Hundreds of thousands of US stripper wells with production totaling 1 million b/d of crude could be at risk if oil prices fall below $35/b, where prices teetered in recent days, for long, observers say.
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Stripper wells are wells nearing the end of their lives that each produce very low volumes of 15 b/d or less. Collectively, they account for a surprisingly large amount of output -- as much as 1 million b/d of crude from about 410,000 oil wells, or about 11% of the US' total oil production of around 9.1 million b/d, according to the National Stripper Well Association website.
"The low $30s/b is about it," as far as the economic threshold, Mike Cantrell, chairman of the Oklahoma City-based National Stripper Well Association, said. "We're not making any money ... at below $30."
Front-month WTI crude futures in early afternoon trading were up $1.30 to $37.61/b.
Crude prices closed in the $35-$36/b range in the last few trading days.
Cantrell said many stripper well owners are "struggling," but added: "I don't think the hammer has dropped yet" on many or most of them.
This could happen, though, if prices get much lower toward year end, when companies report year-end reserve numbers, he said. For now, operators "are kind of hunkered" down, he added.
Investment bank Tudor Pickering Holt said in its daily note on Monday that the average stripper well does not cover direct operating expenses at $35/b WTI.
In general, stripper wells operate on a basic program where the expenses include electricity to run the pump jacks and artificial lift to help oil flow better out of the well, as well as anti-corrosion chemicals, insurance, repairs and hired labor unless the owner does the day-to-day work.
"Some [wells] are actually economic" right now, Cantrell said. "Just as long as your revenue exceeds your expenses, you can keep going."
He and others say all stripper wells are not necessarily at risk even at current low prices. Because the economics of each well are so different, and have such mixed variables, they will not necessarily go under, they say.
And sometimes the wells keep pumping oil for other reasons. Cantrell said a friend who operates stripper wells and whose company has "a lot" of leverage, is forced to keep his wells going.
"He said, 'I have no choice, I have to keep their revenue going whether I like it or not because the banker wants to see the production'," Cantrell said.
Other wells may continue to operate at breakeven because shutting them down costs even more.
"Let's say you get down to a point where you're breaking even or a little negative. If I shut the well down, I have to submit it to abandonment," which incurs expenses and a required regulatory process, energy economist James Williams, who founded and runs energy consultancy WTRG Economics, said.
"Sometimes there is a limit on how long you can go without producing a well before you're required to go through official abandonment procedures," Williams said. "So it may be best to keep it going for awhile until oil prices go back up."
In addition, some wells that are shut-in are lost entirely, due to the type of formation or other well issues, while others can be brought back afterwards, he said.
"The decision point is different on every well," said Williams. "It's not a simply one-size-fits-all solution."
But with low oil prices stalking the industry, 2015's activity has been lower than that of recent years, stopping some production -- even though it will create hardship for well owners -- is not an unwelcome development, others say.
"Stripper wells fill a role in the market -- but the market doesn't support [them as] necessary at this point," Doug Sheridan, founder of the EnergyPoint Research consultancy, said.
"It's a challenge for those guys, but nothing I see suggests [stripper wells] will necessarily be a very prosperous part of industry for the next few years," Sheridan said.
Low oil prices that are forecast to be around for some time, stemming from a horde of new crude output in the US and also increases in Saudi Arabian production and potentially from Iran over the next year or so, mean less crude output is needed for awhile until demand picks up, he said.
"The role of stripper wells will be greatly diminished going forward until such time we see commodity prices bounce back," Sheridan said. Stripper wells "are kind of America's reserve supply," he added.