OPEC output cut could help local producers

Members agree to reduce production by around 4.5 percent, or about 1.2 million barrels per day.

OPEC’s decision last week to limit its oil output for the first time since 2008 could have a positive impact on the local and statewide economy.

According to the Reuters news service, members of the Organization of the Petroleum Exporting Countries agreed last Wednesday, Nov. 30, to a proposal by member Algeria to reduce production by around 4.5 percent, or about 1.2 million barrels per day.

Additionally, the story reported that Saudi Arabia would take the biggest hit, cutting 0.5 million bpd by reducing their output to 10.06 million bpd. It also reported that Iran would freeze output at close to current levels of 3.797 million bpd and other members would also cut production.  

In a short phone interview with the Breckenridge American on Thursday, a day after the announcement of the cut, local, long-time oil man Paul Prater said he believes the OPEC cut is going to make a great difference for the local industry. He said oil went up $4 a barrel on word of the cut and had already gone up another $1.59 per barrel on Thursday morning, driving the price over $50 per barrel.    

“My thinking is, if it will just come on up and get around $55 or so, or maybe even $60 and kinda settle in there, it would be great,” Prater said. “You never know about OPEC;  next week they might say we decided not to do this and it will drift back down, hopefully not. But, yes, it’s been a tremendous help.”

 He said, as for the local industry, things appear to have stabilized and the bleeding had about stopped. He said that when oil reached $40 - $45 a barrel, it was kind of a “Band-Aid” for the industry.

“You know, I think everybody is making a little money,” Prater said. “We don’t have enough room for growth yet. But, yes, it’s a lot better. People have kind of tightened their belt and got their budgets in line. It’s not great, but it’s better than what it was.”

Alex Mills, president of the Texas Alliance of Energy Producers based in Wichita Falls, said only time will tell if the cut has an effect on the price of oil. He said OPEC has tried to cut production several times before and hasn’t been able to maintain the agreement with each other.

“The proof is in the pudding here,” he said. “If they’re able to reduce their production in accordance with the agreement, then it should have some impact on moving crude oil prices upward.”

Mills said U.S. producers had already made cuts in production. But unlike OPEC, he said, the U.S. cuts were driven by market forces, not an agreement.

“We don’t do it by collusion or agreement,” Mills said. “It’s done by the market place forces dictating. When prices go down, normally production will follow it down until supply and demand equals out.”

He said right now in the U.S. there is still an oversupply in storage, which has kept prices soft. The supply has declined for a couple weeks in a row, Mills said, but the U.S. is still in that upper tier of the oversupply.

He said as far as how much of an oversupply of crude oil there is available world-wide, it’s hard to get extremely accurate numbers because the foreign governments that are producing a lot of the crude oil don’t want people to know how much crude is on the market.

“They think it’s to their advantage to keep those numbers confidential,” Mills said.

Another factor concerning the future oil prices is whether or not Russia agrees to cut back its production. Mills said that although Russia is not part of OPEC, it is one of the three largest producers in the world and definitely has an interest in crude oil prices.

He said, however, that unlike in the U.S., where individual companies decide if they can or will produce during a certain time period, the Russia government calls the shots on production there.

“There’s been rumors that Russia and Saudi Arabia are going to be talking about reaching some sort of agreement. But those have been floating around for a while,” he said.

Mills said increasing demand is the key for long term increase of prices in crude oil and for that to happen, the economy has to pick up which will increase demand.  

He said in Texas crude oil and natural gas production are both down about 6 percent from last year. “We’re off a little bit, but, again, price has been a big factor in all that,” he said.
Mills also thinks the bleeding in the industry has stopped but that it was a severe blow.

He said Texas has lost 99,000 jobs in the past two years in the upstream sector of the industry, exploration, production and service supply sector. He said those numbers do not include the refinery, marketing and transportation sectors of the industry.

“It’s been a big hit,” he said. “Everybody has had to tighten the old economic belt. Unfortunately in many cases, you get down to having to let people go. Companies have adjusted to the economic conditions in effort to stay in business. It’s been painful; it’s been a rough ride.”

However, he said he thinks the job losses have pretty much leveled off and he doesn’t expect to see any more of the large companies doing mass layoffs anytime soon.

As far as what the price of oil per barrel would need to hit in order to get people back to drilling and producing again, Mills said that depends on what part of Texas you are in.
He said that in the Permian Basin people can make a living at the current prices. In South Texas, he said, it will take a $60 to $70 price per barrel in order to get people back drilling and producing again.

As for North Texas, he said it’s cheaper to drill because they are not drilling exceptionally deep wells with the 7,000 and 8,000 thousand feet laterals costing $10 to $15 million. Also, most of the wells in North Texas are vertical and a lot cheaper to drill.  

Mills said when it comes to drilling, it’s not just how much it costs, but also how much you can produce. He said the production amount goes right to the bottom line and wells in North Texas are not as prolific as those in the Permian Basin.

“Most the wells in North Texas now are what we call marginal wells, producing 15 barrels or less a day,” he said. “And small operators can make a living doing that when prices are reasonable. But when prices go down significantly, it makes it really tough for those smaller operators to continue to stay in business.”

Another challenge the industry will face with a turnaround is getting the labor to go back to work. He said historically, as the industry learned in the past downturns of 1986, 1998, 1999 and 2008, once people leave, most of them don’t usually come back.
So when there’s a turnaround, they have to go out, find and retrain people. But fortunately, he said, they industry has been able to maintain training schools.

“We have one in Bowie and Graham that trains blue collar workers in the oilfield,” Mills said. “The industry has learned that we need to keep people in the loop.”

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