The Shale Revolution Is Changing Fast… And Wyoming Is Vulnerable

Feb 7, 2020

On January 27, oil and gas company Southland Royalty Company filed for bankruptcy. Wyoming's 15th largest natural gas producer said in a filing, "the debtor has suffered from the industry's general and sustained decline over the past several years." It went on to say the company would be taking drastic measures to get back to profitability.

It's becoming a familiar story as natural gas prices fall to their second lowest point in a decade, creating a glut in the market. The prices aren't compatible with paying off debts said Buddy Clark, a partner with the law firm Haynes and Boone LLP, so some companies are holding off from producing.
 

Henry Hub Pricing with averages in each month plus the $1.87 spot price today.
Credit U.S. Energy Information Administration

"Stakeholders are maybe deciding it's better to just take their losses now and get what they can off the table and not try to continue to keep these producers lights on without any hope of ultimately getting repaid," Clark said.

In Wyoming, several other companies are also feeling pressure. Ultra Petroleum, the state's largest natural gas producer, has suspended operations through 2020, meaning it not do any new drilling. Pinedale Energy Partners has suspended drilling. Jonah Energy is spending less money and plans to slow down production. Those three companies alone account for 54 percent of Wyoming's natural gas, according to Jonah Energy.

Outside of Wyoming, 42 U.S. and Canadian oil and gas companies filed for bankruptcy in 2019 - a sharp uptick from the year before. Buddy Clark said he expects bankruptcies to continue because the market is changing.

"We are experiencing a transition from the original shale revolution to a more mature industry, where the producers now understand much better the reservoirs that they're drilling into. How to complete them and how to produce them," he said.

For years, the name of the game was "Drill Baby Drill" meaning keep exploring, producing, selling, then repeat. But Clark said, these days, that approach is too risky. In 2015, investment was strong, but then many companies went bankrupt. Then in 2017, investors got confident again.

The chart signifies producers are getting very little cash from public investors and increasingly have diminished access to those markets.
Credit Haynes and Boone Energy Roundup, Fall 2019

"They jumped back in with both feet, invested a lot of money and then they got burned again," he said.

Burned again, as in 42 companies went bankrupt last year.

"The market is telling producers, we're not going to be fooled three times. You guys either have to be a positive cash flowing business or you're not going to get our dollars invested in your company," Clark said.

So, the fracking-horizontal drilling combo that brought on the shale revolution is making a transition. Clark hopes it will lead to more stability.

"Shale 2.0 is going to be a little bit less of the wildcatter-cowboy mentality and much more of the methodical manufacturing process. That should lead to a little more predictable returns on investment," he said.

Getting there though is less easy. Paul Ulrich, Vice President of government and regulatory affairs at Jonah Energy, said, right now, his company can't afford to drill much.
 

Map of Jonah's operations in Sublette County
Credit Jonah Energy

"You'll see an overall production decline and in our expectation, in 2020, based on a limited drilling program, is a decline in production," he said.

With similar moves from companies in the area, Ulrich estimates overall natural gas production will decline 15 to 25 percent annually in Wyoming likely until prices bounce-back. And while the entire country is feeling the low commodity prices and lack of investment, Ulrich said Wyoming is particularly vulnerable.

"We're an export state. We're quite far from markets that are meaningful, our supply cost is higher due to our remoteness, our cost of getting the gas to market is higher," he said.

Steve Degenfelder, spokesman for Kirkwood Oil and Gas, said there's also disadvantages on the bottom line in Wyoming having to permit wells on federal land.

"It forces operators who have drilling rigs under contract to, in some cases, drill wells where they don't want to… but they can get a drilling permit" he said. "In some cases, they have to locate their wells, these horizontal wells, closer together."

Over the past decade, natural gas production has fallen nearly 40 percent in Wyoming. Paul Ulrich said those multi-year low prices and reduced production will be noticeably tough for the state of Wyoming in the short-term and not just the companies.

"It doesn't take a mathematician to put the numbers together that Wyoming as a whole is going to have significant reduced revenues based on our production taxes. That will result in… loss of jobs, and really put Wyoming in a precarious situation," he said.

Buddy Clark, Ulrich, or Degenfelder do not have any idea when prices will improve but Clark said when they do, the focus will almost certainly be about less risk.

For now, Ulrich and Degenfelder hope the state legislature looks at ways to cut taxes and find a long-term solution for the transitioning oil and gas industry.

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