oil and gas industry isn’t dead. It’s hibernating.

Last year was one of records for the industry. Oil prices reached historic highs near $150 a barrel and within a few months fell more than $100 a barrel to four-year lows. It was the single biggest drop in oil and gas prices in the history of the industry and has left fear and doubt in the hearts of those who depend on it to survive.

National media continues to report job cuts and a dubious future for oil and gas production. Uncertainty is prevalent throughout the industry, but fear and defeat are hardly the predominant attitude.

“We have seen good and bad times,” said Dwayne Taylor, president of Hobbs-based Lucky Services Inc. “We had a good run the last five years. We all wish we could stay like we were, but this isn’t anything we haven’t seen before.”

Where oil is today

The $100 a barrel drop in oil is unprecedented in the industry, but so was the climb to $147 oil, Taylor said. In both cases the reasons are unfounded and the outcome bad for the nation, he said.

Another source agreed.

“There was no fundamental for oil to be $140 and no fundamentals for it to be at $35 a barrel,” said Bill Walls, chief executive officer of Plantation Petroleum, which operates fields in the Permian Basin. 

Ten years ago, oil fell below $9 a barrel and Taylor helped form the Concerned Citizens for Energy Policy group to try and find out who was running the futures market. The group traveled to Washington, D.C., to talk to then Department of Energy secretary Bill Richardson.

The group learned that speculators were driving the oil prices almost at will, Taylor said. Many analysts have said the same of the 2008 record climb of oil. 

“On June 1, the country was using 20 million barrels of oil per day,” Taylor said. “On that one day alone, more than 1 billion barrels of oil were traded.”

As oil prices climbed, demand fell, but it was a minor drop — 2 million barrels daily across the globe.

“The demand is still there. It makes no sense why the price is so low,” Taylor said. 

Will Palmer, superintendent of oil producer Read & Stevens Inc., said oil should still be at $60-$70 a barrel and that low natural gas prices are even more troubling.

“Two years ago the states were importing 3 trillion cubic feet of natural gas from Canada yearly. Now it is 1.2 trillion,” Palmer said. “That is a 65 percent drop in imports, and Canada is the only nation we import natural gas from. The U.S. has not made up the difference with domestic drilling and increased production, and we have not decreased our electricity production in the last two years.”

Natural gas is currently selling for around $4.80 per 1,000 cubic feet now, but Palmer said it should be closer to $7-$8 per Mcf.

“I have no idea why it isn’t,” he said. 

The effects on unemployment

The effects of oil hovering below $40 has not gone unfelt in Lea County and the Permian Basin, but so far the pain has not been widespread. 

The Associated Press recently reported ConocoPhillips is cutting 4 percent of its work force globally, or about 1,300 jobs. Other oil and gas job cuts have also been reported.

Locally, staffing companies are reporting surges in the number of employees seeking work through their offices, and many of those are from the oil and gas industry.

SOS Staffing branch manager Holly Lathrop said the industry started laying off in late November, and her company saw the largest number of job seekers just before Christmas. The number is starting to climb again.

“A large portion of the people coming in are from layoffs in the oilfield,” said Spherion Staffing owner Paula Eggleton.

Sandy Wood, division manager of CPST Staffing, said about 40 percent of its job seekers are oilfield workers recently laid off.

Julio Cruz, a supervisor at Lobo Trucking, said the number of oilfield workers coming in his door looking for work has been almost constant. 

“Pretty much the ones applying are from other jobs where they have been laid off,” he said. “Our traffic of applications and phone calls is all day long.”

The most recent state unemployment rates have not been released, but staffing company representatives have estimated the unemployment increased at about 1 percent, a relatively small increase. In November, Lea County’s unemployment rate was 2.5 percent. December’s unemployment rate will not be released for another few days.

The effects on oil business

The layoffs have only really begun. Many in oil and gas expect them to increase despite attempts to curb such actions. 

“Servicing is in for a major hit. People with limited skills will probably be looking for jobs,” said Palmer.

Palmer and many others expect prices to start to climb, and in the meantime the prevailing attitude is one of buckling down for a rough patch — a rough patch not much different from any in the last five decades.

“I think a lot of companies can still do work at $35 a barrel oil, but it is not as much a profit,” Palmer said. 

For many companies, $35 a barrel oil is probably the breaking point because of their economics, Palmer said. He said it is possible some companies may have overextended when oil was $140 and are now facing large deficits, but Read & Stevens is not one of them.

