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Rig cuts taper

The Permian Basin lost seven oil and gas drilling rigs in the past week, supporting expectations that the industry’s slowdown in the region is beginning to stabilize.

The area had 355 drilling rigs running on Friday, according to the latest count from Baker Hughes. That meant the count stayed relatively flat, after losing just six rigs the week before.

The Houston-based service company only counts rigs with turning drill bits. So the week-to-week change could even reflect rigs still under contract but are simply being moved. Nationally, oil and gas rigs fell by 43 to 1,267. Of those, 33 rigs drilled for oil.

“We are just kind of sliding lower, instead of nose-diving,” said Joseph Triepke, a financial analyst from Odessa and managing director of Oilpro.com. “Down seven is a good thing, and we’ve got two weeks now of small declines. If we get three or four, I think we can definitely say it’s slowed to a crawl.”

There were 211 fewer rigs running on Friday than on Nov. 26. That was a day before already falling prices began to plummet in response to the decision by the Organization of Petroleum Exporting Counties not to cut production quotas despite signs of global oversupply and weakening demand.

The regional Plains-West Texas Intermediate oil price ended at $46.25 on Friday.

That is less than half what it was in the peak month of June. It is a drop that took a severe toll on the ambitions of companies that built themselves up during a five-year-period with an average West Texas Intermediate oil price of $90 a barrel.

Most of that appeared in the first several weeks of the year as oil companies sought to scale back their drilling programs as quickly as possible. The week before last, the Permian Basin shed 49 rigs. Before that, oil companies in the region lopped off 37 rigs.

Reductions are still expected, just at a slower pace. Analyst projections range from 270 to 300 rigs operating in the region before a slow recovery begins.

“The band aid has come off,” said Ben Shattuck, an analyst with Wood Mackenzie in Houston. “We’ll continue to see drops but not at 90 a month.”

Oil prices hovering below $50 mean no oil producer is going to try to explore new fields or take on riskier projects, said Ray Perryman, the Odessa economist who runs the Perryman Group and who recently projected the downturn to last a year and a half or longer before the region’s economic growth continues.

“It doesn’t completely slow the industry down,” Perryman said. “But it has a big impact.”

A daily reminder of that downturn is more than 30 drilling rigs idling in a yard along Business Interstate 20 that belongs to Helmerich and Payne.

Perryman called oil activity an industry with “very big tentacles” in its impact on the broader economy. That impact should manifest in real estate, consumer spending and rents “very quickly.”

“You are going to see that in the next two to three months,” Perryman said. “It doesn’t take long.”

The next test for the region is whether oil companies’ reductions show up in a slowdown of production growth.

The biggest oil companies focusing on the region have announced capital expenditure cuts for 2015 from as low as about 25 percent to greater than 60 percent. But most of the companies also projected production growth of 10 percent and more, in part because of a backlog of wells.

In the meantime, observers expect regional job losses in the thousands.

But determining how many workers have been let go is difficult. Many public companies that have announced layoffs have declined to offer regional breakdowns of those losses.

But the Permian Basin is expected to be one of the hardest hit among the country’s energy production regions.

“What happened, if you look across the entire industry, the service sector included, everyone was trying to get ahead of this massive development of the Permian,” Shattuck said. “And one of the vital constraints to many of these Permian companies’ plans was personnel. So you were hiring ahead of schedule.”

That left more workers to lose in the Permian Basin, already the nation’s biggest absolute producer of oil.

The major oilfield service companies, for example, who make up Odessa’s largest regional employees, announced total global layoffs of about 30,000 people in the past several weeks. Many were expected in the Permian Basin as producers drill and complete fewer wells.

Smaller private companies were expected to lay off employees too.

There are scattered reports of the sudden workforce reductions. The Midland office of driller Patterson-UTI earlier this month let go 200 workers, according to court filings from one of the men, who is suing the company.

The oilfield service company Advanced Stimulation Technologies laid off 69 workers this month “due to the downturn in the economy,” according to a notice filed Monday with the Texas Workforce Commission.

Economic development officials say they will re-double efforts to diversify the economy during the downturn.

“It directly affects us,” said Charles Gibson, a board member of the Odessa Development Corporation. “Unfortunately it’s not only the manufacturing side and the drilling side. It affects all of us.”

Mike George, the president of the Odessa Chamber of Commerce, said he does not anticipate a bust but does see continued suffering in parts of the oil patch workforce. Even though businesses outside of the oil patch have been desperate for workers, George acknowledged that some might have adjusted their lifestyle to boom-time wages.

“The folks that are laid off recently likely will have to settle for making less money,” George said.

 

This article was written by Corey Paul from Odessa American, Texas and was legally licensed through the NewsCred publisher network.

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