This is what an oil bust looks like
Low prices have energy companies and communities reeling as rig counts plummet and unemployment climbs.
In early March, Daniel Fine, associate director of the New Mexico Center for Energy Policy, told a gathering of tribal energy officials that the oil bust is officially on. Those gathered, however, sure as heck didn’t need an expert to tell them that. In the oil and gas patches it has become clear that the economic gains of the so-called shale revolution are being wiped away by one of the worst fossil fuel downturns in U.S. history.
Now, the oil companies are crying for help. First, they got the crude oil export ban lifted. Next they want proposed federal rules on methane emissions weakened or scrapped. As if any of that will help.
Back in 2010, the price of a barrel of Brent crude (the international oil price benchmark) topped $80. That made it profitable to extract oil from tight shale formations, which is especially costly. A drilling frenzy ensued, domestic oil production skyrocketed, oil companies raked in profits and oil patch communities prospered.
But all that new oil on the market, plus China’s slowing economic growth, began to dampen oil prices in the summer of 2014. Instead of curtailing production to keep prices afloat, OPEC’s leaders launched a thinly veiled price war, clearly aimed at putting U.S. producers out of business. Here are some indicators that OPEC won the war:
The U.S. rig count has collapsed to levels not seen since, well, ever. With both oil and natural gas prices at near-record lows, it simply doesn’t make economic sense to spend up to $10 million to drill a well. So the rigs are shutting down. In September 2014, 1,931 oil and gas rigs were operating in the U.S.; today there are just 476. That’s a 75 percent decrease, and it’s still some 50 percent lower than the 1987 count, which followed what was considered the biggest, baddest bust ever, until now. Tom Dugan, who runs an oil and gas production company in northwest New Mexico, told the Farmington Daily Times, "It's the hardest bust I've been through and I have been in this business for 57 years."
Even as unemployment declines nationwide, it’s going up in the oil and gas patches. Following the great Recession of 2008, the counties that were fastest to recover tended to be those with a lot of oil and gas drilling. Now, the opposite is true. North Dakota, whose economy soared between 2010 and 2014, is down in the dumps. Nearly 20,000 jobs have been lost in the state during the last year, most of them in the oil and gas and construction sectors. Wyoming saw one of the biggest unemployment rate increases in 2015 in the country, led by its fossil fuel hot spots. (Tourism-rich Teton County, on the other hand, has a jobless rate of just 3.7 percent). Nationally, the oil and gas extraction sector alone has shed some 21,000 jobs since late 2014, and the "support activities for mining" sector has lost 133,000 jobs. A recent analysis by the Brookings Institute predicts "much worse employment carnage in energy states" to come.
Energy-state tax revenues are crashing. A single oil or gas well can be a big moneymaker for state and local governments, generating royalties, severance taxes, gross receipt taxes and property taxes. Price shifts hit these revenue streams hard. During the last quarter of 2015, all the major Western energy-producing states saw significant decreases in severance tax revenues, levied on the value of produced oil and gas and minerals, compared to the previous year. North Dakota took in $400 million less — in just one quarter — than it did in the final quarter of 2014. As a result of these losses, four of these states saw total tax collections decrease, as well (Utah was the exception), despite the fact that nationally, state tax collections were up. While motor fuel sales taxes increased for every state, thanks to low gas prices, it wasn't enough to offset the other tax losses.
Profits? They’re gone. During the final quarter of 2015, alone, the mining industry (which includes oil and gas extraction) suffered $85 billion in losses, according to U.S. Census Bureau data. Ouch.
And what happens when once profitable corporations end up in the red? They cry for help.
Unlike banks during the 2008 crash, the oil companies probably can’t count on a taxpayer bailout, so they’re angling instead for regulatory laxness. First, companies pushed, successfully, to get the oil export ban lifted late last year. That managed to bring West Texas Intermediate (domestic) prices into line with Brent Crude (global) prices, but it didn’t do anything to increase prices overall, and thus was little help to domestic producers. "Lifting the restriction on exporting crude oil adds American oil to a world market which is over-supplied," wrote energy expert Fine in December. "Expect no cash flow increase for American producers and still lower world prices than with the restriction or ban in place."
Now, the fight is on to weaken proposed Environmental Protection Agency and Bureau of Land Management methane emission rules. The San Juan Basin in northwestern New Mexico has had a double bust, first in 2008, when the price of natural gas — its cash crop — crashed, and then again during the recent oil bust. At least a quarter of the producing 20,000 gas wells in the basin are “cash flow negative” according to local economic development officials. Meanwhile, the basin is also home to the now notorious Four Corners Methane Hot Spot, which might mean it has more work to do in stemming emissions.
Local town and county officials recently drafted a letter to their Congressional delegation indicating that the "onerous array of new rules" would put another 2,500 wells into negative cash flow territory, and are "quite likely to be the industry’s tipping point." The BLM’s analysis of its own rules, however, show that at least some of the cost of compliance would be offset by the sale of natural gas that is now being lost via leaks and other emissions. This conclusion is backed up by independent studies.
You can't blame these folks for trying. After all, because they've hitched their economic wagon to oil and gas and, to a lesser extent, coal, they truly are facing an existential crisis. But being required to fix leaky infrastructure and replace high-bleed valves with low-bleed valves is not going to push an industry over the edge. Only the market has the power to take away and, one of these days, to give back. Which leaves us with the question: When good times inevitably return, will industry be clamoring for more regulations?
Jonathan Thompson is a senior editor at High Country News. Follow @jonnypeace
