Employment, Revenue Threatened With "Multi-Year Low" Natural Gas Pricing

Nov 22, 2019

Comparison of Natural Gas Production and Price Forecasts.
Credit Consensus Revenue Estimating Group

Natural gas producers in Wyoming are facing a dramatic new normal as prices drop and supply explodes. The state Consensus Revenue Estimating Group (CREG) report estimates natural gas production is falling at similar levels to coal projected to be down nearly 40 percent this year from 2009.

"I would say it's more than a little bit of a slow down. Our forecast shows continued extremely depressed natural gas prices," Paul Ulrich said, Vice President of Government and Regulatory Affairs for Jonah Energy.

He said the impacts are going to be significant.

"We've already seen companies, including the state's largest natural gas producer, lay down their last rig just a couple months ago. The impact of that decision, and that decision alone, will have significant negative impact on tax revenue picture, and certainly employment," Ulrich said.

Ultra Petroleum, the state's largest oil and gas taxpayer, announced in September it's suspending operations through 2020 in response to the downturn. Halliburton laid off employees as well. Jonah Energy is still working through is 2020 plans. 

Officials with Ultra explained its natural gas pricing is near multi-year lows. The hope is that discipline now will pave the way for more productivity when the market rebounds.

"This is an important step in the ongoing efforts to strengthen the balance sheet as well as conserve valuable future inventory for a more constructive natural gas price market," David Honeyfield, Ultra Petroleum’s Senior Vice President and Chief Financial Officer, wrote in a Letter of Intent.

Rob Godby, energy economist at the University of Wyoming, said the reason for the pricing issue is simple: there's too much supply. That's not good for Wyoming producers' profit margins who drill expressly to reach natural gas.

Monthly natural gas spot and future prices at selected hubs
Credit U.S. Energy Information Administration, based on S&P Global Platts

We're competing against places like New Mexico, who basically produce natural gas as a byproduct of their oil operations. And so the natural gas production is effectively free. And that's both flooding the market and also making it very difficult for companies that really only produce natural gas to compete," he said.

As far as a quick turnaround, Godby said that's unlikely barring some kind of technological breakthrough, "but even then, it's awfully hard to compete against producers who are producing natural gas at effectively a zero cost."

Jonah Energy's Ulrich said Wyoming has good pipeline infrastructure, transportation, supply; he agrees with Godby that the challenge is just the cost of producing. He said part of the problem is regulatory.

"Solutions can and should include taking a hard look at our severance tax burden... there is no single solution. But I strongly believe there's a number of things that we can do to put Wyoming back in a more competitive position," Ulrich said.

As far as employment, Ulrich said each rig employs about 108 people. Since mid-September of this year, the rig count had already gone down by three since the same time last year. 

The revenue picture will also likely suffer as new drilling is necessary just to keep oil and gas production at the same levels, let alone an increase, given the natural depreciation rate of a well. 

The U.S. Energy Information Administration found future markets signal lower natural gas prices in most U.S. regions in early 2020.

Have a question about this story? Contact the reporter, Cooper McKim, at cmckim5@uwyo.edu.