Oil companies cut Permian Basin operations amid staggering price drop led by coronavirus
Oil and gas companies began to reduce their operations in the Permian Basin as the spread of coronavirus and COVID-19 was blamed for stymieing global energy demands and leading to subsequent multi-week drop in the price of oil.
As of Tuesday, domestic crude oil was listed at about $24 per barrel, an 18-year low, per data from Nasdaq.
The price peaked at $62 per barrel on Jan. 7, records show, but began a steady decline since as the virus’ spread from its origin in China’s Wuhan province and became a global pandemic.
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The Centers for Disease Control and Prevention reported about 7,000 cases of COVID-19, the disease caused by the virus, as of Tuesday, and the World Health Organization reported 132,758 worldwide.
The spread of the disease, and subsequent travel restrictions, led to a sinking demand for oil and gas as the market was already heavily supplied.
Thus, the value of oil declined.
Further leading to global market tensions, a price war was ongoing between Saudi Arabia and Russia as the two nations – which are the second- and third-largest producers of oil in the world after the U.S. – failed to agree on supply cuts intended to drive the price up.
In response to such market declines, Houston-based Apache Corporation announced it would pull all its oil and gas rigs out of the Permian to save on short-term spending.
The company planned to reduce its 2020 capital investment by almost $1 billion.
In the coming weeks, the company would reduce its Permian rig count to zero, read a March 12 news release, to limit its exposure to short-cycle oil projects.
Chief Executive Officer John Christmann said the reductions were needed during the market’s struggles. He said Apache must remain ready to address further volatility in the coming months.
“We are significantly reducing our planned rig count and well completions for the remainder of the year, and our capital spending plan will remain flexible based on market conditions,” Christmann said.
“We are also further reducing operating and overhead costs as we continue to implement our corporate redesign program, which began in the fall of 2019. These decisive actions will benefit Apache as we navigate these challenging market conditions.”
Meanwhile, Pioneer Resources, which operates mostly in the Delaware Basin on the western side of the Permian – one of the largest acreage holders in the region – also announced a significant cut in operations.
The company’s rig count will be cut from 22 to 11, read a news release, while completion crews will be reduced from six to two or three.
Overall, Pioneer’s capital budget was to be cut by 45 percent.
Pioneer still expects its 2020 oil production to be similar to 2019’s average of about 211,000 barrels per day, and Chief Executive Officer Scott Sheffield said Pioneer and the industry should be well positioned to recover when the economy recovers, and the market resumes its upward trends.
“As they have in the past, global headwinds and macroeconomic factors are impacting commodity prices,” Sheffield said. “After successfully managing through the previous five cycles, it is apparent to me companies that maintain strong balance sheets and low leverage during these difficult times will prosper when economies eventually rebound, and commodity prices recover.”
Spokesperson for the New Mexico Oil and Gas Association Robert McEntyre said New Mexico’s industry was well-positioned to emerge from the financial crisis a leader in energy production.
He pointed to New Mexico overall rig counts, reaching 116 rigs – a record – and growing to 117 in March, an increase over March 2019’s average of 105 rigs.
But until the virus is contained and the price war between Saudi Arabia and Russia is resolved, McEntyre said the industry faced uncertainty.
“Our companies are making choices to modify their short-term business plan to make sure they can survive this business environment,” he said. “There’s no question the ripple effect is impacting our industry and others. Because of the uncertainty, the short-term is challenging.
“We can say with some confidence that the price of oil will be in a challenging place in the near-term.”
And as the market struggles, McEntyre said optimism remained in that New Mexico and the Delaware Basin was known to be home to largest continuous oil and gas resource ever discovered, per a report from the U.S. Geological Survey in November 2018.
“New Mexico is still known to have the largest resource ever found,” McEntyre said. “This has been a focal point for domestic and global companies for the past couple years. It was encouraging to see the situation in New Mexico before the pandemic.
"It’s going to be a challenging business environment, but New Mexico is well positioned for when we come out of it.”
Kathleen Sgamma, president of the Western Energy Alliance said that while the demand and price would cause financial troubles for producers, she said the American industry was well-equipped to survive the price war and global pandemic.
"I would anticipate some inevitable slowing with the decrease in global demand, but it’s much too early to predict a bust cycle," Sgamma said. "With COVID-19, it’s a double punch to the American producer, but we will ultimately prevail because we’re more nimble and our free-market economy is more flexible and diverse."
More oil and gas news:
- Southeast New Mexico plagued by oil and gas spills as production booms in Permian Basin
- State of New Mexico can fine oil and gas operators for violating state law
- New Mexico activists question governor's climate change goals amid Permian Basin oil boom
- U.S. Sen. Tom Udall introduces bill to 'modernize' oil and gas fees on federal land
- Texas leads nation in oil, gas production. But how does New Mexico compare?
Adrian Hedden can be reached at 575-628-5516, email@example.com or @AdrianHedden on Twitter.