Crashing oil prices hurting Pennsylvania drillers

OIL CITY, Pa. (AP) — Crude oil prices crashed over the weekend, lending a new meaning to Black Friday for petroleum producers plying their trade in the Pennsylvania oil patch.
“It’s putting a monkey wrench into the industry’s economy. The other side of that is that the rest of the economy is good for consumers in terms of gasoline prices,” said Lou D’Amico, president of the Pennsylvania Independent Oil and Gas Producers PIOGA) that represents drillers and producers across the state.
At the close of last week, global crude oil prices plummeted to their lowest levels in more than four years. The West Texas Intermediate oil, the benchmark crude in the U.S., tumbled to $63.72 a 42-gallon barrel.
The steep slide smacked the price of PennGrade crude oil, the paraffin-rich petroleum produced in shallow wells throughout the four-state Applachian Basin.
Pegged now at $62.15 a barrel, typically a dollar or so lower than West Texas Intermediate, it is the lowest PennGrade price since May 2010 and is far below the 2013 average PennGrade price of $95.70. The one-day drop late Friday was a whopping $7.54, a big change from the average daily up-and-down price movement of 35- to 50-cents a barrel.
The 2014 year has been turbulent for the producers of Pennsylvania’s 11,000 shallow oil wells, also known as stripper wells, legacy wells and conventional wells. PennGrade prices topped the $100 per barrel mark in April, again in June and finally in July before starting a skid that saw the dollar figures sink to the current $62.15.
“It’s a bleak day with the bottom falling out of the oil market,” said Ray Stiglitz, owner of Allegheny Well Services Inc. of Franklin and a longtime oil man. “We’re in a pretty good pinch right now.”
So far in 2014, Stiglitz and his crew have drilled “probably in the neighborhood of 50 to 60 wells,” a workload that made it “a pretty good year,” he said.
“Some of the program drilling, where the money has already been committed, will probably go ahead and carry over into 2015,” he said. “But beyond that, if there isn’t a rebound in the first half of the year, it will really impact things. Drilling for oil and gas, both at low prices, will dry up.”
While a boon to consumers who rely on gasoline as well as heating fuel, the slipping crude oil prices are walloping Pennsylvania drillers and producers.
Drilling activity aimed at shallow oil production has dropped, according to a tally of drilling permits filed with the state. The impact has local ramifications since Venango, Clarion and Forest counties traditionally boast heavy drilling figures. So far in 2014, 264-plus new wells have been drilled in tri-county turf.
Permit applications for new drilling are expected to stall significantly as low crude prices make drilling unattractive, especially for shallow wells. In sharp contrast to deeper oil wells in the Oklahoma and Texas fields, Pennsylvania’s wells are classified as stripper wells, or shallow wells that are marginal producers and eke out 10 barrels of oil or less a day. The average stripper well in Pennsylvania yields less than half a barrel (0.43) of oil a day, or about 18 gallons of crude oil.
PennGrade crude prices follow the global oil price shifts and those have been dramatic in the past few weeks because oil supply is exceeding oil demand.
“The Saudis are flooding the market and trying to make the (U.S.) shale oil uncompetitive,” said D’Amico. “They want to get their market share back.”
D’Amico referred to the 12-country Organization of Petroleum Exporting Countries (OPEC) that met Nov. 27. Members failed to come to a consensus about production cuts, a move that would have reduced market supplies and boosted prices.
“I can’t see the (price) drop continuing, honestly,” said D’Amico. “This is all OPEC has to sell, oil. And they are hurting themselves.”
For Stiglitz, the international oil scenario came as no surprise.
“This whole pricing thing was intentional. I can understand why OPEC is doing this. It’s because they keep losing market share to the shale production in the U.S,” said Stiglitz. “But, something has to give.”
Well aware of how low crude oil prices will play out in Pennsylvania’s petroleum industry, Stiglitz sees beyond the local ramifications.
“The other thing that can’t be discounted is that with the turmoil in the world, you have to wonder if some of this isn’t orchestrated to put pressure on the Russians or on ISIS. One thing is for sure — it is going to create more turmoil because most of the OPEC countries can’t afford to operate their governments with oil this cheap,” said Stiglitz. “So, what will be the political consequences to come out of this?”
One looming threat due to low prices and reduced oil drilling involves refineries, specifically those that refine PennGrade crude oil. The two leading buyers of crude from Pennsylvania oil wells are American Refining Group of Bradford and Ergon Oil Purchasing of Newell, W.Va.
If low prices sap production, that will impact refinery operations that rely on millions of barrels of crude oil from PennGrade producers in Ohio, Pennsylvania, New York and West Virginia.
Two years ago, when strict regulations aimed at deep Marcellus gas and Utica oil operations threatened to derail the smaller producers who were cutting back their operations, the refiners reported they were operating below capacity because of a drop in PennGrade supplies. Low oil prices will further depress production, said D’Amico.
In addition to low prices whipsawing the shallow oil industry, the lack of available acreage for more drilling is cutting into production, said D’Amico.
“The refineries are already at risk because of this problem: where are you going to go to drill for oil in Pennsylvania? When shale (drillers) purchased those rights, they go for deep, not shallow,” said D’Amico. “But they haven’t farmed out any acreage because they are afraid of longtime liabilities related to the shallow oil. Justifiable or not, that limits the areas where producers can can develop reserves. And anything that limits the producers’ drilling hurts the refiners.”
Running alongside the oil price dip is the cost for natural gas. That figure, too, is continuing to move down.
Natural gas prices, important to Pennsylvania’s deep and shallow gas drillers and producers, are stuck below $4 mcf (thousand cubic feet) after enjoying a $6-plus-change range last winter. Pennsylvania boasts the second largest output of shale gas among all 50 U.S. states.
“We’re victims of our own success in the gas market,” said D’Amico. “We have way too much shale gas in the country at this point. We’ve been very successful in developing it and finding reserves. The bottom line is there is just not enough market.”
Good news for consumers
There is a holiday-esque element to falling petroleum prices. A marked-down oil pricetag is good for consumers.
Prices at the gasoline pump fell across the country on Thanksgiving Day due to the jittery petroleum market. The tag was 50-cents lower than one year ago.
Industry analysts suggest that if petroleum prices stay low, a gallon of regular gasoline could drop in price to $2.60 over the next several days. In states with low excise taxes on fuel, the figure could go below $2 a gallon.
In Pennsylvania, a state with a higher than average gas tax, the decline in the pump price may not be as substantial as elsewhere. State and federal taxes add up to slightly more than 60-cents a gallon in Pennsylvania.
Homes and businesses that rely on heating oil for their winter fuel will also see a break in prices. Heating oil is selling at about $3 a gallon, more than a dollar cheaper than a year ago. That price, too, is expected to fall.
Mid-2014 reports indicated West Texas Internmediate crude oil prices would average $78 a barrel in 2015, according to the U.S. Energy Information Administration. It is in the range that shale oil and gas drillers use to decide whether to drill more wells.
However, the federal agency also predicted West Texas oil prices would average $80 a barrel in the fourth quarter of this year. No revised estimate based on the latest price plummet has been issued.
For Stiglitz the driller, it’s a dicey business to forecast where crude oil prices will settle.
“This was a good year but we all kept wondering how long it would go before things broke,” he said. “And then, it did break. Even knowing it would doesn’t prepare you very well for it when it happens.”