As Oil Dips, What To Watch For In Colorado And Other Boom States

Dec 15, 2014

As oil prices go down, down, down (they've dropped 40 percent since June 2014), what most Coloradans notice is that they are paying less for gas. Other than that, the average person might not see much of an effect.

That doesn't mean one isn't coming. As oil prices stay low or continue to drop, energy boom states like Colorado, Wyoming and North Dakota may soon see impacts on jobs and even state budgets. Here are a few key indicators that offer help in tracking the on-the-ground effect of falling oil prices.

Rig Counts

Drilling a well is expensive. So when the price of oil drops, companies often slow their drilling in new, unproven areas, and concentrate it in places where they know they'll make money. The slowdown in exploratory drilling often means companies hire fewer rigs.

When rigs get released, the people who work on them lose their jobs. Companies that offer services like fracking also see slowdowns. This isn't happening at a large scale yet, because rigs are usually contracted for longer periods of time, from six months to one or two years, said Timothy Fitzgerald, a professor of natural resource economics at Montana State University.

"Firms, if they have already got a rig reserved, they hold that rig and will end up drilling [a well] even if prices fall," Fitzgerald said. But if prices stay low, as they have been, rig contracts won't be renewed, and they'll go idle.

This is beginning to happen in North Dakota, whose rig count of 183 is ten fewer than September, said Lynn Helms, director of the state's Department of Mineral Resources, during his monthly production webinar on December 12.

"We are expecting 40 to 50 less rigs by mid-year 2015. That means it will be a month-to-month struggle to see production increases, if they come at all," said Helms.

Drillers are already feeling the pinch. Patrick Hladky, president of Wyoming-based Cyclone Drilling, operates in North Dakota, Montana, Wyoming and Colorado. Only one of his 27 rigs is out of service now, but that will soon change, he said.

Over the next few months,  as they finish work on wells and their contracts end, many of his rigs are being released, with nowhere to go.

Hladky, who has been in the business for decades, doesn't like to see the downturn, but it isn't a surprise either, he said.

"It's a cyclic business, so we're prepared for it."

Drilling Permit Applications

Another on-the-ground indicator that companies are slowing down is a drop in drilling permit numbers. Usually referred to as "applications for permits to drill," when these numbers fall it means drilling is also slowing down.

In Colorado, the APD numbers are updated through November, and there isn't a slowdown yet. There could be a couple reasons for this.

First, a lot of wells in Northern Colorado are profitable even with oil at low prices. This number is often referred to as a break even price, and it varies, even within one oil field, depending on factors like how deep you have to drill and how much oil comes out of a well.

As Reuters market analyst John Kemp noted in a column December 10:

North American shale producers themselves are not a homogenous group. Breakeven prices for new wells are estimated at anything from $40 to $80 per barrel or more, depending on the play, and even the acreage within the play.

Some experts say oil from parts of Texas, like the Eagle Ford and Barnett Shale, can be profitable at prices around $50 a barrel. In other places, like the southern Bakken and the Mississippi Lime formation, oil extraction is much costlier.

Northern Colorado is middle of the road in terms of its break even prices, said Peter Maniloff, an energy and environmental economics professor at Colorado School of Mines.

"In the Denver-Julesberg we often see price estimates around $60 a barrel, $60-$70 a barrel for the well to be profitable."

Doug Hock, a spokesman for Encana, which operates in Northern Colorado, said his company can make money with its Northern Colorado wells even with the price drop.

"Even at the current prices we are able to economically extract oil and gas in Weld County," he said.

Applications could even go up in parts of the oil fields known to be more profitable, as companies focus their energy on wells that make them more money, rather than looking for the next big play.

Nationwide, many analysts say a third of U.S. oil is uneconomical with oil prices below $80 per barrel.

A second reason APDs may be stable right now is simply the a time lag between a drop in prices and a slowdown in drilling -- those rigs are already contracted out. Companies generally make their drilling plans on a yearly basis, and right now they are operating on plans made when oil was over $100 a barrel.

State Coffers

A third effect to look for as oil prices plummet is that on state budgets. Many oil-producing states rely heavily on severance taxes from oil and gas production. When that oil is worth less, tax revenues fall.

States base their budgets on projections for oil prices. Wyoming's 2015 projection set oil at $85 per barrel; Alaska projected oil prices at $105, reports the Christian Science Monitor.

Colorado, which has a more diverse economy than nearby states like Wyoming and North Dakota, won't see as big of an impact. New Mexico is projecting a $100 million budget shortfall due to the oil price slump.

Overall, the effects of lower oil prices will take a while to trickle through the economy of oil states. Many states are hoping the slump is similar to the one that hit in 2008 and 2009, where prices dropped but quickly recovered, and the industry didn't feel too hard of a pinch. At this point, though, the future is anyone's guess.