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North America’s Oil Industry Is Shutting Off the Spigot

Pump Jack

By Ryan Dezember and Vipal Monga, Wall Street JournalENERGY: Canceled orders were mounting when Texland Petroleum LP recently decided to shut in each of its 1,211 oil wells to cease production by May.

“We’ve never done this before,” said Jim Wilkes, president of the 7,000-barrel-a-day Fort Worth, Texas, firm, which has weathered oil busts since 1973. “We’ve always been able to sell the oil, even at a crappy price.”

Now there are no buyers for the crude coming from its wells and no choice but to shut them in. Texland told state regulators its plans and applied for a loan through the Small Business Administration’s Paycheck Protection Program to keep its 73 employees on payroll.

From the West Texas desert, where oil is blasted from deep shale formations, to the wilds of western Canada, where multibillion-dollar steam plants bubble thick crude from the earth’s crust, energy producers are resorting to the desperate measure of shutting in productive wells.

The sharp drop in fuel consumption caused by the coronavirus pandemic and exacerbated by a feud between the world’s largest producers has limited options for North American oil companies. Pipelines, refiners and storage facilities are filling up. Even when there is somewhere to send oil, low prices mean that many barrels lose money.

West Texas Intermediate, the main U.S. price benchmark, ended last Thursday at $22.76 a barrel, down 63% since the start of the year. It’s been even worse in Midland, Texas, where a lot of oil extracted from the Permian Basin is priced, and in western Canada, from which most of the country’s output comes. Oil has traded below $10 a barrel in both markets.

oil prices from wells in production

Since mid-March, producers ranging from Exxon Mobil Corp. and Royal Dutch Shell PLC to Oklahoma City’s Devon Energy Corp. and Cenovus Energy Inc. of Calgary, Alberta, collectively have announced spending cuts totaling some $50 billion.

The number of rigs drilling in the U.S. has fallen to about 600, down from nearly 800 a month ago, according to Baker Hughes Co. Drilling is always down in Canada this time of year, when the spring thaw hinders accessibility, but the 35 rigs operating there are the fewest Baker Hughes has ever counted.

It can take months for the flow from new wells to taper off, so production has only begun to reflect the austerity. U.S. production has declined about 5% from March’s record levels, according to the Energy Information Administration.

energy producers are idling oil rigs and have shut in production

The drop in demand has been steeper, with factories idled, flights grounded and billions of people around the world under stay-at-home orders to fight the spread of the deadly virus. Analysts forecast oil consumption declining by at least 20 million barrels a day, representing roughly 20% of global demand.

Daily consumption of petroleum products in the U.S. fell 19% during the week ended April 3 to what is at least a 30-year low, the EIA said. Domestic crude inventories swelled by the biggest weekly increase on record.

At that rate, the world would run out of places to put oil within about 60 days, analysts with Houston’s Simmons Energy estimate. Some analysts think the world’s storage caverns, tank farms, pipelines, refineries and ships will fill even faster.

Canada has room for fewer than four days’ worth of production, energy data provider Genscape Inc. estimates. In the U.S., there is much more storage capacity, but it isn’t evenly available to producers.

U.S. petroleum product consumption

US Petroleum Consumption - oil wells. source - US Energy Information Agency

A refiner teeming with, say, jet fuel, may not be able to take in more crude from its suppliers even if there is demand for other products, like diesel. Backed-up pipelines could strand barrels.

“We‘ve been told by two of my markets they won’t take my production in May because there’s nowhere to put it,” said Russell Gordy, a Texas oilman with wells in his home state, Colorado, Wyoming and the Gulf of Mexico. “We won’t have to shut in everything, but we’ll have to shut in most of our production.”

Larger companies are shutting in wells too. Continental Resources Inc., which drills in Oklahoma and North Dakota, said it would reduce output in April and May by about 30%. In West Texas, Parsley Energy Inc. has shut in about 150 older wells that together produced about 400 barrels a day, and were no longer worth the expense of powering the equipment inside, daily maintenance and paying out royalties, said Chief Executive Matt Gallagher.

petroleum products derived from energy productionOutput from newer shale wells can be reduced without shutting them in entirely. But those big wells, with horizontal bores that stretch for miles, usually produce oil at the lowest costs, which makes choking them back unappetizing to producers scratching for every penny.

Canadian producers have eliminated roughly 325,000 barrels of daily output, according to consulting firm Rystad Energy, which predicts ultimate declines of about 1 million barrels, or nearly 25%. Suncor Energy Inc. has shut down one of two production lines at its 200,000-barrel-a-day Fort Hills oil sands mine in northern Alberta. Others have capped smaller wells.

“We have small companies that have shut every drop in,” said Kent McDougall, chief commercial officer at Alberta oil trucker Torq Energy Logistics.

Producers are doing so without knowing what will happen when they try to resume production.

Canadian crude is often called bitumen, which is as thick as peanut butter unless it’s heated. Producers shovel up reserves close to the surface, but deeper deposits are coaxed out by injecting steam underground. Shutting down such operations is risky and expensive. Restarting them is touchy. It can take a long time to warm up the wells to resume flow, and there’s no guarantee they will be as productive.

In the U.S., the risks usually have to do with water. It can flood reservoirs, alter pressure and, since deep groundwater is salty, corrode components downhole.

That is what worries Texland’s Mr. Wilkes. The company has no experience restarting its wells and he can only guess what problems might arise once the artificial lift systems in its wells are powered down.

“Some wells may take time to recover to their previous production rate,” he said. “Some may never recover.”


Source:  Wall Street Journal


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