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‘Strippers’ Pose Dilemma for Oil Industry

‘Strippers’ Pose Dilemma for Oil Industry thumbnail

Steve Plants, vice president of Plants & Goodwin Inc. in Shinglehouse, Pa., still pumps crude oil from wells drilled in the 1890s.

But with the price of crude below $50 a barrel, some of those low-producing wells, known as stripper wells, don’t turn a profit. Mr. Plants has permanently closed 10 wells, he says, and plans to plug another 10 by the end of the year.

“We’re losing money every day,” said Mr. Plants, who operates about 200 wells in Pennsylvania and New York. “If we were pumping wells every day, we might be pumping them once a week now,” to save on costs.

Mr. Plants, and thousands of individual operators like him, could turn out to be a key element in ending the oil-price rout, rather than a large producing country like Saudi Arabia or a big public company. A sharp drop in stripper-well output, currently estimated at a million barrels a day, or 11% of total U.S. production, would be nearly impossible to observe as it happens, but it could still shrink the glut that continues to weigh on prices, surprising the market, analysts say.

An oil pump at a Plants & Goodwin well in Wellsville, New York. ENLARGE
An oil pump at a Plants & Goodwin well in Wellsville, New York. Photo: Nick Brandreth for The Wall Street Journal

While investors are closely watching public companies for signs of when crude production is set to slow, many are ignoring the country’s 400,000 stripper wells, most of which produce less than five barrels a day. Stripper wells—so called because they “strip” the remaining oil out of the ground—are mostly aging ones that continue to produce oil, but at much lower rates than when they were drilled.

In some states, including Illinois and New York, stripper wells account for all, or most, oil output. With oil prices still near six-year lows, stripper-well operators are facing new pressure to let damaged wells lie dormant, or even shut down production.

If oil prices fall back below $40 a barrel and stay there, half of stripper-well production could be shut down, said David Pursell, managing director at Tudor, Pickering, Holt & Co., a Houston investment bank. The U.S. oil benchmark on Friday lost 70 cents, or 1.5%, to close at $46.05 a barrel on the New York Mercantile Exchange.

“If you saw half-a-million barrels a day of stripper-well production come off line at the end of the year,” he said, “the market would tighten earlier in 2016.”

ENLARGE

These aren’t the newer, horizontal wells used to pump water into shale-rock formations, releasing a tide of oil that has driven U.S. production growth in recent years. In contrast to low-producing stripper wells, shale-oil production accounts for 60% of the country’s output. Offshore wells in federal waters make up 16%.

When oil prices collapsed to nearly $10 a barrel in 1986, half of the country’s stripper-well production was estimated to have been shut in, according to the Rapidan Group, an energy-advisory firm.

A loss of stripper-well production would easily be overshadowed by a big pullback from some U.S. shale-oil producers or the Organization of the Petroleum Exporting Countries. Total U.S. oil production has fallen from a peak in April, the Energy Information Administration said last week, due to a sharp decline in new drilling that started in late 2014.

Still, this preliminary data often fails to include the smallest companies, meaning that a drop in stripper-well output wouldn’t show up right away.

“You’ve got wells out there in the middle of nowhere that just about no one knows about,” said R.T. Dukes, research director at the consulting firm Wood Mackenzie. “You might not know the barrels have been shut in for a year.…It’s something that happens at a very micro scale, at the smallest operators in the U.S.”

Mr. Pursell estimates that the average stripper well costs $2,000 a month to operate, mostly due to electricity and water disposal. At that price, a well that produces two barrels a day would need to earn more than $33 a barrel to make a profit.

Many stripper well operators already earn a few dollars less than the benchmark U.S. oil price, due to transportation costs. Nelson Wood, chief executive of Wood Energy Inc. in Mt. Vernon, Ill., said he earns $7 or $8 less per barrel than the Nymex price. Mr. Wood laid off seven employees in the last month and says he might shut down some of his production if prices fall again.

