Operating companies aren’t among the businesses in the US asking for taxpayer dollars to be bailed out due to historic fluctuations in oil and gas prices the past 2 years.
Dry holes are punishment enough, it could be said.
When oil and gas prices crash, overextended economic entities often go away but the hydrocarbons they sought to produce remain in the ground awaiting the next price cycle that enables them to be brought to the surface at a profit.
Oil & Gas Journal’s OGJ200 report had 197 public companies listed for calendar year 2000 (OGJ, Oct. 1, 2001, p. 102).
Of those 197 entities, in 2007 about half were no longer in operation under their year 2000 names. About half were, in testament to their management’s ability to navigate through commodity price cycles.
Here is how executives of two US exploration and production companies describe the interaction of commodity prices and field operating costs and examples of how they have adjusted their operations to respond.
Incidentally, Gulfport Energy Corp., Oklahoma City, and Southwestern Energy Co., Houston, are two of the OGJ200 companies still around since 2000.
Permian basin ‘Wolfberry’
Gulfport Energy scaled back its operations in the Permian basin in late 2008, expecting its drilling and completion costs to drop in correlation with commodity prices.
In the last few days of 2007, Gulfport acquired 50% interest in 8,200 acres from private seller ExL Petroleum LP in the Wolfcamp and Spraberry play, which Gulfport refers to as Wolfberry. Windsor Permian LLC acquired the other 50% interest.
Gulfport and Windsor Permian identified 178 future development locations on the properties and began drilling in 2008. Most of the acreage is in West Bloxom and East Bloxom fields in Upton County in the Midland basin south of Midland.
A 10,200-ft well on 40-acre spacing generally recovers only 3% of the original oil in place, and the companies employ a drilling pattern to facilitate efficient downspacing to 20 acres. About 80% of recovery comes from the Wolfcamp, and total production is 64% oil, 23% natural gas liquids, and 13% gas.
The scaleback came after the companies spudded 29 wells in 2008, James D. Palm, chief executive officer, said in late November.
As commodity prices rose dramatically, wells expected to cost $1.7 million ended up costing more than $2 million. Critical materials such as frac sand became unavailable, and tangibles such as casing and tubing as much as tripled in price.
The companies deferred further drilling into 2009 on the expectation that costs will come down 20-25% in the first half of the year.
“Either commodity prices will go back up, or service costs will come back down,” Palm said.
The scaleback is giving the operating team time to integrate new geoscience information, including extensive electric logging suites, a microstem study, and lots of core. Goal is to better understand the reservoir and improve completion practices.
Fayetteville shale
With gas prices on the skids, Southwestern Energy decided against its initial plan to ramp up activity in the Arkoma basin Fayetteville shale play in 2009 and instead hold drilling at about the 2008 rate (see story and map, p. 32).
Harold Korell, chairman and chief executive officer of Southwestern, sees the seeds of a resumption in Fayetteville growth in the decline in the US rig count in recent months.
The $15/Mcf price of gas caused the current oversupply, he said in early December. Some companies paid $10,000-20,000/acre for land, and those in difficult financial circumstances are overextended and are idling rigs and cutting budgets.
Idling those rigs will help bring supply back in line with demand, Korell reasoned, because of an expected 65% decline in first-year production from the shale wells being drilled in numerous US plays.
The same thing happened in 2000-01, he said, when 400 rigs were stacked and production fell dramatically.
“I think we’re going to see that happen again in 2009,” he said.
Southwestern’s Fayetteville play is economic at less than present prices, but many of the other plays are not and they’re going to slow down. “They have to,” Korell said.