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Low Gas Prices Haven't Slowed Domestic Drilling — Yet

Nov 9, 2014
Originally published on November 10, 2014 2:22 pm

It's lunchtime in Douglas, Wyo., a town smack in the middle of the state's booming oil patch, and the line of cars at the McDonald's drive-through wraps around the building. A hiring poster hangs in the window, and the parking lot is full.

Troy Hilbish, a tool hand for the oil field servicing company Schlumberger, says while he didn't know oil prices have been falling, he does know what falling prices mean.

"If the oil prices go up, we drill more," Hilbish says. "If they go down, we don't drill as much."

With gas prices plunging below $3 a gallon in recent weeks, American motorists have plenty to celebrate.

But in oil-producing states like North Dakota and Wyoming, that celebration is muted. If prices stay low, it means fewer jobs and less revenue for governments. While there's concern in those states, there's no panic — yet.

In Wyoming, Hilbish says he has seen prices tank before.

"I ended up picking up a second job and worked on a drilling rig, which was pretty tough," he says. "I got two hours of sleep for three days out of the week." Hilbish fared better than some of his colleagues, who simply got laid off.

Not In Panic Mode, So Far

Oil prices have fallen by more than a quarter since June, and most analysts expect they'll stay low for a while. That poses a problem for shale oil in particular, which has fueled the U.S. oil boom in recent years.

Because shale oil is more expensive to drill than conventional oil, prices have to stay relatively high for it to be profitable.

"Nobody around here is in a panic mode, by any means," says Jim Willox, commissioner for Converse County, which includes Douglas. Like his counterparts in Texas and North Dakota, Willox says so far, lower prices haven't led to a discernible slowdown.

"Right now, I think there's 18 rigs in Converse County that are exploring," he says. "That's one of the highest numbers we've had. We've sat at 10 to 12 to 13 for quite a while. Suddenly, we have 18."

Willox says most people in Douglas are still talking about how much more drilling there's going to be, not whether it's going to slow down. But he acknowledges that historically, energy booms do go bust.

"Nobody knows where we are on the curve," he says. "Are we still on the upward curve? Have we peaked? Are we plateaued? Nobody really knows."

Consultant Niles Hushka recently studied the break-even price — the point when companies start losing money — for oil drilling, county by county, in North Dakota. The break-even price varies wildly by location because of geology and infrastructure, among other things, Hushka says.

"I think what we're seeing right now is an industry that can't quite figure out what's happening," he says.

Hushka's analysis shows that at current prices, drilling new wells is already unprofitable in some places, but not everywhere.

"The industry doesn't want to overreact, because this is an industry that's used to boom-bust cycles," he says. "You have to be careful to make sure that the cycle is a true cycle, and that you're not seeing false statistics and so you might make some decisions that will hurt you."

State budget officers are also scrambling to figure out what's going on. North Dakota gets half of its revenue from oil and had been counting on oil prices staying around $90 a barrel for the next few years.

But last week, the state's revenue estimating group reduced that figure by as much as $18 a barrel. Over hundreds of millions of barrels, that quickly adds up.

States New To Drilling May Feel The Pinch First

Other oil-dependent states are in similar situations.

"It's a heck of a lot less damaging to the state's budget if we miss it on the low side than if we miss it on the high side," says Dan Noble, director of Wyoming's Department of Revenue.

Right now, Wyoming is projecting $85 a barrel. Noble says if prices go lower, the state will need to revise its figures. But he's also hoping that shale producers will wildly exceed everyone's expectations, as they have over the past couple of years.

"When they produce more, even though it may be at a lower price, you have another opportunity to actually reach your financial goal," Noble says.

That might be overly optimistic. Most experts agree that while well-developed oil fields like the Bakken in North Dakota and the Eagle Ford in Texas can probably withstand lower prices, areas like Wyoming, where drilling is still in its early days, are likely to feel the pinch.

Willox says that wouldn't necessarily be a bad thing.

"If we develop it at a slower pace, that's OK, because we can deal with it better," he says.

But for workers like Hilbish, a slower pace also means fewer jobs. He's based in California but wants to move to Wyoming, where he's working now.

"I have six kids, a wife," he says. "I think family life up here would be better."

But he might want to wait a few months — and keep an eye on the price of a barrel of oil — before making that decision.


This story was produced by Inside Energy, a public media collaboration focused on America's energy issues.

Copyright 2018 Wyoming Public Radio. To see more, visit Wyoming Public Radio.

