As oil prices fall, fewer wells drilled in US

The sharp decline in drilling – a 46 percent drop compared with last year – could push up future energy prices.

Pump jacks draw oil from wells in Midland County, Texas. [Editor's note: The original caption incorrectly described the equipment pictured.]

With the price of oil falling and the US in a recession, the oil industry is in no mood to punch more holes in the ground.

Instead, for the second quarter in a row, drilling activity has plunged 46 percent compared with the same quarter last year. Energy exploration is now at its lowest level since 2003-2004, according to a new estimate by the American Petroleum Institute (API).

“This is an indication of an industry in crisis, compared to in its heyday,” says Sarah Emerson, managing director at Energy Security Analysis Inc. in Wakefield, Mass.

The sharp decline in drilling may have an impact on future prices, since oil and gas wells drilled today provide energy sometime in the future. Oil prices soared from $20 a barrel to $60 a barrel in 2003 by 2006, reflecting a tightening of oil supply and demand.

“Every barrel counts,” says Ms. Emerson. “This is not to say oil drilling won’t come back, but it takes time.”

It’s not surprising that drilling fell sharply in the second quarter this year, Emerson says. In January, she says, some energy companies may have reviewed their drilling budgets, especially with the price of oil falling. The marginal wells are the first to get canceled. Then, as company cash flow dwindles, more-promising wells get pushed back.

But, Emerson adds, with prices more stable now at close to $60 a barrel, she would not be surprised to see some reappraisals. “It seems intuitive [that] it would bounce back,” she says.

An estimated 8,038 oil wells, natural-gas wells, and dry holes were completed in the second quarter, down 46 percent from 2008 levels, according to the API. The number of exploratory wells fell even more, down 63 percent from last year.

It’s not just oil. The number of new natural-gas wells dropped 43 percent from last year. According to the API, that’s the most severe quarterly decline this decade.

In the case of natural gas, the price has plummeted from $13 per million British thermal units (Btu) on the NYMEX, a futures exchange, to $3.37 per million Btus last Friday.

“This is a very low price relative to the cost increases, especially for new developments such as the shale gases, which are more expensive to produce,” says John Felmy, chief economist for the API.

The reduction in drilling for natural gas reflects the falling price, Mr. Felmy says, as well as the credit crunch, which is making it harder for smaller producers to finance their drilling programs.

Energy companies are also faced with some uncertainty about how much more they will be taxed by Washington. The energy industry will absorb the biggest cost increases in the proposed cap-and-trade legislation to regulate greenhouse gas emissions, Felmy notes. Proposals to limit speculation in the energy markets may also affect future drilling, he says.

“Some of the smaller producers could be affected,” he says. “It could be a case of unintended consequences.”

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