Small producers adjusting to oil prices

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Somerlyn Cothran, NSWA Executive Director

There’s been a lot of talk lately about how the prices of oil are affecting production in the massive U.S. shale plays. While a lot of analysts disagree on how low oil prices must go before shale oil production becomes unprofitable, not too many people are talking about the mom-and-pop producers.

Stripper well producers are resilient. Many “long-timers” I know have watched fluctuations in oil prices many times, and adapted, by becoming experts in keeping costs low. You know, as well as I do, that prices will have to drop significantly and stay depressed for a prolonged period before stripper well producers cut back on production or shut-in wells. Of course, as wells go down for mechanical reasons, they might not be put back on as quickly. This practice is something the large independents like Continental Resources are looking at doing as well.

What we must do, as stripper well producers, is work on revising our production targets and forget about shutting in or abandoning our wells, for now. In the areas of higher-cost production, where wells are deeper and cost more to repair, or where weather conditions are more severe will impact these decisions more. And producers in states with high taxes and costly regulatory environments are disadvantaged when it comes to producing in a lower price environment. However, according to the 2012 Marginal Well Report, recently released by the Interstate Oil & Gas Compact Commission (IOGCC), states that, “On average, each million dollars of lost marginal production … would reduce economic output by an additional $700,000.” Also in the report, “The marginal oil and natural gas produced in 2012 had an estimated value of $30.8 billion.” America needs America’s energy, and these are big numbers that we can’t afford to ignore.

Our industry is always going to be subjected to supply- and demand-driven price swings. Sometimes, the price is driven by speculation or foreign government manipulation as much as, or more than, supply and demand. I personally think this time the Saudis are talking the market down with threats of flooding the market in order to slow increasing U.S. production. Only time will tell, but I believe they no longer have the production capacity needed to drive the market, like they once had.

The nation’s 771,000 stripper wells produce about 11% of our total oil. It is like a strategic petroleum reserve all across America. This resilient production will be there for generations of Americans to come—as long as we don’t tax or regulate it out of business.

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