A cut in output could take investors by surprise
Nicole Friedman | Wall Street Journal
Sept. 7, 2015
Steve Plants, vice president of Plants & Goodwin Inc. in Shinglehouse, Pa., still pumps crude oil from wells drilled in the 1890s.
But with the price of crude below $50 a barrel, some of those low-producing wells, known as stripper wells, don’t turn a profit. Plants has permanently closed 10 wells, he says, and plans to plug another 10 by the end of the year.
“We’re losing money every day,” said Plants, who operates about 200 wells in Pennsylvania and New York. “If we were pumping wells every day, we might be pumping them once a week now,” to save on costs.
Plants, and thousands of individual operators like him, could turn out to be a key element in ending the oil-price rout, rather than a large producing country like Saudi Arabia or a big public company. A sharp drop in stripper-well output, currently estimated at a million barrels a day, or 11% of total U.S. production, would be nearly impossible to observe as it happens, but it could still shrink the glut that continues to weigh on prices, surprising the market, analysts say.
While investors are closely watching public companies for signs of when crude production is set to slow, many are ignoring the country’s 400,000 stripper wells, most of which produce less than five barrels a day. Stripper wells—so called because they “strip” the remaining oil out of the ground—are mostly aging ones that continue to produce oil, but at much lower rates than when they were drilled.
In some states, including Illinois and New York, stripper wells account for all, or most, oil output. With oil prices still near six-year lows, stripper-well operators are facing new pressure to let damaged wells lie dormant, or even shut down production.
If oil prices fall back below $40 a barrel and stay there, half of stripper-well production could be shut down, said David Pursell, managing director at Tudor, Pickering, Holt & Co., a Houston investment bank. The U.S. oil benchmark on Friday lost 70 cents, or 1.5%, to close at $46.05 a barrel on the New York Mercantile Exchange.
“If you saw half-a-million barrels a day of stripper-well production come off line at the end of the year,” he said, “the market would tighten earlier in 2016.” Full Story