An energy glut now, but when the economy turns, this only provides more reasons to expect a crunch in the future..
By CLIFFORD KRAUSS
FORT WORTH — The great American drilling boom is over.
The number of oil and gas rigs deployed to tap new energy supplies across the country has plunged to less than 1,200 from 2,400 last summer, and energy executives say the drop is accelerating further.
Lower prices are bringing to an end an ambitious effort to squeeze more oil from aging fields and to tap new sources of natural gas. For the last four years, companies here drilled below airports, golf courses, churches and playgrounds in a frantic search for energy. They scoured the Rocky Mountains, the Great Plains, the Gulf of Mexico and Appalachia.
But the economic downturn has cut into demand. Global oil prices and American natural gas prices have plummeted two-thirds since last summer. Not even an unseasonably cold winter drove down unusually high inventories of natural gas.
The drop has been good news for American consumers, with gasoline now selling for $1.92 a gallon, on average, down from a high of $4.11 in July. But the result for companies is that it is becoming unprofitable to drill.
The reversal of fortune could have important implications for the future health of the nation’s energy companies, for consumer wallets and for national aspirations to rely less on foreign energy sources.
The drilling cutback has been particularly stark for natural gas. Gas exploration had soared in recent years after technology advances enabled the exploitation of gas trapped in huge shale beds found around Fort Worth, western Pennsylvania, upstate New York and elsewhere.
But that boom has created such abundant supplies that companies are not only drilling less but also deciding not to pump from wells already drilled.
Thousands of oil and gas workers who migrated around the country to work in new fields for fat salaries have been laid off.
“The big bonanza is over,” said Jay Ewing, the completion and construction manager for Devon Energy in the Barnett Shale field here, where so far this year his company has brought its rig count from 35 to 8. “Everyone is really shocked how fast everything has turned.”
Energy experts and company executives warn that oil and gas companies now cutting back on investments will be unable to respond quickly to a future economic recovery. John Richels, Devon’s president, said that if the slump lasted two years, it could then take 18 to 24 months for companies to reassemble rig crews.
That means a glut could rapidly turn to scarcity, sending energy prices soaring again. Already, experts are predicting that lower domestic gas production by the end of the year will require increased imports of liquefied natural gas from places like Qatar.
Through most of this year, gas supplies are not likely to decline sharply because so many shale wells came on line recently. But those wells should start to decline in productivity by next year, potentially leading to tight gas supplies if industrial and residential use picks up significantly in the second half of 2010.
“Inevitably, the market doesn’t react; it overreacts and shoots itself in the foot,” said Adam J. Robinson, director of commodities at Armored Wolf, a California hedge fund.
Domestic oil production is expected to increase this year over last, for the first time since 1991, according to projections by the Energy Department. That swing is attributable in part to increased production in the Gulf of Mexico from two giant new platforms that were years in the making. But some potential onshore production is likely to go untapped, as companies cut back on new drilling and abandon expensive efforts to flush extra oil from aging fields.
Many energy executives had thought the drilling renaissance, coming after years of declines, represented a new era, particularly for gas production. Domestic natural gas output rose by almost 8 percent last year from 2007, the biggest annual jump in more than a generation.
That jump reversed the widely held notion that domestic gas fields were in irreversible decline. It enabled the Texas billionaire T. Boone Pickens to promote a plan to use natural gas instead of gasoline in the nation’s cars.
But such ambitions are sputtering, as falling prices force companies to cut their drilling expenditures. Oil now costs $46.25 a barrel, down from a peak of more than $145 in July, and natural gas costs just less than $4 per thousand cubic feet, down from a peak of more than $13.
One reason companies need to make cuts is that the cost of drilling and servicing operations, while falling, is still roughly double the 2005 level, while the prices oil and gas companies earn from their production are suddenly below the 2005 level. Meanwhile, the cost of borrowing money for exploration and production has soared recently in the credit crisis.
“When everybody sobers up after the first quarter and sees what their real cash flow is going to be,” said G. Steven Farris, chairman and chief executive of the energy company Apache, “people are going to be very discouraged about how much capital they have to spend and that will depress the rig count even further.”
So far economists say the energy patch is still doing better economically than the rest of the country. The surge of drilling and leasing poured enough money into communities with oil and gas resources that they did not begin to feel the pain of the recession until the end of last year.
However, a slowdown appears to be coming in local tax revenue and businesses like restaurants that cater to oil workers. Residents here who receive monthly royalty checks for gas pumped through long horizontal wells tapping gas deposits deep below their homes say their payments are getting smaller or disappearing altogether.
Perhaps most nervous are the rig workers themselves. With the rig count in the Barnett Shale field down to less than 100 from a high of 227 in October — and expected to go as low as 60 before the year is over — thousands of gas field workers have already lost their jobs here.
One who is worried is Chris Stamper, 32, a derrick hand from Union, Miss. A former furniture factory worker, he doubled his salary, to $80,000 a year, when he came to the Barnett Shale field two years ago to learn to work on a rig. Fifteen of 20 workers on Mr. Stamper’s crew have already been laid off, replaced by more senior workers from other crews that were disassembled in recent weeks.
He keeps thinking about the $216,000 house he bought for his family back in Union.
“I have to pay for it,” he said. “That’s what I worry about.”