Oil field rig trucks at Ritchie Bros. Auctioneers, 4444 Ritchie Dr., Wednesday.
Oil field rig trucks at Ritchie Bros. Auctioneers, 4444 Ritchie Dr., Wednesday. (Lewis Geyer / Staff Photographer)

How low can it go?

That's the $30-a-barrel question being asked in the energy industry.

In December of 2014 oil was trading at $107 a barrel. Today it hovers around $30. As a result of that free-fall, the value of Colorado's oil production dropped by more than 34 percent, hitting $5.4 billion last year, down from $8.2 billion in 2014.

Jobs have evaporated as well, with Colorado oil fields losing roughly 2,000 jobs during that period.

The cheap gas has been great news for consumers, who are now paying less than $2 for a gallon of gas. It's also welcome news for airlines, which are saving millions of dollars in fuel costs.

But the news isn't good for those who work in the oil industry, and those who support it.

It's a story of supply and demand, and demand isn't looking so good.

In addition, Iran has announced plans to put up to 500,000 barrels of oil a day on the market, now that sanctions against that country have been lifted, which had curtailed their ability to export oil.

In recent days oil has been selling at below $27 a barrel, it's lowest price since 2003.

"I anticipate job losses to continue through 2016," said Joe Winter, senior economist with the Colorado Department of Labor. He expects the declines that started last year when oil prices began their dive, will not slow down.

"Oil at below $30, that's a bit below break even for production," he said.

It means that oil firms that battled through 2015 are still fighting for survival.


Advertisement

The value of Colorado's oil production for 2015 is estimated at $5.4 billion. That's a drop of more than 34 percent from 2014's value of $8.2 billion.

"This is a dramatic situation," said Colorado Petroleum Association President Stan Dempsey.

Over the course of the last 12 months, oil companies with operations in Weld County and across the state have scaled back their plans. Some have left oil-rich Weld County altogether.

In October, Encana signed a deal to sell all of its assets in the massive Denver-Julesburg basin of northeast Colorado to the Canada Pension Plan Investment Board. That $900 million deal included 51,000 acres and more than 1,600 wells.

"The sale of our Denver-Julesburg assets should close the second quarter of this year," said Encana's Doug Hock last week. "We operate 3,800 wells on the West Slope, but we're not drilling there."

Hock said that the company is focused on operating in those basins where they can continue to be profitable, which means a bigger focus on Texas.

Other oil companies in the area are pulling out their calculators and trying to figure out their next steps.

"We have no comment to make at this time," said Jon Kruljac of Synergy Resources, a Denver-based company with most of its operations in the Denver-Julesburg Basin.

"At this point in time we are accessing what we're going to do with these prices. We haven't made any public comment on this."

Anadarko, another big player in the industry here, would not comment on its future plans in light of $30 a barrel prices.

Jobs

Last year was not a good year for jobs in the oil sector. Across the state and the country, layoffs became prevalent as prices tanked.

Baker Hughes, one of the world's largest oil field services companies, laid off more than 15,000 workers last year. That number included 114 staffers from its Brighton office.

Each month in 2015, the number of those employed in the Colorado oil industry shrank.

Last January, the department of labor listed 36,000 as employed in the energy sector. By March that number had dropped to 35,400 and by May, 34,400.

Those decreases continued and by December it was estimated to be below 34,000 (final December employment figures are not yet available).

Overall according to the state's labor department, the energy work force shrank 8.3 percent in 2015, and is projected to shrink another 4.2 percent this year.

Those numbers do not include jobs that support the industry, which are harder to quantify. Those would be the metal workers, truck drivers, and earth movers who play support roles in oil development and drilling.

One company that thrived in 2015 was Ritchie Brothers Auctioneers, which operates an auction house just east of Interstate 25.

"Many oil and gas companies in the region have faced some financial hardship as a result of the oil downturn. We have become a preferred seller of their assets, and have seen an increase of interest and consignment from oil and gas companies," said David Hobbs, regional vice president of Ritchie Bros.

Last year Ritchie Bros. sold $4.25 billion worth of equipment through their auctions globally, a new record for the company.

"I can tell you that in the third quarter, the latest quarter we have reported, consignments from oil and gas sector customers increased 15 percent from the same quarter of 2014."

Hobbs believes that the industry will bounce back, and that's why he is able to sell equipment so easily.

"For equipment that is more oil and gas-specific, there are still many people and companies buying that equipment on speculation that the market will turn around. People who have been in the oil and gas industry for a long time have been through downturns like this before—they understand the market and are buying equipment now for when the market returns," Hobbs explained.

When?

"When will the market return" is the other $30-a-barrel question.

"I think a rebound in prices would take an adjustment in the supply/demand equilibrium—real or anticipated," said Brian Lewandowski of the Leeds School of Business at CU Boulder

The Colorado Business Economic Outlook for 2016, produced by the Leeds School, reported that prices will remain soft through 2016.

"Future energy prices depend on a myriad of factors across multiple scales, including economic and geopolitical situations, technological developments, and new resource discoveries," the report stated. "Abundant supply driven in large part by the boom in U.S. oil production and Saudi Arabia's desire to keep market share points to continued soft oil pricing in 2016."

Saudi Arabia, analysts stress, is the key to the entire equation.

"Saudi Arabia doesn't want to lose control of the oil market," said Michael J. Orlando, owner of Economic Advisors and a professor at the Global Energy Management Program with the University of Colorado Denver Business School.

Orlando said that the Saudi-led price drop, and move to maintain production levels in OPEC, was designed to discourage large investments in places such as Alaska, Russia, South America and Canada.

"This is all political. Saudi Arabia wants to keep the next generation of oil producers out. By keeping the prices this low, no one will make the big investments. So the Saudis can control the market for another 40 years."

"I don't ever see us back at $100 prices. But I do see prices low through this year and into 2017."

A price rebound all depends on Saudi Arabia, and OPEC, Orlando said.

Stan Dempsey of the Colorado Petroleum Association said market conditions are forcing new discipline on the industry.

"These market conditions force them to find efficiencies, to do more with less," he said. "They are perfecting the craft. We are a lot leaner than we were a year ago."

Dempsey added that this new efficiency will serve the Colorado oil industry well, if and when the prices climb back.

Vince Winkel: 303-684-5291, winkelv@times-call.com or twitter.com/vincewinkel