Oil-Price Drop Forces Big Energy to Retreat Stephen Gandel

TIME

12/4/08

Oil-Price Drop Forces Big Energy to Retreat

Stephen Gandel

Shortly after the 6 a.m. shift change, drilling crews start pouring into the Base Camp Café in Rifle, Colo. Business has been booming at the diner for much of the past few years as rising energy prices have increased exploration activity at the nearby natural-gas-rich Piceance Basin. Four years ago, the café moved to a new, 100-seat location to accommodate the crowds.

But lately, the wait for the café's signature Packer breakfast sandwich, which is two eggs and sausage covered in gravy on a biscuit, has been shorter than usual. On a recent Tuesday morning at 7 a.m., the restaurant was only a quarter full. "One of the drilling crews just got laid off," says waitress Theresa Steffen. "It's slowed down a little."

Across the country, energy companies are quickly cutting their exploration efforts. On Tuesday, oil fell to $46.85 a bbl., its lowest price in 3 1/2 years, down significantly from the $140 it traded for this past July. Natural-gas prices are well off highs too. And that is causing energy executives, recently determined to drill in places long considered uneconomical, to rethink their plans. "Oil and gas companies are going to meaningfully cut their budgets next year," says Larry Nichols, chief executive of Devon Energy, one of the nation's largest exploration companies. "And that includes us."

In some places, like northwestern Colorado and Montana, exploration could drop as much as 40% in the next few months. Experts say the resultant drop in oil and natural-gas supplies could cause energy prices to spike sometime next year, further slowing the nation's economic recovery. Last month the International Energy Association warned that oil prices could return to record highs if energy companies pull back their investments. "I worry that the downward slide in prices is causing the industry to overcorrect," says John Harpole, who runs Mecator Energy, a natural-gas broker. "We are going to see higher tops."

Up until a few months ago, energy exploration was one of the few bright spots in the darkening U.S. economy. There were 165,500 people in the U.S. working on oil- and gas-drilling crews at the end of October, up 11% from a year earlier, according to the Bureau of Labor Statistics. All mining support-service jobs, including those in the coal business, were up an even larger 17%, to 343,000. Now energy companies are sure to pull back. And that could make the nation's economic recession even worse, taking job losses to areas that had so far dodged the downturn. Denver-based Delta Petroleum said it planned to cut its capital budget in half next year. Other companies are not waiting until next year. Matthew Simmons, who heads Simmons & Co., an investment-banking firm focused on energy companies, says he has been surprised at how fast firms have begun to cut exploration. He has already heard of a number of drilling projects that have been put on hold. "Unless prices rebound fast, energy companies are going to spend less next year," says Simmons.

It's not just falling prices that are causing companies to pull back. Some are worried that Democrats in Washington will soon push through regulations that will increase costs. What's more, Simmons says, the credit crunch is having an effect. "Drillers have to rely on their own cash flow, and that means some projects don't work anymore," says Simmons. "No one wants to count on bank financing."

Few places seem to be hit as hard as northwestern Colorado. New drilling technology and rising energy prices caused exploration to flourish in the region in the past few years. The Piceance Basin alone drew dozens of exploration firms, including large companies like Chevron. Now those firms are pulling back. Harpole expects the number of rigs in the Piceance Basin, which energy experts say is one of the largest natural-gas reserves in North America, to drop 40% in the coming months. "There is a systematic change in thinking among energy companies that you could not have guessed just six months ago," says Harpole. "The places with the highest drilling costs will see a reduction first, but rig counts are going to decrease everywhere."