Is it the end of the slump? Official advises caution
FARMINGTON – A recent uptick in the number of drilling rigs in the San Juan Basin has some in the oil and gas production business wondering if we might be seeing the beginning of the end to the slump that has devastated San Juan County's economy.
Not everyone, however, believes that it's time to pop the cork and celebrate.
Jason Sandel, executive vice president for Aztec Well Servicing, acknowledges that there has been a slight increase in business, but he cautions against being overly optimistic about an industry surge in the San Juan Basin.
Aztec Well Servicing was formed in 1963 by Jason's grandparents, Wayne and Sally Sandel, along with Jason's father, Jerry Sandel, the company's president.
The company provides complete oil and natural gas drilling services as well as trucking, equipment rentals and other support services to oil and gas projects and consists of several subsidiaries: Aztec Drilling, Triple S Trucking, Totah Rental and Equipment, and Road Runner Fuels.
Sandel said the company has lived through several "booms and busts" in the oil and gas industry since its formation.
"In October of 2008, gas prices were over $4 a gallon. We were at full utilization within the San Juan Basin and had about 900 employees," he said. "Then overnight, everything was shut down when prices dropped to below $2 a gallon. So, we began to take a look outside of the Basin."
As a result of that crash, Sandel said, the company now works on projects throughout the U.S. and is active in the Permian Basin, Eagle Ford, and Marcellus formations, in addition to the San Juan Basin.
"We've gone anywhere there was work," he said. "My grandad used to say, 'we have wheels and will travel.'"
Sandel said another setback for the county and for his company occurred in November 2014, when oil prices dropped from $100 a barrel to $28 a barrel.
"All oil activity shut down, and since then we have had a dry spell. It's been difficult because our workforce is very dependent on rigs operating," he said.
The recent speculation about a possible increase in drilling operations in the Basin is partially due to a Rig Report that is sent out weekly to those involved in the industry. As of May 10, the report listed six drilling rigs operating in the Basin. This number seems especially significant given the fact that as of last November, there were no drilling rigs operating.
During this time in 2016, Sandel said Aztec Well Servicing's workforce had dropped to about 200 employees, but that number has increased over the past year. Currently, there are approximately 375 employees.
With 13 drilling rigs and 30 well-servicing rigs available, the company is currently using one rig on a BP drilling operation, another for a Kinder Morgan project, and it will soon be drilling a well for Encana and several for Logos Resources.
Sandel said it's important to realize that it's not just the number of drilling rigs operating that indicates a positive change in the industry, it's also the nature of the drilling.
"In 2008, we'd have rigs contracted by big companies for a year at a time, but now we're contracting a well at a time," he said. "We'll drill a well every 10 days, then the operations shut down. Encana, for example, only has two wells to drill and then they'll be done. It's a completely different industry now."
Different not only for the San Juan Basin, but for the country, said Sandel.
"The on-land rig count in the U.S. before November 2014 was 2,200. That number dropped to around 500 after that date and is now closer to 1,000," he said. "There has been some pick-up from 2016 to present, and I think that's based on the commodity price of oil getting to between $50 to $60 a barrel. But recently the price dropped back down to $48. It becomes a question of how stable and solid the price will remain."
While he acknowledges that any increase in activity is a positive development, Sandel said he's skeptical that oil prices will get to where they need to be, which is $60 or more per barrel, to turn the industry back around.
Another factor in addition to the Rig Report that could be causing an appearance of increased activity, Sandel said, might be due to companies trying to spur growth via their own investments.
"Oil and gas operators have to develop a certain amount of resources every year to show the stock market what they've got," he said. "If the market sees declining investments (by the company), they won't invest (in the company), so I also think we're seeing companies investing capital dollars right now. But I don't see it being sustainable."
Sandel said he is particularly concerned that an inflated sense of optimism might be influencing financial planning of entities such as the City of Farmington, which has predicted a 4.5 percent increase in gross receipts tax revenue over the next year.
"They're thinking the industry will be going strong, but my opinion is that this optimism is premature," he said. "We're a natural gas-based basin, and until gas prices rise significantly, 'spot work' will not fuel the economy in ways people are used to from the past. It's important for the community to know we need to be cautious."
Sandel said he still holds hope for some for economic improvement, but said time will tell as far as any sort of sustainable changes.
"It is going better and there's hope associated with that," he said. "My cautious optimism is rooted in hoping the story gets told that it's not time to celebrate the recession being over. We remain one of the largest natural gas reserves in the world, but natural gas has never recovered – we need it to recover to between $4 to $5 a gallon to make a difference. Recovery around here is relative, so while six rigs is an improvement from zero rigs, it's nowhere near a full-scale recovery."
Leigh Black Irvin is the business editor for The Daily Times. She can be reached at 505-564-4621.