“We’re certainly approaching the margins where it won’t make sense,” said Brad Gill, vice president of Chautauqua Energy Drilling Inc. in Westfield, N.Y., which operates about 100 wells. Chautauqua planned to drill between five and 10 wells in Pennsylvania this year, but an investor pulled out due to low oil prices, Mr. Gill said.

In Frankfort, Ky., Cumberland Valley Resources LLC has laid off one employee and may cut more staff, said co-owner Rudy Vogt. The company operates about 200 oil wells in eastern Kentucky, some of which are nearly a century old.

“We could survive at $50. $40, we’re losing money,” Mr. Vogt said. Shutting wells would be a measure of last resort, as halting production costs money and the company might be unable to restart the wells if prices rebound. “Everybody’s going to have to decide whether to make the payments or close the door,” he said.

To be sure, plenty of production is still profitable at current low prices. Cantrell Energy Corp., which operates 150 stripper wells, says its wells cost between $10 and $30 a barrel to operate. The company hasn’t stopped any of its production and is looking “awfully hard” to buy new wells, said Blake Cantrell, president of the Ada, Okla., company.

“There are a lot of our contemporaries in the business that aren’t going to make it,” said Mike Cantrell, a partner at Cantrell Energy and chairman of the National Stripper Well Association. “We’ve got an oversupply situation, and it isn’t going to be a quick turnaround.”

WSJ



31 Comments on "‘Strippers’ Pose Dilemma for Oil Industry"

  1. Fat Lady on Mon, 7th Sep 2015 8:32 pm 

    With %70 of oil in the US coming from stripper wells and fracking I would say the US is in for it, in the not to distant future.

  2. Makati1 on Mon, 7th Sep 2015 9:46 pm 

    Fat Lady, that was an understatement if I ever heard one. LOL

  3. Truth Has A Liberal Bias on Mon, 7th Sep 2015 10:01 pm 

    I’m interested to see how USA collapses. I’m wondering if it will be a Balkanization. Texas seems to have a radical streak of independence so that’ll probably be the first to declare independence. There are so many lines of division to choose from. North vs South, in the civil war era sense of the term, Black vs White vs Hispanic vs everything else, rich vs poor, right vs left, rural vs urban. Americans haven’t had a common cause for a few decades now and in lack of that a common enemy, as portrayed by Fox News, seemed to suffice. But even that isn’t working so well anymore. There’s just not much holding America together accept notions of superiority and exceptionalism, and that rings increasingly hollow. Given the quantity of firearms and all the angst I’d say you chaps will no doubt rip yourselves apart.

  4. GregT on Mon, 7th Sep 2015 10:11 pm 

    “I’m interested to see how USA collapses.”

    As we all should be, because when the US goes down, we’re all headed into the ‘darkest’ ages that humanity has ever experienced.

  5. Truth Has A Liberal Bias on Mon, 7th Sep 2015 10:51 pm 

    Berman is spot on. As usual.

    http://www.artberman.com/rig-productivity-is-a-red-herring/

    I’m sure the shale oil cornies, aka NonyMarm, will be on here shortly to talk about how things are just so frickin awesome on the shale-patch.

  6. Davy on Tue, 8th Sep 2015 6:04 am 

    Biased and not True, just wait and enjoy your popcorn because a day after the US collapses Montreal is toast. All of Canada is toast. The hordes of US migrants will overwhelm your small country. You will be sleeping with Americans all around you dip shit. BTW, you anti-Americans are going to be so frustrated that the US may be the last man standing. That is what I will enjoy. Asswipes, like you Biased and Not True from Montreal will be so upset as your life then falls apart. At that point you won’t care because your worries will be with food finding not mental puking. The US is going down but probably after many other dumb ass counties.

