Low Gas Prices Double-Edge Sword For Wyoming
It’s lunchtime in Douglas, Wyoming and the line of cars at the McDonald’s drive-thru wraps around the building. A hiring poster hangs in the window and the parking lot is full. Leaning out the window of his black pick-up truck, Troy Hilbish says he had no idea oil prices have fallen more than a quarter in recent months. But he knows what falling oil prices mean.
“If the oil prices go up, we drill more," he says. "If they go down, we don't drill as much.”
Hilbish is a toolhand for the oilfield servicing company Schlumberger and he’s seen oil crash before. "I ended up picking up a second job and worked on a drilling rig, which was pretty tough. I got two hours of sleep for three days out of the week,” he says.
So far, things aren't that dire. But if oil prices stay low in coming months, it could be a problem for shale oil, which is fueling development in the eastern part of the state. Shale oil is more expensive to drill for than conventional oil, so prices have to stay relatively high for it to be profitable.
“Nobody around here is in a panic mode by any means," says Jim Willox, the chair of the Converse County Commissioners. Like his counterparts in Texas and North Dakota, Willox says so far, lower prices haven’t led to discernible slowdown.
“Right now, I think there’s 18 rigs in Converse County that are exploring," he says. "That’s one of the highest numbers we’ve had. We’ve sat at 10 to 12 to 13 for a while, and now all of a sudden we’ve got 18.”
Which is why, he says, most people are still talking about how much more drilling there’s going to be -- not whether it’s going to slow down. But Willox knows that historically, energy booms do go bust. “Nobody knows where we are on the curve," he says. "Are we still on the upward curve? Have we peaked? Have we plateaued? Nobody really knows.”
There's no detailed study of the “break-even” price for Wyoming shale oil -- when it becomes unprofitable for companies to keep drilling -- but most estimates are in the $70-80 range. Patrick Fleming, a lecturer in energy trading and hedging at the University of Wyoming, says that means if prices stay where they are right now for more than a few months, it could be a problem.
“It will be very difficult for a lot of these high-cost shale producers to continue to expand and produce the amount of oil that they have been in the past,” he says.
But even more than the price, the newness of shale activity in Wyoming might play against it.
“If you a CEO of one of these companies and you say okay I have this $8 billion to spend, at $80 you’re going to be much more conservative than at $100, and that’s just human nature,' Fleming says. "So, would new well curtailment happen? I would say absolutely.”
If that turns out to be the case, Wyoming may need to revise its revenue projections. The current state forecast is for oil to hover around $85 a barrel for the next few years.
“Does it make us nervous when it goes below that?" asks Dan Noble, director of Wyoming's Department of Revenue. "Sure it does.”
But, he adds quickly -- he doesn’t expect prices to stay low. If they do, Noble says the state has been conservative in its production estimates.
“When they produce more, even though it may be at a lower price, you have another opportunity to actually reach your financial goal,” he says.
If prices stay low and production doesn’t exceed expectations, Noble says the state’s Consensus Revenue Estimating Group will have a chance to revisit its numbers in January, before the legislative session.
“It’s a heck of a lot less damaging to the state’s budget if we miss it on the low side than if we miss it on the high side.” he says, adding that the state has millions in investment revenue that doesn’t get counted in the budget forecast. So, he’s not terribly worried one way or another. Neither is Jim Willox, the county commissioner.
“If we develop it at a slower pace, that's fine. We can deal with it better,” he says.
But for workers like Troy Hilbish, a slower pace also means fewer jobs. He’s based out of California, but wants to move to Wyoming.
“I have six kids, a wife. I think family life up here would be better,” he says.
But he might want to wait a few months -- and keep an eye on the price of a barrel of oil -- before making that decision.