On to Plan B as Oil Work Stalls in Texas
By CLIFFORD KRAUSSJAN. 19, 2015
MIDLAND, Tex. — With oil prices plummeting by more than 50 percent since June, the gleeful mood of recent years has turned glum here in West Texas as the frenzy of shale oil drilling has come to a screeching halt.
Every day, oil companies are decommissioning rigs and announcing layoffs. Small companies that lease equipment have fallen behind in their payments.
In response, businesses and workers are bracing for the worst. A Mexican restaurant has started a Sunday brunch to expand its revenues beyond dinner. A Mercedes dealer, anticipating reduced demand, is prepared to emphasize repairs and sales of used cars. And some well-off oil company managers are cutting back at home, rethinking their vacation plans and cutting the hours of their housemaids and gardeners.
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Dexter Allred, the general manager of a local oil field service company, began farming alfalfa hay on the side some years ago in the event that oil prices declined and work dried up. He was taking a cue from his grandfather, Homer Alf Swinson, an oil field mechanic, who opened a coin-operated carwash in 1968 — just in case.
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Homer Alf Swinson, left, an oil field mechanic, opened a coin-operated carwash in 1968 — just in case oil prices declined. Credit Michael Stravato for The New York Times
“We all have backup plans,” Mr. Allred said with a laugh. “You can be sure oil will go up and down, the only question is when.”
Indeed, to residents here in the heart of the oil patch, booms and busts go with the territory.
“This is Midland and it’s just a way of life,” said David Cristiani, owner of a downtown jewelry store, who keeps a graph charting oil prices since the late 1990s on his desk to remind him that the good times don’t last forever. “We are always prepared for slowdowns. We just hunker down. They wrote off the Permian Basin in 1984, but the oil will always be here.”
It’s at times like these that Midland residents recall the wild swings of the 1980s, a decade that began with parties where people drank Dom Pérignon out of their cowboy boots. Rolls-Royce opened a dealership, and the local airport had trouble finding space to park all the private jets. By the end of the decade, the Rolls-Royce dealership was shut and replaced by a tortilla factory, and three banks had failed.
There has been nothing like that kind of excess over the past five years, despite the frenzy of drilling across the Permian Basin, the granddaddy of American oil fields. Set in a forsaken desert where tumbleweed drifts through long-forgotten towns, the region has undergone a renaissance in the last four years, with horizontal drilling and fracking reaching through multiple layers of shales stacked one over the other like a birthday cake.
But since the Permian Basin rig count peaked at around 570 last September, it has fallen below 490, and local oil executives say the count will probably go down to as low as 300 by April unless prices rebound.
The last time the rig count declined as rapidly was in late 2008 and early 2009, when the price of oil fell from over $140 to under $40 a barrel because of the financial crisis. The United States benchmark was down $1.17 on Monday to $47.52.
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Unlike traditional oil wells, which cannot be turned on and off so easily, shale production can be cut back quickly, and so the field’s output should slow considerably by the end of the year.
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The Dallas Federal Reserve recently estimated that the falling oil prices and other factors would reduce job growth in Texas overall from 3.6 percent in 2014 to as low as 2 percent this year, or a reduction of about 149,000 in jobs created.
Midland’s recent good fortune is plain to see. The city has grown in population from 108,000 in 2010 to 140,000 today, and there has been an explosion of hotel and apartment construction. Companies like Chevron and Occidental are building new local headquarters. Real estate values have roughly doubled over the past five years, according to Mayor Jerry Morales.
The city has built a new fire station and recruited new police officers with the infusion of tax receipts, which increased 19 percent from 2013 to 2014 alone. A $14 million court building is scheduled to break ground next month. But the city has also put away $39 million in a rainy-day fund for the inevitable oil bust.
“This is just a cooling-off period,” Mayor Morales said. “We will prevail again.”
Expensive restaurants are still full, and traffic around the city can be brutal. Still, everyone seems to sense that the pain is coming, and they are preparing for it.
“We are responding to survive, so that we may once again thrive when we come out the other side,” said Steven H. Pruett, president and chief executive of Elevation Resources, a Midland-based oil exploration and production company. “Six months ago there was a swagger in Midland, and now that swagger is gone.”
Mr. Pruett’s company had six rigs running in early December but now has only three. It will go down to one by the end of the month, even though he must continue to pay a service company for two of the rigs because of a long-term contract.
The other day Mr. Pruett drove to a rig outside Odessa he feels compelled to park to save cash, and he expressed concern that as many as 50 service workers could eventually lose their jobs.
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Randy Perry, who makes $115,000 a year, plus bonuses, managing the rig crews at Elevation Resources, said he always has a backup plan. Credit Michael Stravato for The New York Times
But the workers themselves seemed stoic about their fortunes, if not upbeat.
“It’s always in the back of your mind — being laid off and not having the security of a regular job,” said Randy Perry, a tool-pusher, or rig crew manager, who makes $115,000 a year, plus bonuses. But Mr. Perry said he always has a backup plan because layoffs are so common, even inevitable.
Since graduating from high school a decade ago, he has bought several houses in East Texas and fixed them up, doing the plumbing and electrical work himself. At age 29, with a wife and three children, he has three houses, and if he is let go, he says, he could sell one for a profit he estimates at $50,000 to $100,000.
Just a few weeks ago, he and other employees received a note from Trent Latshaw, the head of his company, Latshaw Drilling, saying that layoffs may be necessary this year.
“The people of the older generation tell the young guys to save and invest the money you make and have cash flow just in case,” Mr. Perry said during a work break. “I feel like everything is going to be O.K. This is not going to last forever.”
The most nervous people in Midland seem to be the oil executives who say busts may be inevitable, but how long they last is anybody’s guess.
Over a lavish buffet lunch recently at the Petroleum Club of Midland, the talk was woeful and full of conspiracy theories about how the Saudis were refusing to cut supplies to vanquish the surging American oil industry.
“At $45 a barrel, it shuts down nearly every project,” Steve J. McCoy, Latshaw Drilling’s director of business development, told Mr. Pruett and his guests. “The Saudis understand, and they are killing us.”
Mr. Pruett nodded in agreement, adding, “They are trash-talking the price of oil down.”
He continued: “Everyone has been saying ‘Happy New Year.’ Yeah, some happy new year.”
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