“We want to be at a point to maintain a steady, constant growth while maintaining a decent return for our investments,” he said. 

Walls said his company began cutting its rate, the price it will pay for service, two weeks ago. He said the company wants to keep its staff together too, but the problem is, while oil prices dropped $100, the price of services hasn’t come down.

“I think those costs will come down,” Walls said. “Every operator will put every request at a point of emphasis that it has to be done at this cost. If it can’t, they’ll have to find someone who can.”

Wages in the service side of the industry are the highest they have ever been, and service companies face perhaps the toughest times of all with low oil prices. 

Alonzo Aranda, chairman of the Hobbs Chapter of the Association of Energy Service Companies, said the service companies are the first ones expected to cut rates when oil goes bust, but it isn’t that simple. 

“(The oil companies) don’t like running a tighter ship, so they fall back on the service companies,” he said. “The oil companies could continue to afford those service prices at $35 a barrel.”

What makes it so tough for service companies is, while they are expected to cut their rates and while oil has dropped, the cost of materials service companies use has not gone down. 

“The problem is the goods and services we use haven’t gone down,” said Bruce Sharp, president of Reeco Well Services Inc. “We are hoping for a price reduction in the goods and services we buy. My gut feeling is it will get worse before it gets better.”

The future of oil

Many in the industry see things getting worse before they get better, but it will get better.

“There is going to be a minimum two-three months of a very tough stretch,” Palmer said. “Oil companies are going to be doing little or no capital projects. People will be moving out of the communities because there are no jobs. There has to be a common ground where oil producers can continue to drill and work over wells and make a profit and service companies can make a profit, and we have not reached that common ground yet.”

The common ground that producers and servicing companies say will mean profits for all and a fair price at the pump is $60-$70 a barrel. Some see it climbing close to there by the end of year.

Gary Fonay, a veteran of the oil industry who now focuses on ranching but maintains oil interests, said the industry has seen huge changes and had to make huge adjustments in a short time. It has been tough, but things will continue to move, even if painfully slow.

“I think oil is going to bounce back up to $60 in the next six months,” he said. “I think the consensus is $140 was full of speculation and inflated above the dictates of supply and demand. The market takes awhile to stabilize. There has been so much turmoil in the financial markets in general, everything is difficult to get a handle on. I think we will see a fair price later in 2009.” 

The Energy Information Administration, which studies the oil and gas industry and projects oil futures, estimates oil prices to hover around $43 a barrel in 2009 and around $55 in 2010.

The EIA projects natural gas prices to climb to around $6.63 per Mcf in 2010, down from more than $9 per Mcf last year.

For now, oilfield operations are in a stall, according to Dan Fine, associate for the New Mexico Center for Energy Policy. Credit to small producers, which supply 60 percent of the nation’s oil supply, has been drastically slowed, he said.

“Without $50 oil, in the next 90 days at least, exploration outside the major companies will come to a real halt ,” Fine said. 

Fine has been studying the oil and gas industry for decades and predicted the fall of oil to $35 a barrel late last year. The good news is he expects oil to climb to $50 by April or May. Friday oil for the West Texas Intermediate ended the day at $46.47 spot and $43 posted.

An over-supply of oil mixed with a small, but real, drop in demand and an artificial deflation in oil caused by last year’s speculation and fall of the credit market has led to the low oil prices, Fine said.

“The current spot price is lower than the forward month price in the futures market,” he said. “The cause is there is oversupply and those who have oil — the producers and exporters — are storing oil. Those are led by Morgan Stanley. They are chartering ships to carry inventory in storage. They are expecting oil to come back up with the OPEC cuts in exports.”

The Organization of Petroleum Exporting Countries is expected to cut its oil production by 4-5 million barrels per day by May, he said. When that happens, supply and demand will reflect actual conditions and the price of oil will climb. 

“This will be a real supply and demand physical equation,” he said. “The second part of that is the absence of speculation. There is no funding available for the hedge funds. All of that is now in a deep freeze.”

Whether oil goes beyond $50 a barrel depends on several factors, but Fine set his 30-month average of oil at $70 per barrel beginning Dec. 1. 

“OPEC will defend what it calls the fair price — $75 a barrel,” Fine said. “Should it go higher (than $50) will depend on the regulatory reform of the Obama administration on the speculation market. I think the role of regulatory agencies will be expanded and we will see a regulatory cap over prices.”

Perhaps the best news of all is the days of $4 a gallon gasoline are behind us — for now.

“I don’t think we will see a return to those prices for another generation,” Fine said.