  7. rockman on Tue, 8th Sep 2015 6:19 am 

    Actually they also need to keep an eye on those Hz shale wells. I’m not familiar with production costs for the Bakken but the late life eagle Ford wells produce a lot of water which does run the LOE (Lease Operating Expense) up. In old stripper conventional fields that produce a lot of water they typically have their own water disposal wells (SWD wells) with injection costs running around $.25 to $.40 per bbl. But if you have to have the water hauled to a commercial disposal well the cost can run between $1.60 to $3.00 per bbl. SWD wells are typically more expensive to drill then an oil producing well so they tend not to be economical to drill for just a well or two on a lease. Thus the problem with EFS wells: lack of concentration on an operator’s lease.

    I don’t have a handle on EFS SWD cost but will ask around. But a lease with half a dozen stripper wells and its own SWD well might remain profitable making 40 bopd at $50/bbl while a single EFS making 40 bopd and having to haul its water might not have a positive cash flow at $50/bbl. And this potential problem could be worse due to many EFS operators unable to service their current debt and thus making it more difficult to continue producing marginally profitable wells.

  8. Hello on Tue, 8th Sep 2015 6:28 am 

    Truth says: “There’s just not much holding America together”

    Unfortunately you are right. Wholesale import of 3rd worlders with absolutely no connection and no history to the nation is not helping either.

  9. shortonoil on Tue, 8th Sep 2015 6:48 am 

    With oil in the $40/ barrel area it doesn’t seem likely that the industry will make it to the 2030 “dead state” point projected by the Etp Model. The assumption that shutting in wells is going to sharply drive prices up is flatly incorrect. When wells are shut-in, so also is the demand that they created. It requires energy to produce oil, when production is curtailed so also is the demand that they generated. Shutting in strippers wells is just an indication that the economy can no longer consume all the oil that the industry can produced.

    The world is now in the cannibalization stage. The point where it must convert its assets into consumables to survive. The efficiency with which that conversion takes place will determine how long any semblance to modern civilization will continue?

    http://www.thehillsgroup.org/

  10. Davy on Tue, 8th Sep 2015 7:52 am 

    Short, cannabalism and I add systematic atrophy. As the global economic system falls below its optimum growth equilibrium entropic decay will overwhelm real growth. The Freddy fluff charts and the news talking head snake oil salesmans will still show growth for marketing purposes but real aggregate growth the kind that support a society is over. Economic abandonment, dysfunctional node networks, and irrational attitudes and policy will increasing be the result.

    I second your question with the energy descent and apply it to the systematic. How long can this process go on? Descent and decay being characterized by randomness and turbulence makes useful prediction much more difficult than growth.

    What is more important is the human aspect of this all. How long can confidence and cooperation hold with a sinking ship. Confidence and cooperation is the basis for economic liquidity. Without liquidity economic activity will grind to a hault. Economic collapse leads to food and fuel shortages.

    That is the key to collapse. How long can adequate food and fuel supplies hold out to maintain the basics of civilization.

  11. Nony on Tue, 8th Sep 2015 9:36 am 

    Shortonoil says: “When wells are shut-in, so also is the demand that they created. It requires energy to produce oil, when production is curtailed so also is the demand that they generated.”

    This is silly. The diesel used to drive the stripper pumps and haul the water is a tiny fraction of the oil generated. Diesel prices have fallen pretty much along with crude prices. The issue is labor, electricity, chemicals prices which have not. Along with machines, parts, trucks, etc. which also have not.

  12. Nony on Tue, 8th Sep 2015 9:44 am 

    Rock, Bakken’s water ratio is 50% or less. Not that bad in the scheme of things and better than most Texas wells, I think.

    See Figure 01 in this link: http://peakoilbarrel.com/will-bakken-red-queen-outrun-growth-water-cut/

    Note the oil ratio is going up by year. Not sure why although fluid pumped downhole during fracking has been going up very substantially.

    There is some work on central water handling systems. Obviously pad drilling helps with this. Not sure the extent, how it compares to the Eagle Ford (or Permian).

