Wyoming oil is saving the day, something that hasn’t been said for more than two years. State revenue forecasts are improving. The oilfield service industry is climbing. And the general mood has gone from “cautiously optimistic” to just plain “optimistic.”
Proponents point to high producing wells in the Powder River Basin, a flush of new applications to drill and most of all the rising price of crude as evidence of a turnaround.
The national benchmark price, West Texas Intermediate, eclipsed $65 a barrel last week, the highest it has been since before the bottom dropped out two years ago. Perhaps more importantly, the price has held steady within a favorable band for about six months, encouraging operators and Wall Street alike. The International Monetary Fund recently released projections that global economic growth will be higher than expected, while the national stockpile of oil has fallen for eleven consecutive weeks.
In Wyoming, a state depleted of once robust fossil fuel revenues, the recovery has spurred hope. Oil is just one of the three commodities that tanked in recent years, but its comeback has brought unexpected revenue right before a legislative budget session. The state is facing an $850 million shortfall, depending on how it’s calculated, due to the downturn in coal, oil and gas. That money that goes to schools, the Department of Health and basic government services from Cheyenne to Meeteetse.
The recent oil recovery has been strong in Wyoming and across the country, and for many it’s been surprising. But the resilience of the price rise that made this recovery possible is harder to define. The questions now are ‘How much staying power does the oil sector have?’ and ‘How well positioned is Wyoming’s eastern oil patch to take its place in the global uptick?’ The answers depend on who you ask.
The good, the bad,
The outlook in Wyoming’s oil patch changed dramatically from the middle of 2014 to the beginning of the following year. The price of crude fell by half and it hadn’t held a sustainable price over $55 until this winter.
Phil Flynn, an analyst at Price Futures Group in Chicago said he’s not surprised. He’s been bucking the trend of pessimism for a year.
The best booms follow a time when the market was glutted, he said.
“It’s always the same at the bottom of every cycle,” Flynn said. “People get so bearish and make statements like ‘oil prices will never rise again.’ But they don’t look at what happens when oil prices crash.”
When the prices fell two years ago, billions of dollars in oil investment disappeared, he said. That adds up to expected production that won’t be there, on top of new projections of global demand, he said.
“If the economy continues to go the way it’s been going, we are going to need every drop of shale oil we can get to replace all the oil production investment that we didn’t see,” he said.
But Wyoming has reason to be cautious of the good news, because the price of oil is no less tenuous than it was, some say.
“The fundamental risks are all still there,” said Rob Godby, director of the Center for Energy Economics and Public Policy at the University of Wyoming. “People are paying less attention to those than they did before, and it’s not clear whether they should be.”
Chief among these concerns is that U.S. production is higher than it’s ever been and will only rise, he said.
This boom to bust to recovery is typical of others, Godby said.
The financial market overshoots in one direction, then the other. A year ago, the sector was entrenched in pessimism, now it’s hopeful again.
“What’s going to cause that pessimism to reappear in the market is the question,” he said.
And Wyoming, currently relieved by a stream of oil dollars into dry coffers, is still suffering from the two years of downturn, he said.
“People move from cautious to taking for granted sometimes pretty quickly,” he warned. “The fundamental risks are all still there.”
to make money
One thing is certain; the last six months have heartened Wyoming operators, small to large.
Bill Thompson, vice president of the Jonah Bank in Casper, said his oil and gas customers are in a better financial position now than they’ve been in since the downturn.
Those who were looking for more time to pay back loans are taking money out to expand operations, add trucks and employees. For the banker, the turnaround has been recent, over the last 90 days.
“There is this optimism around town that we are starting to feel,” he said. “It’s got a buzz.”
Jonah finances the smaller projects, existing wells that are no longer economical for major players but that a small company can make a profit from. Their loan amounts go up to about $5 million or $7 million. For Wyoming’s larger projects, it’s either major players like Anadarko and Chesapeake making moves, or it’s mid-sized companies following suit and using private equity money from high-risk, high-return investors. That kind of funding is flowing into Wyoming right now, said Peter Wold, of Wold Oil in Casper.
And it’s necessary for some firms to be able to take advantage of this uptick, he said.
Wold said the renewed optimism is coming from a mix of good news, from the economic growth picture to the business-friendly attitude in Washington.
He expects the price to hold, though it will go through ups and downs in 2018.
Wold is also confident because of the success of drilling in recent months. Wells are producing at astonishing rates, as operators continue to figure out how to tap the complex layers of the Powder River Basin.
“When you start hearing and seeing that type of thing,” he said, “That really lifts your spirits.”
Wyoming’s place in line
Wyoming is not first choice for the increase in oil and gas investment compared to Texas or Oklahoma, but it’s not last either.
“We have oil that’s, relatively speaking, higher demand,” said Godby, the economist, of Wyoming’s sweet crude.
“As oil prices go up, it’s only going to increase the chances that people are going to want to invest in oil,” he said. “And we are one of the places they could do it.”
Once thought of as the next big play, Wyoming lost its shine during the downturn, and operators turned to more profitable opportunities elsewhere. But interest in the state’s many layers of rock has risen.
Operators argue that’s for good reason.
For one thing, the biggest play in the country, West Texas’s Permian Basin, got too expensive even during the low price environment, said Bruce Hinchey, president of the Petroleum Association of Wyoming.
Operators started looking at Wyoming as a deal, and that competition pushed up the cost of buying leases in Wyoming’s Powder River Basin.
“We haven’t seen that in a long, long, long time,” Hinchey said of the $15,000 per acre leases sold in 2017. Companies were dropping millions simply to stake out a claim, he said.
“When you buy a lease like that, you want to make it productive, because you’re spending a lot of money,” he said.
Large companies like EOG Resources, Anadarko, Chesapeake and Devon have all made investments in eastern Wyoming.
Coinciding with the current uptick in price are new strides in the drilling plans that these companies have set up in earlier years.
The Bureau of Land Management released a draft environmental impact statement Friday for a joint oil and gas project between five major players north of Douglas. The 5,000-well project is planned over a 10-year period, and according to BLM’s estimates could generate 8,000 jobs.
Major players like EOG and mid-sized operators like Wold Oil are figuring out the puzzle of Wyoming’s rock. They are drilling horizontally, keeping within a band of oil saturated sediment for up to 2 miles.
“Clearly Wyoming is benefiting a lot from this,” said Godby, the economist, of the oil recovery. “How strong is this? That’s hard to say.”