FARMINGTON — Local contractors in the oil and gas industry are facing severe cuts in the wake of fallen oil prices.
One industry leader in the San Juan Basin, WPX Energy, has asked its contractors for a 20 percent price cut on goods and services.
“I am writing to request a 20 percent cost reduction in the goods and services you provide WPX Energy …,” Ken McQueen, WPX’s vice president of San Juan Basin operations, wrote to the company’s vendors in a Feb. 9 letter. “WPX has enjoyed a long and productive history with our vendor community in the San Juan Basin. I hope you understand that this in no way reflects poorly on you or your company. Instead, this is my only alternative to keep a modicum of activity intact during this depressed commodity price environment.”
News of McQueen’s letter comes just a week after WPX Energy announced its plans to spend as much as $300 million in the San Juan Basin and $225 million on three new rigs in Western Colorado this year. The company will announce its first-quarter earnings on Feb. 26.
One of WPX’s vendors is Farmington’s Calder Services Inc. Majority owner Shannon Calder Monk said she has yet to respond to WPX’s letter. She said the cuts would be damaging to her family business.
“I understand their point of view but I am not making a 20 percent profit,” Monk said in a phone interview on Friday. “Did (WPX) take a 20 percent cut? I just don’t have it to cut it.”
Monk said her company, which started in 1987 and offers trucking, rig completion and other oil field services, used to employ eight roustabout crews but is now down to just one.
“Last year, we only made a 3-percent profit,” Monk said. “How do you get to 20 percent?”
In the last year, McQueen said, WPX has seen a 50-percent cut in its product prices, which is impacting its ability to maintain 2015 production levels. The company had originally planned to operate four drilling rigs in the San Juan Basin, and now will operate two.
“We saw oil as high as $105 and now it’s $50 a barrel,” McQueen said. “We can make money with our existing production, but under the current pricing scenario and what our supplies and services are running, we can’t continue to drill (and) make money.”
WPX has a favorable hedge position, which means they locked in prices on the futures market, but that only applies to existing operations, McQueen said.
“WPX has hedged approximately three-fourths of its anticipated 2015 natural gas production at a weighted average price of $4.10 per MMbtu and approximately two-thirds of expected oil production this year at an average price of $94.88 per barrel,” McQueen said in an email on Friday. “Our hedge position only covers a portion of our current production, any new wells that are drilled and completed are subject to current market pricing.”
McQueen said that his letter was a necessity, but neither he nor the company’s spokesman would say exactly what cuts WPX made prior to requesting service companies to cut their rates. He did say that drilled wells in the Piceance Basin in Colorado will not be hydraulically fractured until pricing levels go up.
“We value our vendors and that’s what were asking them to do — to partner with us in this depressed market rather than our shutting down,” McQueen said. “We are preparing for an extended (period of) low prices and hoping that is not the case. But all the indications are that this will last a while and we want to continue our operations. We’re not doing this to try to squeeze anybody out of business. We’re doing this to keep a rig or two running.”
How long the downturn will last is unclear, but Daniel Fine — associate director for the New Mexico Center for Energy Policy at New Mexico Tech and project leader for New Mexico’s energy policy — said prices are likely to remain depressed through most of 2016.
“Not until the third quarter of next year” are things likely to improve, Fine said on Wednesday at the Quality Center for Business after a speech on the current downturn that he delivered at the college’s “New Normal” workshop for industry business owners. “I don’t see a return to previous price levels until then. Where the price starts to stabilize is the question.”
Fine said he speculates that West Texas Intermediate crude oil prices will hover around $50 and $60 per barrel after they stabilize in late 2016. Local operators say the price has to be in the mid-70s before activity in the Mancos shale play will pick up.
McQueen said responses to his letter have been favorable, overall, but that is cold comfort to Monk.
“I just don’t have a 20 percent profit margin to cut. I can’t go to Western Refining and say, ‘You’re going to drop our fuel bill’ and go to the truck repair and say, ‘This repair on this truck, you need to drop this by 20 percent so I can give it to WPX,'” Monk said. “They’d laugh if I said that.”
James Fenton covers Aztec and Bloomfield for The Daily Times. He can be reached at 505-564-4621 and firstname.lastname@example.org. Follow him @fentondt on Twitter.
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