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Falling oil prices force cutbacks at smallest companies

Clifford Krauss | New York Times
SEMINOLE, Okla. - The plunging price of crude has inflicted pain in the Oklahoma oil patch, and now it is threatening to take out the smallest of the small operators, those that have survived decades of booms and busts. Moran Oil Enterprises is losing $5 on every one of the 205 barrels it produces every day, forcing it to borrow $30,000 this month to meet a payroll that includes 24 employees and contractors. One partner at RKR Exploration is so distressed by debt payments he has taken to bringing his garbage to the office to save the $25-a-month fee at home.

And the Columbus Oil Company, losing more than $10,000 a month, has given up its rented postage stamp machine.

"How much can I keep bleeding before I say enough is enough?" said Darlene S. Wallace, the president of Columbus Oil, who is preparing to sell her house in Oklahoma City and live full time in an apartment above her office.

Ms. Wallace's firm is among the 7,500 small, mostly privately owned businesses that operate more than 400,000 aging oil wells nationwide. They are commonly known in the industry as "strippers'' because they strip out the last barrels.

Frequently family owned, and passed on from generation to generation, the stripper wells each produce at most 15 barrels a day. But collectively their production is significant, generating about a million barrels a day, or more than 10 percent of national production.

The companies that operate them are struggling to stay in business or shutting their doors altogether, putting pressure on local banks as well as the trucking and other service companies that keep the wells running. Those that remain in business are slashing salaries and health benefits to stay alive.

Once solidly middle-class business owners who routinely traveled abroad on vacation and put money aside for their grandchildren's college educations are suddenly clipping coupons, slashing cable television costs and giving up restaurant dinners.

"I would characterize this as a depression," said Mike Cantrell, an Oklahoma oilman and chairman of the National Stripper Well Association.

Sales tax receipts in this town of 7,500 are down 15 percent this fiscal year, and farm roads around Seminole County connecting the oil wells are suffering because many producers are saving money on gravel, which they customarily hauled and spread to protect their pickup trucks from wear and tear.

"We're worried," said Steve Saxon, Seminole's city manager.

The tiniest oil companies represent the backbone of scores of rural communities in around two-thirds of the nation's states, including Texas, California, Illinois, Louisiana, Ohio, Kansas and Kentucky, and employ more than 150,000 workers.

Aside from the loss of jobs, industry leaders and energy analysts say the possible shut-off of thousands of wells could lead to a reduction of 400,000 barrels a day of production or more.

Already, as many as a quarter of the wells have been turned off, according to some estimates, but they are generally the most marginal - producing as little as a half a barrel a day.
Leading members of the stripper well industry say their companies are now so financially stressed that if oil prices remain at the current levels for many more months, as many as half of the nation's stripper wells could be shut off by the summer or by the end of the year at latest. All it takes is a simple flip of the switch to halt power to the pump in most cases.

"I have been in the business of stripper wells since the 1970s, and we've never seen anything like this before," said Patrick Montalban, chief executive of Mountainview Energy, an operator of more than 80 oil and natural gas stripper wells in Montana.

He estimated that half the workers who operate and repair Montana's 2,000 stripper wells have already lost their jobs. He has cut his staff to eight from 25 and cut salaries to everyone left by more than 20 percent, including himself. "It's just a blood bath."

American oil production, which peaked at 9.7 million barrels a day early last year, has come down by about half a million barrels a day despite an increase in offshore Gulf of Mexico production and the resilience of many shale fields.

Much of the reduction probably comes from stripper wells already shut, though estimates vary since the marginal wells are scattered and unevenly monitored by the government and analysts who focus on public companies.

"The potential to balance the market is very large," said David Pursell, an analyst for Tudor, Pickering, Holt & Company, an investment bank. He estimated that reductions in stripper well production could be equivalent to half or more of the new oil Iran was preparing to sell on the market as nuclear sanctions were lifted.

Mr. Pursell's expectation of a drop in stripper well production is based on his estimate that the average stripper well raises about $1,800 a month of revenue at current oil prices, but costs $2,000 to operate because of expenses that include electricity, transport, insurance and water disposal. Such losses, he said, can be sustained only so long.

The last time there was a collapse in oil prices this sharp and severe was the 1980s, when industry officials say approximately half the nation's stripper wells were shut down, though not permanently plugged, so that the majority were eventually revived as prices recovered. There was a similar impact in the late 1990s when prices again tanked. That makes stripper well production akin to an underground reserve that operators will turn on and off depending on price.

Typically, operators keep pumping their most productive wells to keep cash flowing since shutting down wells can jeopardize their leases and even damage the wells themselves. But as soon as a well needs repairs, owners sharpen their pencils since major repairs on a deep well can cost $20,000 or more.

In the 1980s, before Ms. Wallace took over Columbus Oil in 2004 after her husband died, the company cut salaries, borrowed money, mortgaged properties and shut down half of its 36 wells. But the oil price roared back, and the company was saved. Again in the 1990s, it borrowed money and shut in wells. "We didn't make any money for a long time," she remembered from her days as a stay-at-home mother.

Her cash position is stronger this time because she and nine partners were smart enough to sell off 11 oil and gas wells in February 2014, when oil prices were near their peak, which raised $900,000. But now she is reviewing her 26 wells to see which ones are worth operating and which ones are not.

As recently as last June, the company was producing 50 barrels a day. After shutting down a few wells, it is now down to 40. And by the summer, Ms. Wallace expects daily production to drop to as low as 25 barrels after she shuts down more.

Visiting one well the other day originally drilled in the 1940s, she watched her son-in-law, Clint Reitz, who works for the company as a pumper, check for leaks and gauge pressure levels. As he opened the hatch on a tank to drop a gauge, the distinct fragrance of petroleum wafted through the air.

"We used to say that's the smell of money," Ms. Wallace said. "Now we say that's the smell of debt."