HOBBS, N.M. (AP) — There was a time when oil companies would have been thrilled with $60 a barrel, but in today's market industry executives say it will take more than that to get oilfields jumping again.
As oil tipped the $60 a barrel mark last week, some movement has begun, but layoffs and cutbacks continue in southern New Mexico.
"We have seen an increase (in activity) in the last couple of weeks because of oil prices," said Dwayne Taylor, owner of Lucky Services Inc. "For the first time in months, every truck we have a driver for is busy. A week ago we were trying to find things for them to do."
But Alonzo Aranda, chairman of the Hobbs chapter of the Association of Energy Service Companies, said companies are still laying off workers.
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"It is as bad as it was last month and last month was the worst month so far," he said.
Oil company executives agree that oil in the $70-$75 per barrel range is needed to revive the industry, but a lack of credit capital, unstable oil prices and high service costs are all factors holding back the industry.
"The price of our products is certainly the major issue, but it is not the only issue," said Larry Scott, co-owner of Lynx Petroleum Inc. and president of the Independent Petroleum Association of New Mexico. "Our little company has been working on some cost analysis for drilling projects. The costs now are somewhere 10-15 percent the wrong direction. Another increase in product price or decrease in service would get us back to work."
Today, the profit on $60 oil does not outweigh the cost to drill.
Kenny Jordan, executive director of the Association of Energy Service Companies, said five years ago oil companies needed equipment and service companies could not keep up with demand. The rig count went up to 4,500 rigs.
What resulted was a climbing price of services as service companies jumped their wages to keep good hands and purchased new equipment to meet the demand from oil producers, Jordan said.
Five years ago the average age of a drilling rig or pulling unit would have been 20 years. Today, the average age has dropped by as much as half.
"We had to raise the prices because we had a lot of new equipment coming into the field," Jordan said.
The servicing companies that own those rigs are still paying on them in many cases, meaning they have to keep rates high to keep in the black.
Among the biggest complaint in the oilfield is the price of natural gas is too low.
"Natural gas is basically worthless at this point," said Johnny Gray, president of Marbob. "A lot of companies will use the natural gas to pay a lot of their overhead and they take the profits off the oils and drill new wells. If natural gas is worth nothing, then you have to take part of your oil profit and use it for overhead."
Supply for natural gas has skyrocketed in the last few years, while demand has fallen in recent months.
Dan Fine, research scientist for New Mexico Tech's Center for Energy Policy, points to the discovery of shale natural gas as part of the cause in the drastic drop in the price of natural gas.
"They were predicting 10 years ago that we were entering an era of natural gas shortage," he said. "The shale gas was an unexpected source."
As a result, gas lines and storage containers across the nation are overflowing with natural gas, and with production of goods down on a global scale, natural gas is not in demand, Gray said.
"If they are not building cars then the big foundries are not running and building gas," he said. "I think natural gas has five years before it comes back, in my opinion."
Uncertainty in oil prices also is taking a toll on the oil and gas industry.
"If you could say it would be $60 flat for 10 years then you would have something you could depend on. The price has to hang in there long enough to get your investment back. Credit is very tight right now and companies are trying to figure out if it is cheaper to acquire assets or to drill for them," said John Crum, co-chief operating officer and president of Apache Corporation North America.
Price in recent years has been set by speculation and the flood or drought of oil supplies caused by Middle Eastern countries that dominate the supply market.
The result was an unprecedented rise to $147 oil and an equally unprecedented fall to $30 last year.
Fine said he believes federal regulations being discussed will help regulate the price, which should stabilize around $70 a barrel.
Bob Gallagher, president of the New Mexico Oil & Gas Association, said he, too, thinks $70 a barrel for oil is coming.
"As we begin to see demand come back, then I think you will see the price continue to increase and it will be for the right reasons, supply and demand and not speculation," he said.
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Information from: Hobbs News-Sun, http://www.hobbsnews.com