Oil industry reaching new lows - Albuquerque Journal

Oil industry reaching new lows

A kite surfer rides as oil tankers sit offshore Wednesday, April 22, 2020, in Huntington Beach, Calif. About three dozen tankers are parked between Long Beach and the San Francisco Bay Area with nowhere to go due to lack of demand and nowhere to store the oil. (AP Photo/Mark J. Terrill) 

Copyright © 2020 Albuquerque Journal

Regeneration Energy Corp. in Artesia has ceased production at all 50 of its oil and gas wells.

With prices stuck beneath $20 a barrel and further declines likely as the coronavirus lockdown continues, it makes no sense for producers to keep pumping hydrocarbons, said Regeneration Energy President Raye Miller.

“Most companies are curtailing their operations now, because there’s no logic in producing at these prices,” Miller said. “The good news is, with all my wells shut in, at least I’m not losing money from selling oil and gas below cost.”

State oil production data for March, when the pandemic virtually shut down the global economy, is not yet available. But local producers and industry experts say operators across the Permian Basin in West Texas and southeastern New Mexico are rapidly capping their wells, at least temporarily, to await better times.

“Most oil companies here have shut in at least half their production, if not the majority of it,” said Gregg Fulfer, a Republican state senator and owner of Fulfer Oil and Cattle Co. in Jal. “Some of those wells may never come back online.”

The crisis engulfing the oil and gas industry hit a new low this week, when oil prices for May delivery of U.S. benchmark West Texas Intermediate plunged below zero for the first time in history, meaning producers would have to pay buyers to take crude off their hands.

It was a one-day phenomenon that occurred Monday, the day before futures contracts for May delivery expired. With oversupply flooding the market and U.S. storage capacity filled nearly to the brink, buyers had no place to put new crude, pushing the price down to minus $37 a barrel.

The price for June delivery bounced back to positive Tuesday. But with the global supply-and-demand imbalance only getting worse, the price for WTI closed at just above $17 a barrel on Friday, down from about $60 in early January.

“The negative price last Monday was a wake-up call,” Fulfer said. “Everybody’s eyes are wide-open now.”

Monday’s negative prices, while historic, were “a bit of a side show,” as oil does have value and prices immediately climbed back Tuesday, said Raoul LeBlanc, vice president for nonconventional oil and gas at international consulting firm IHS Markit. But it exposed the depth of the market glut, forcing oil operators to immediately hit the brakes.

“Everyone was waiting for awful prices to force shut-ins, and now it’s happening. Prices have dropped below the cash cost to pull oil out of the ground, so producers are literally losing money on every barrel of oil,” LeBlanc said.

A decision this week by New Mexico and Oklahoma regulators to suspend penalties for producers who temporarily halt production is likely encouraging many operators to proceed with shut-ins, said longtime industry expert Daniel Fine.

“It means they can shut in their wells during the crisis without losing their leases,” Fine said. “That was a risk they faced before.”

Plunging production will be hard on New Mexico, which already faces a budget crisis from crashing prices. For each $1 drop in price for a barrel of oil, the state loses an average of about $22 million in revenue over a year’s time. Now, with output declining, the state faces a double whammy.

Legislative Finance Committee Chairman Sen. John Arthur Smith, D-Deming, said in mid-April that the state will likely lose between $1.5 billion and $2 billion in revenue in fiscal year 2021.

“We’re probably ramping up to the $2 billion mark now,” Smith said Friday. “The losses are mounting as we speak.”

With no end to the pandemic in sight, the state can’t assess the true impact.

“At this stage, we can’t quantify it, because we don’t have enough information,” Smith said. “I’d like to say the worst is behind us, but I think we’re still a few months away from any level of stability.”

Gov. Michelle Lujan Grisham is expected to call a special session in June to deal with the budget crunch.

For now, producers are struggling just to survive the coronavirus lockdown, which has cut global oil demand by about 30%.

“This is a demand-side issue as much as a supply-side issue,” said state Republican Rep. Larry Scott, who owns Lynx Petroleum in Hobbs. “Jet planes are racked up in rows in Roswell and Houston and everywhere in between. We’re not burning fuel, there’s no demand, and all the storage places are full.”

Many companies will crumble before things get better, LeBlanc said.

Even when the lockdown ends and demand climbs again, it will take a long time to consume the reservoir of excess oil on the market. And with the potential for new virus outbreaks and more lockdowns, nobody can predict how fast things will return to normal once the economy opens again, LeBlanc said.

IHS Markit’s working assumption is about two years for demand to reach pre-crisis levels.

“It will be much longer than anything we thought even a month ago,” Fulfer said.

New Mexico Oil and Gas Association Executive Director Ryan Flynn said the industry has never faced a challenge like this.

“Nobody knows how long the recovery will take,” Flynn said. “All we can honestly say is it will be slow. It’s too early to tell how long.”

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