 With global oil prices plunging by half since June, oil companies are slashing
costs by shutting down rigs and laying off employees.
It’s hitting small producers especially hard.
“Our cash flow is half what it was last year,” T. Greg Merrion, president of
Merrion Oil and Gas, a family run operation with a staff of 25 in Farmington,
New Mexico, in the heart of the energy-rich San Juan Basin. “We just got through
the budget cycle for 2015 and it looks like we’ll have about half the cash
available.”
Photo by Rob Nikolewski
Photo by Rob Nikolewski
HUNKERING DOWN: Merrion Oil and Gas president T. Greg Merrion runs a small
company but has managed to survive the recent drop in oil prices.
It’s not any better across town at D.J. Simmons Inc., where three of the
company’s 13 employees have been laid off.
“It’s pretty bad with the price of oil and gas being down at the same time,”
John Byrom, president and CEO, told Watchdog.org.
“It’s a double-whammy that’s really taken its toll. It’s been difficult to keep
our cash flow up, finance projects we need to do and even to justify projects in
this price environment.”
Courtesy of DJ Simmons Inc.
Courtesy of DJ Simmons Inc.
John Byrom
For all the gloom, though, there’s little sense of doom coming from Merrion and
Byrom — and certainly no sense of panic.
“We’ve been in business since 1960, so this isn’t the first bust cycle we’ve
been through,” Merrion said. “We’re a small producer and I’m determined to
survive this.”
“We are price takers,” Byrom told an audience of about 300 attending the San
Juan Basin Energy Conference last week. “We get what we get, and we don’t have a
fit.”
For small producers to survive, it’s all about cutting costs.
“What we’ve done is maintain a core group of key employees, and as activities
pick up, we utilize contractors and consultants,” Merrion said. “As for as
drilling, we have to rein that in.”
“On the drilling side, there really isn’t much that’s economic here in the oil
world at these prices,” Byrom said. “So we just have to look at our production
and do what we can on existing wells.”
While U.S. oil production keeps rising despite the price drop, there are plenty
of signs that will change in a matter of months.
Courtesy of WPX Energy
Courtesy of WPX Energy
Richard Muncrief
“I think in mid-year you’re going to see things flattening out,” Rick Muncrief,
president and CEO of WPX Energy, told Watchdog.org. “A lot of producers are not
only dropping their drilling rigs, but they’re not completing some of the wells
they drilled. They’re going to hold off.”
“That’s the option right now, to slow down our activity,” said David Lawler, CEO
for the U.S. Lower 48 Onshore for BP.
Nationally, exploration and production companies have cut capital expenditures
by 41 percent this year.
In New Mexico, which is estimated to derive nearly one-third of its general fund
revenue from oil and gas production, Secretary of Energy, Minerals and Natural
Resources F. David Martin said last week a drop in rig counts across New Mexico
from 85 to 60 since last year will translate into at least 2,000 layoffs.
[to top of second column] |
 The price drop has hit the big oil companies, too, but they often
have deep pockets and are more insulated than the smaller outfits.
Especially vulnerable are companies that got into the shale boom
late and took out loans to expand operations just before prices
collapsed. With little sign prices will climb up anytime soon, some
of those companies may get gobbled up by bigger companies.
“It’s now survival of the fittest out there,” Daniel Fine, associate
director at the Center for Energy Policy at New Mexico Tech, said at
last week’s conference.
But smaller companies that are smart with their money can take
advantage of the situation.
“We’re going to be concentrating on some less expensive work overs,
looking for opportunities to acquire properties at some fire-sale
prices, which we think will be there because of low oil and gas
prices,” Merrion said. “That’s what’s going to keep us busy.”
BP’s Lawler said he, too, sees opportunities in a low-price
environment for producers large and small.
“Some of the best innovations in the industry happen when prices are
the lowest,” Lawler told Watchdog.org. “When the price decreases,
you get smarter … We’ll figure out how to adapt and make it work.”
Smaller companies also seem to be in the cross-hairs of the
Organization of Petroleum Exporting Countries, or OPEC.
As late as June 2014, oil prices bubbled to more than $100 a barrel,
but started dropping before taking a swan dive after OPEC decided in
November not to scale back its production. Coupled with the boom in
U.S. production in recent years, the global market became awash in
crude oil.
Though OPEC oil ministers denied it, the move was widely interpreted
as an attack on North American shale oil producers, who use advanced
technology in hydraulic fracturing and horizontal drilling to siphon
off market shares from OPEC members.
Saudi Arabia, the dominant OPEC member, has much lower production
costs than U.S. shale producers and has stored up to $750 billion in
foreign currency reserves, leading some to believe the Persian Gulf
OPEC members can starve out its shale competitors, especially
smaller companies.
“Certainly (U.S. shale) can survive,” Byrom said. “As to Saudi
Arabia, I think there’s a limit to what they can produce. Maybe
their break even price is $15 or $10 a barrel, but I don’t think
they can produce all of the oil for the whole world at $15 a
barrel.”
Smaller producers, meanwhile, will hunker down and try to wait
things out.
“You can try your best to sharpen your pencil and cut your costs
where you can,” Merrion said. “But long-term, we’re going to need an
improved price for us to get back to drilling.”
[This
article courtesy of
Watchdog.]
Click here to respond to the editor about this article |
