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Rig drop slightest in months

Permian Basin producers last week idled far fewer rigs than in weeks past, even as low oil prices continue to curb industry activity, according to the Friday rig count from Baker Hughes.

The Permian Basin shed two rigs drilling for oil and gas, leaving 290 running and renewing hope that a bottom is near. The rig count Friday is almost half of the peak 566 rigs that drilled in the region in November.

So far, industry and employment officials estimate thousands of oilfield jobs eliminated during the downturn. About 70,000 layoffs are estimated nationwide, according to the energy analytics firm Wood Mackenzie.

The drawdown is driven by regional oil prices hovering below $50 a barrel and has yet to halt production in the Permian Basin, but it has forced service companies to cut costs.

In many cases, those savings come from labor. And employees on rigs and well servicing crews are among the hardest hit.

“We are just doing what is in front of us,” said Clint Walker, the general manager for the well servicing company CUDD Energy Services in Odessa and Midland. “And what’s in front of us is we are trying to reduce our costs and our labor structure in a way in a way that we can go out there and keep the lights on.”

Walker declined to specify how many CUDD employees suffered layoffs in the area but said other cost reductions included pay freezes, reduced bonuses, and pressure on vendors to reduce maintenance and supply costs.

But CUDD and other companies have also attempted to keep employees by cutting overtime. Walker said that strategy also leads to some attrition as employees facing the de facto pay cut leave the company, but the idea is to maintain who they can after the industry struggled with a tight labor market during the oil boom.

Related: In Texas oil town, early signs of economic strain as drilling slows

CUDD’s capital expenditures this year focus on maintaining equipment for fear of not being able to ramp up once prices rebound, Walker said.

“We’re holding our own,” Walker said. “You still have a lot of big fish out there and there’s only so many minnows in the tank. Everyone is going after a lot less work.”

But production continues to grow as oil companies pull back on new exploration and focus instead on the best producing areas.

About 70 percent of the rigs drilling in the Permian Basin are higher producing horizontal rigs, according to Baker Hughes.

Vertical rigs, more often contracted by smaller companies on shorter terms, operate by a different mindset and typically are shed or activated quicker than horizontal rigs, according to Ben Shattuck, an analyst with Wood Mackenzie in Houston, who said further plummets in the horizontal count might be ahead but probably not for long.

“We’ve got to be getting close on the rig counts in the horizontals,” Shattuck said.

Nationally, the oil and gas rig count dropped by 21 to a total 1,048. But the drop reported Friday is less drastic than the last several weeks of declines. The Permian Basin alone shed 19 rigs the previous week.

Wood Mackenzie this week forecast that lower service costs and other efficiencies will add up to about a 30 percent reduction in costs of drilling and completing a well this year, spurring more drilling through 2016.

Analysts look to the rig count for signs that oil production might soon drop as a domestic glut builds and storage capacity lessens at the benchmark hub of Cushing, Okla., threatening another price drop.

But in the meantime, United States production has yet to drop despite declines in the Eagle Ford of South Texas and the Bakken of North Dakota. Permian Basin growth has offset those declines.

The region is expected to add more than 21,000 barrels per day of production from March to April to a total 1.98 million barrels per day, according to the Energy Information Administration.

As evidence of oil companies’ focus on best producing areas, the EIA also expects production of new wells to increase to an average 240 barrels in April, up 38 barrels per well from March.

“The problem is independent producers are essentially concerned about tomorrow’s buck,” said Sandy Fielden, an analyst with RBN Energy. “They are not concerned about a year down the road, because they want a return on their investment. To heard a bunch of Texas producers and tell them to stop producing — well, it ain’t going to happen. They are almost inevitable going to go beyond the market need. They are going to overproduce.”

But the Permian Basin remains attractive relative to other regions such as North Dakota that could suffer because of the additional transportation costs to get crude to market, Fielden said. That could mean that growing Permian Basin production pushes out new drilling and production in other parts of the United States.

But the effect that will have on oil prices remains a source of uncertainty for producers, who suffer a nine-month slide in oil prices driven by signs of global oversupply and weaker than expected global demand.

The regional benchmark Plains-West Texas Intermediate oil price ended at $45.25 per barrel on Friday, after bouncing up and down through the week amid reports of violence in Yemen and a nuclear deal between the United States and Iran that could release more crude onto the global market.

“Unfortunately, I have seen this more than I care to remember, and I don’t like making predictions of when the end will happen,” Walker said. “You just don’t know.”

 

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

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