GRIGSBY BATES: Motorists have had plenty to celebrate in recent weeks with gas prices plunging. The average price has fallen below $3 a gallon. But in oil producing states like North Dakota and Wyoming, that celebration is muted. If prices stay low, it means fewer jobs and less revenue for governments. But as Wyoming Public Radio's Stephanie Joyce reports, while there's concern, there's no panic yet.

(SOUNDBITE OF TRAFFIC)

STEPHANIE JOYCE: It's lunchtime in Douglas, Wyoming, a town smack in the middle of the state's booming oil patch, and the line of cars at the McDonald's drive-through wraps around the building. A hiring poster hangs in the window, and the parking lot is full. Troy Hilbish says while he didn't know oil prices have been falling, he does know what falling oil prices mean.

TROY HILBISH: If the oil prices go up, we drill more. If they go down, we don't drill as much.

JOYCE: Hilbish is a toolhand for the oilfield servicing company Schlumberger. And he's seen prices tank before.

HILBISH: I ended up picking up a second job and working on a drilling rig, which was pretty tough. I got two hours of sleep for three days out of the week.

JOYCE: And Hilbish fared better than some of his colleagues who simply got laid off. But that's not happening in oil country yet. Oil prices have fallen by more than a quarter since June, and most analysts expect they'll stay low for a while. That poses a problem for shale oil, which has fueled the U.S. oil boom in recent years. Because it's more expensive to drill for than conventional oil, prices have to stay relatively high for it to be profitable.

JIM WILLOX: Nobody around here is in a panic mode, by any means.

JOYCE: That's Jim Willox, commissioner for Converse County, which includes Douglas. Like his counterparts in Texas and North Dakota, Willox says so far, lower prices haven't led to a discernible slowdown.

WILLOX: Right now, I think there's 18 rigs in Converse County that are exploring. That's one of the highest numbers we've had. We've sat at 10 to 12 to 13 for quite a while. Suddenly, we've got 18.

JOYCE: Willox says most people here are still talking about how much more drilling there's going to be, not whether it's going to slow down. But he acknowledges that historically, energy booms do go bust.

WILLOX: Nobody knows where we are on the curve. You know, are we still on upward curve? Have we peaked? Are we plateaued? Nobody really knows.

NILES HUSHKA: I think what we're seeing right now is an industry that can't quite figure out what's happening.

JOYCE: That's Niles Hushka, a consultant who recently studied the break-even price for oil drilling county-by-county in North Dakota. That's when companies start losing money. There's a huge break-even range because of geology and infrastructure among other things. And Hushka's analysis shows at current prices, it's already unprofitable to drill new wells in some places, but not everywhere.

HUSHKA: The industry doesn't want to overreact, because this is an industry that's used to boom-bust cycles. So in an industry that's used to boom-bust cycles, you have to be careful to make sure that the cycle is a true cycle, and that you're not seeing false statistics and so you might make some decisions that will hurt you

JOYCE: And it's not just companies scrambling to figure out what's going on. North Dakota gets half its revenue from oil. It had been counting on oil prices staying around $90 a barrel for the next few years. But last week, the state's revenue-estimating group reduced that figure by as much as $18 a barrel. That might not seem like a lot, but over hundreds of millions of barrels, it quickly adds up. Other oil-dependent states are in similar situations. Dan Noble heads up Wyoming's Department of Revenue.

DAN NOBLE: It's a heck of a lot less damaging to the state's budget if we miss it on the low side than if we miss it on the high side

JOYCE: Right now, Wyoming is projecting $85 a barrel. Noble says if prices go lower, the state will need to revise that figure. But he's also hoping that just as shale producers have wildly exceeded everyone's expectations over the past couple of years, they'll continue that trend.

NOBLE: When they produce more, even though it may be at a lower price, you have another opportunity to actually reach your financial goal.

JOYCE: That might be optimistic though. Most experts agree that while well-developed oil fields like the Bakken in North Dakota and the Eagle Ford in Texas can probably withstand lower prices, areas like Wyoming, where drilling is still in its early days, will likely feel the pinch. But Commissioner Jim Willox says that wouldn't necessarily be a bad thing.

WILLOX: If we develop it at a slower pace, that's OK, because we can deal with it better.

JOYCE: But for workers like Troy Hilbish, a slower pace also means fewer jobs. He's based out of California, but wants to move to Wyoming.

HILBISH: I have six kids and wife. I think family life up here would be better.

JOYCE: But he might want to wait a few months and keep an eye on the price of a barrel of oil before making that decision. For NPR News, I'm Stephanie Joyce. Transcript provided by NPR, Copyright NPR.