  13. BobInget on Tue, 8th Sep 2015 11:23 am 

    In fact, WW crude oil consumption is rising.
    Slower then predicted last year but still going higher.
    INDIA
    rofit.ndtv.com/news/economy/article-indias-oil-imports-dependence-may-hit-90-in-2-decades-report-1211991
    Oh yes, even China.. August 2015 imports GROWTH was off but actual consumption, going up, just not as fast.
    http://www.valuewalk.com/2015/09/oil-demand/

    Today’s China numbers showed weak import and export growth.

  14. rockman on Tue, 8th Sep 2015 11:34 am 

    Nony – Yep…tricky to find the details. And there’s an odd dynamic that can keep some strippers alive: A well might lose $100/month but plugging it might coast an operator $5,000 to $10,000. It can be easier to eat $100/month loss for some time then to write that big check. Additionally the operator can keep the lease in effect while praying for higher prices.

  15. Boat on Tue, 8th Sep 2015 11:34 am 

    short,

    The assumption that shutting in wells is going to sharply drive prices up is flatly incorrect. When wells are shut-in, so also is the demand that they created.

    Except demand is growing. The inconvenient truth.

    Shutting in strippers wells is just an indication that the economy can no longer consume all the oil that the industry can produced.

    That is true short. But, demand continues to grow because of the low prices of oil even faster. In a glut the highest cost producer is the one who gets hurt the most.

  16. Boat on Tue, 8th Sep 2015 11:43 am 

    Rock

    ,A well might lose $100/month but plugging it might coast an operator $5,000 to $10,000. It can be easier to eat $100/month loss for some time then to write that big check.

    That makes a lot of sense. Tks for the incite.

  17. BobInget on Tue, 8th Sep 2015 12:00 pm 

    If some here are predicting US collapse, I take that as a bullish sign.
    Maybe you’ll are just disappointed.

    Those oil companies who dared increase CAPEX, put more rigs out in the face of falling oil prices weren’t so dumb after all.

    Listen, I know we are in a bear market. Oil prices
    are what set the pace for the bear.

    Strike me if I need to type once again;
    “Saudi Arabia, all his allies, are at war with Iran and all his allies”. That’s a fact.

    Apparently, very few here or there, understand how serious a matter this is. It’s life and death
    for Russia and Saudi Arabia. A bit of finagling
    with oil prices to drive out weak hands is one thing, wars are something else. Saudi Arabia and his Gulf buddies changed the equation invading Yemen. Maybe they thought air power alone would do the trick. This is like saying a BJ isn’t sex.

    All sides are weaponizing the one commodity none of us can manage with-out…. Unless.. we shift to gas.

    Afghanistan was/is all about gas pipelines.
    But, you knew that.
    Syria is all about Russia’s hold on European gas markets. Pipelines through Syria could deny Russia a good chunk of Europe.

  18. Nony on Tue, 8th Sep 2015 12:05 pm 

    Abandonment cost concept was discussed in the article:

    ““We could survive at $50. $40, we’re losing money,” Mr. Vogt said. Shutting wells would be a measure of last resort, as halting production costs money and the company might be unable to restart the wells if prices rebound. “Everybody’s going to have to decide whether to make the payments or close the door,” he said”

  19. Boat on Tue, 8th Sep 2015 12:28 pm 

    Bob,
    It is interesting that Syria gets oil imports from Iran. If the Americans are such killers wouldn’t they take out all imports, electricity, refineries etc?
    This is is why I don’t call it war in the middle east. More like managed conflicts.

  20. BobInget on Tue, 8th Sep 2015 1:32 pm 

    Boat, It’s important you bring up bombing gasoil infrastructure.

    What we have here is classic oil war.
    Once one side, (sides with real flags) or the other, starts to actually destroy pipelines, refineries, they kick themselves in the shins.
    It seems without oil, it’s damn hard to run wars.

    Anyway, it doesn’t pay to destroy oil infrastructure if you think you will one day capture it. (same reason poor whites vote Republican)

    Throughout the Iraq war there were web sites
    devoted entirely to recording pipeline explosions.

    http://www.iags.org/iraqpipelinewatch.htm
    (the best one)

    (we had a pool for where and when the next pipeline attack would come)

    The long and short of it… Nations with actual
    skin in the game don’t blow-up each other’s oil infrastructure. That’s a job reserved for ‘terrorists’.

