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 The conventional wisdom is that "strippers" would be the first to
fold in the face of oil's slide below $40 given their tiny size -
some may pump as little as few hundred dollars' worth of oil a day -
limited access to capital and high costs compared with bigger, more
efficient shale producers.
Yet interviews with executives and experts show those smallest,
often family-owned, businesses are also among the most resourceful,
keeping the oil flowing even as prices near 11-year lows and a
growing number of their wells lose money.
While hopes for a rebound are fading, "strippers" are doing
everything they can to keep their "nodding donkey" pumps working so
they can hold on to land leases that give them access to oil
reserves.
“The small operators of the stripper wells are pretty resilient,"
says Mike Cantrell, head of the National Stripper Well Association.
"They’ve always made it through and will still make it through."
Stripper wells pump no more than 15 barrels of oil per day but
together over 400,000 wells scattered across the nation's oilfields
produce over a tenth of U.S. oil output, enough to affect the market
supply-demand balance and prices.
Drawing analogies to the 1980s oil slump, some analysts had warned
that half of stripper wells could shut if crude prices held below
$40 a barrel, helping ease the supply glut and possibly underpinning
the prices.
The tenacity of the stripper well producers is challenging that
view.
For example, Nelson Wood who runs Wood Energy, a family business
founded by his parents more than 60 years ago, has laid off 14 of
his 32 employees and closed 10 of 150 wells in the Illinois Basin,
but so far the production is down only 4 percent.
He may have to shut more wells, based on electricity, labor,
maintenance and salt water disposal costs, but said one key concern
was meeting the requirements of oil and gas mineral rights.
"We run some wells at a loss to keep the lease active," he said.
POSTAGE AND INSURANCE
To be sure, many of these mom-and-pop shops have already cut
production to conserve cash and the longer oil prices remain low,
the harder it will be for them to keep pumping.
Darlene Wallace, who inherited her company Columbus Oil after the
passing of her husband over a decade ago, has shut in four of her 25
wells in Oklahoma, cutting about a third of production, and is now
focusing on overhead costs.
Wallace says she has done everything from getting rid of a postage
machine, which saves just $300 a year, to asking her three employees
to cover 20 percent of their health insurance costs, which she
estimates could result in annual savings of $10,000.
“I hate to do that to my employees, but we’re all going to have to
cut back,” Wallace says.
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Some stripper operators are even deferring necessary maintenance,
others are turning to temporary workers to cut employment costs.
Many are so small that their owners can roll up their sleeves and do
the work themselves if necessary.
The stripper well operators who spoke with Reuters said many of
their peers are taking similar measures to survive.
Ponderosa Advisors, a Denver-based energy, agriculture and water
consultancy, reckons debt-free companies can cover their operating
costs even with oil below $35 a barrel. Some produce at a cost as
low as $18.
That means prices can fall further before any major shut-ins.
In the meantime, many stripper operators are maneuvering carefully
around clauses in their lease agreements to stay in the business.
Most can only turn off their wells for a brief period without losing
their rights.
In Texas, for example, the cessation period for which a well can get
idled without the operator losing the lease is typically 60 to 90
days, according to Richard Hemingway Jr., head of the oil and gas
practice at law firm Thompson & Knight.
"I have clients that are masters at working that," he said,
referring to a technique in the industry known as "stop-cocking,"
where producers wait until the very final day of the cessation
period before turning back on production.
Ken Hunter of Vaquero Energy, a stripper well company with several
hundred wells in California, says in some cases operators may chose
to produce from just a single well on a lease that includes up to 10
to remain in compliance.
Such techniques could lead to deeper production cuts if the crude
downturn persists, but as long as stripper producers keep their
leases they should be able to crank up output again once prices
recover.
"We could easily fill the void with production from incremental
drilling as soon as the price rebounds to even $50," according to
Bernadette Johnson, a Managing Partner at Ponderosa Advisors.
(Reporting by Liz Hampton; Editing by Josephine Mason and Tomasz
Janowski)
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