The impact, Spenser Sanders said, was almost instantaneous.
The spread of the coronavirus was already steadily draining international demand for crude when the world’s major oil producing nations gathered in Vienna, Austria March 5 for an OPEC+ meeting.
The Saudis proposed across-the-board production cuts to help buoy sagging prices. The Russians refused. The Saudis retaliated, slashing prices and ramping up production.
The market collapsed.
By Monday, three days later, the U.S. benchmark, West Texas Intermediate Crude, hit $27.34, down 25% from the week before and almost 50% from the start of the year. Due to transportation costs, Wyoming producers take home a few dollars less.
“I was doing corporate sales down in Denver two days after,” said Sanders, co-founder of Complete Heat Frac Services. “I couldn’t even get to people, because everybody was in their panic room meetings.”
“Everybody I talked to in (exploration and production) companies said they’re reevaluating budgets,” he added. “Just off the top, many of them are slashing their 2020 operating budgets.”
According to the Petroleum Association of Wyoming, each time a dollar is sliced off the price of oil, the state sustains a $12.5 million annual loss.
Locally, oil was behind almost 15% of the property and production taxes paid to Johnson County in 2018.
The next OPEC+ meeting isn’t scheduled until June. On March 11, research and data firm Rystad Energy predicted that global oil supply will continue to increase for at least the next three months – and that will continue to push prices down.
Prices edged up mid-week, then stumbled. They lifted again Friday as President Donald Trump announced purchases of domestic oil to top off the nation’s Strategic Petroleum Reserve. They fell back down over the weekend. At press time, WTI crude was selling at $28.44, a bit more than half of last year’s average closing price.
It’s not enough for Wyoming.
In the Powder River Basin, operators must average about $59 across the typical well’s life cycle in order to turn a profit.
That price accounts for wages – to roughnecks, truck drivers, welders, mechanics, geologists, environmental specialists and engineers. It pays state and county production taxes. It buys materials and equipment – and pays for the local sales tax on those purchases.
The price collapse came just as Wyoming’s legislators put the final touches on the state’s budget for the next two years, one already slated to lean heavily on reserve accounts. Lawmakers made no significant changes to the budget before departing Cheyenne, although several later said that if the crash came before the session, it might have been a different picture.
Brian Law, a business development professional for Prima Exploration, one of the county’s top oil producers, said his company has some short-term strategies available.
“Some (wells) have a higher economic margin than others,” he said. “There’s a mix of those properties that we have in Johnson County, and some are definitely incurring losses now. We’re trying to kind of leverage those more valuable wells at this point.”
They’re filling storage tanks – but, Law said, each tank can only hold so much.
“We didn’t have a drilling rig going,” he added. “If we did have a rig going, it certainly would have been laid down by now.”
Wyomingites know the cycle of boom and bust.
Industry experts warn that this crash could be different.
It’s not just a supply problem, like it was in 1985, when OPEC reversed production cuts, flooding the market with excess supply and pushing down prices.
It’s not just a demand problem, like it was in 2008, when prices crumbled amid the deepening financial crisis.
In 2020, a global price war has synchronized with a global health crisis. Markets face the squeeze from both sides.
“Even if the Saudis and the Russians did come to an agreement, how much could prices go up?” said Robert Godby, director of the Center for Energy Economics and Public Policy at the University of Wyoming.
According to a March 17 Goldman Sachs report, oil demand had dropped by 8 million barrels a day, roughly an 8% international decrease.
In 2018, mineral industry purchases accounted for more than 15% of Johnson County sales tax collections. The industry provides more than one in 10 local jobs, and is the county’s second-highest paying sector. Employees spend their paychecks in local restaurants, on new homes in the area, or to rent a student’s labor at the latest FFA fundraiser.
Those figures account for all types of extraction, and over the past two decades, natural gas dominated Johnson County production. That’s changing. As aging coalbed methane wells sputter out, oil’s share is steadily increasing.
“Normally, at this time of the year you feel a little bit of rising demand (for oil) as people start to anticipate the spring and summer,” Godby said. “If you don’t have activity in oil and gas development, it’s going to hit your hospitality sector or your accommodation sectors.”
That’s where the local economy faces an additional squeeze from COVID-19. Tourism accounted for roughly 25% of Johnson County’s sales tax dollars over the past five years, and statewide it’s Wyoming’s number-two sector.
Typically in an oil market downturn, low fuel prices incentivize travel and business investments, naturally lifting demand. This time, however, as health authorities increasingly recommend that people not stray from their homes, let alone across state lines, any rebound is far from certain and far away.
Forecasting the future
The last time oil dipped below $30 a barrel was at the beginning of 2016. Prices declined steadily, from more than $100 a barrel in mid-2014, due to elevated supply caused in part by increased U.S. shale production.
By June of that year, prices were back above $50, but 2016 oil production in Johnson County was halved from the year before.
If prices could recover quickly, Godby said, 2020’s rapid crash might not be as damaging. Many companies have price and production contracts locked in for a month or two, delaying immediate impacts. A slow price decline also incubates a general atmosphere of pessimism among investors and executives not yet present after the recent shock.
“Before you got to the bottom of the market (in 2016), you already had producers dropping out,” Godby said. “The longer this goes, then the more likely it is that (companies) are going to be impacted by current prices, as opposed to past prices. They’ll start moving forward and have to make assumptions about whether the price is going to go back up or not.”
“We have leasehold shutdown provisions that we have to keep in mind, which typically offer a 90-day, shut-in period,” said Law, of Prima Exploration. “If you don’t continue producing after that, then you’ll lose your lease. We’re trying to make decisions based off a little bit higher oil price, and with that we’re gonna incur losses in some areas in order to hold those leases.”
“Suspending drilling programs is probably going to be the first thing, just relying on what has already had some cost in it,” said Ryan McConnaughey, director of communications for the Petroleum Association of Wyoming, of the decisions that his members face. “That could mean (lost) employment. You just never know. It’s really up to each individual business on what works best for their business model.”
Their options will also critically depend on whether investors can maintain confidence in shale oil.
The stock prices of two of Johnson County’s largest publicly traded producers, Whiting Petroleum and EOG Resources crumbled to half of their former value over the last month.
“There’s been a lot of money borrowed, and fundamentally speaking, (shale producers are) not making big margins,” Godby said. “And the concern right now is with these lower prices, will they be able to maintain their debt payments?”
Wyoming counties were able to secure more protection against company bankruptcies during the legislative session that ended March 12, but those changes won’t take effect for several years.
A frac’ed well costs as much as $10 million to complete. Initially, they’re incredibly prolific, but like a new car leaving the dealership lot, their value drops quickly. According to recent government statistics, average production drops after the first year by more than 70%. If companies want to keep making money and service their debts, they have to keep drilling – and must find the capital to finance that activity.
“It’s kind of like the coronavirus for people,” Godby said. “If you have pre-existing conditions, this can be a lot deadlier to you than if you didn’t.”
Complete Heat’s Sanders is still trying to be optimistic. He started his business in the post-2016 recovery, and built it around an ethic of efficient, lower-cost services.
“Hopefully, that will benefit us,” Sanders said. “But the thing is, there’s just going to be so much less work to go around.”
“A lot of people are scared,” he added. “I mean, I’d be lying if I said I wasn’t scared. I just try and stay confident.”
At Prima Exploration, Law said there are no planned layoffs or major local production cuts.
“We’re still gonna produce those assets, and keep our people, keep our services employed there and keep people coming out,” he said. “It’s gonna be a tough, tough year for energy in the U.S.”