OPEC agreement creates hope among local producers

Local oil and gas producers are cautiously optimistic after OPEC reached an agreement that could push up the price of oil making local production profitable.

Leigh Black Irvin
An oil and gas production site is pictured Nov. 3, 2014, in Lybrook.

FARMINGTON — A recent OPEC deal to cut oil production is being viewed with cautious optimism by local oil and gas industry officials.

On Nov. 30, OPEC pledged to remove 1.2 million barrels a day from world-wide oil production. The deal is contingent upon non-OPEC countries such as Russia agreeing to cut production by an additional 600,000 barrels per day, which is expected to result in a significant rise in oil prices.

As of Friday, according to the U.S. Energy Information Administration website, West Texas Intermediate oil was up to $51.08 a barrel, a 3.4 percent increase from the previous day and a substantial increase from low of $26.21 in February.

“Any price increase is a good thing,” said New Mexico Oil and Gas Association spokesman Wally Drangmeister. “The main thing is to see if the OPEC deal is going to be honored. If it is, there will be additional drilling activity.”

Drangmeister warned, however, of a “boomerang effect,” which could occur if too many wells are drilled, increasing supply and causing the price of oil to come back down.

“In the short term, it’s good for the San Juan Basin, but we will have to see,” he said.

George Sharpe, investment manager for Merrion Oil and Gas, believes the OPEC deal is a positive development overall, but might not necessarily be a good thing for the San Juan Basin.

“I think it would stimulate oil as opposed to natural gas wells, and when there’s more oil, there’s less gas wells needed,” he said.

Some industry experts are even more cautious about what the OPEC deal will mean for development in the U.S.

Industry expert Daniel Fine agrees that how the non-OPEC countries react following the agreement will determine whether or not prices continue to rise. Fine is the associate director of the New Mexico Center for Energy Policy and State Energy Policy Project.

“If Iran and/or Iraq issue assertions of production-at-will, all hope of a 2017 moderate recovery will be aborted,” wrote Fine in a Daily Times in a column that appears in today opinion section.

Fine goes on to predict that if this happens, an over-supply of oil will create a "Second Downturn," with prices falling below $40 a barrel.

Prices are always the “wild card” in the industry, and companies have no control over the ups and downs, said WPX spokesman Kelly Swan.

“Businesses have to be flexible and stay ready to jump back in, and if the price stabilizes at $50 or $60 a barrel, it could be an improvement economically,” he said.

The question arises as to whether or not the San Juan Basin would be ready for a sudden upturn in activity, as much of the oil and gas production infrastructure has become dormant, and in some cases has evaporated. San Juan area rig reports have been fluctuating between zero and one active rig in recent months.

“Infrastructure could be an issue,” Sharpe said. “I don’t anticipate (production) would kick back in that fast, but infrastructure is absolutely critical to being able to drill and complete a well.”

Swan said WPX has continued to invest in infrastructure during the downturn in order to be ready to drill again when the industry picks up, which he is hopeful will occur soon.

In fact, Swan said WPX has plans for production in 2017, including drilling forty to fifty new oil wells on the southern part of their production acreage in the San Juan Basin. The prospect of producing new wells has the 80-plus employees at WPX looking toward the future.

“We’re excited about rolling up our sleeves and getting back to work,” he said.

Leigh Black Irvin is the business editor for The Daily Times. She can be reached at 505-564-4621.