    Having said that, Syria was once a minor oil exporter deriving a good portion of its income from oil. Syria, like Libya and Iraq are no longer processing (refining) enough oil to feed themselves. In Nigeria, thieves ‘refine’ light oil by cooking it over fires.There are still hundreds of such home refineries. Keep in mind there are still areas in Southern Nigeria untouched by civil war.
    In Syria and Iraq that’s no longer the case.

    Oh, BTW, How did we do in that recent Iraq oil war? Did we destroy those weapons of mass distraction?

    What no one will tell you, oil is a weapon.

  21. BobInget on Tue, 8th Sep 2015 1:48 pm 

    AGW getting in the way of killing.
    http://www.nbcnews.com/science/space/nasa-snaps-image-massive-middle-east-sandstorm-space-n423521

    (Snip)
    “The air is so dense, and visibility so low, it’s even disrupted the fighting in war-torn Syria”.

  22. ghung on Tue, 8th Sep 2015 2:01 pm 

    “‘Strippers’ Pose Dilemma for Oil Industry”…. One too many lap dances and your grunts don’t show up for work, eh?

  23. shortonoil on Tue, 8th Sep 2015 4:40 pm 

    “Except demand is growing. The inconvenient truth.”

    Production is falling (US production down 1.4% EIA), inventories are building (up 7.6 mb API), and the price is down 65% from the January 2014 high. If production is falling, and inventories are growing how do you get that there is an increase in demand? The inconvenient truth is that you are logically, and mathematically challenged!

  24. Nony on Tue, 8th Sep 2015 4:50 pm 

    Imports going up.

  25. Cloud9 on Tue, 8th Sep 2015 6:39 pm 

    If a tripper produces more energy than it takes to pump and refine the oil, would it not be possible for some of these wells to fuel a localized economy? Images of the original Mad Max oil refinery come to mind.

  26. apneaman on Tue, 8th Sep 2015 6:55 pm 

    cloud, this looks Mad Max to me and I could easily see it as a sad, post collapse, future for many.

    Syria’s Illegal Oil Wells

    http://www.vice.com/video/syria-syrian-oil

  27. buddavis on Tue, 8th Sep 2015 6:58 pm 

    this is not the first downturn and these operators run a pretty lean shop. These stripper wells may have been producing 1-2 bopd for decades. . They also operate hundreds of wells. I will be surprised if any meaningful reduction comes from shut-in or plugged wells.

  28. Kenz300 on Wed, 9th Sep 2015 9:02 am 

    High cost producers going broke…… slowly or quickly….. they still are going broke….

  29. Ted Wilson on Wed, 9th Sep 2015 6:52 pm 

    Ohh – So 60% of the US production is coming from Shale which involves Horizontal drilling. If these wells were shut at the continued price of $40 / barrel, then US production will fall by 40%.

    Interesting, there is lot of talk about Oil industry takeovers because of cash crunch.

    If the Natgas is used to replace Oil in power generation and heating, then the price of Oil will not be able to rise fast. That will sink the shale oil.

    Talk about Exxon takeover of Chevron.
    http://blogs.barrons.com/stockstowatchtoday/2015/09/09/yes-exxonmobil-could-buy-chevron/?mod=yahoobarrons&ru=yahoo

  30. rockman on Thu, 10th Sep 2015 6:38 am 

    cloud – “If a tripper produces more energy than it takes to pump and refine the oil, would it not be possible for some of these wells to fuel a localized economy?” That depends on how you define local. China does have a number of “teapot” refineries that do what you’re suggesting. But the US has none. US refining is done on a massive scale. Remember the obvious: folks don’t consume oil…they consume refined products. And no one is going to build small refineries that can compete with the purchasing power of the big boys. Think in terms of auto production: can a company build a few thousands cars (or millions) per year and compete with the big companies that build hundreds of thousands per year?

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