US oil ‘stripper well’ operators adopt new strategies to keep afloat amid crude slump

The conventional wisdom is that 'strippers' would be the first to fold in the face of oil’s slide below US$40 given their tiny size.

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US “stripper well” operators, the nation’s smallest oil producers seen as most likely to succumb to the crude price slump, are hanging in tough, reducing the chances of near-term production cuts needed to rebalance the domestic oil market.

The conventional wisdom is that “strippers” would be the first to fold in the face of oil’s slide below US$40 given their tiny size – some may pump as little as few hundred dollars’ worth of oil a day – limited access to capital and high costs compared with bigger, more efficient shale producers.

Yet interviews with executives and experts show those smallest, often family-owned, businesses are also among the most resourceful, keeping the oil flowing even as prices near 11-year lows and a growing number of their wells lose money.

While hopes for a rebound are fading, “strippers” are doing everything they can to keep their “nodding donkey” pumps working so they can hold on to land leases that give them access to oil reserves.

“The small operators of the stripper wells are pretty resilient,” says Mike Cantrell, the head of the National Stripper Well Association. “They’ve always made it through and will still make it through.”

Stripper wells pump no more than 15 barrels of oil per day but together over 400,000 wells scattered across the nation’s oilfields produce over a tenth of US oil output, enough to affect the market supply-demand balance and prices.

Drawing analogies to the 1980s oil slump, some analysts had warned that half of stripper wells could shut if crude prices held below $40 a barrel, helping ease the supply glut and possibly underpinning the prices.

The tenacity of the stripper well producers is challenging that view.

For example, Nelson Wood who runs Wood Energy, a family business founded by his parents more than 60 years ago, has laid off 14 of his 32 employees and closed 10 of 150 wells in the Illinois Basin, but so far the production is down only 4 per cent.

He may have to shut more wells, based on electricity, labour, maintenance and salt water disposal costs, but said one key concern was meeting the requirements of oil and gas mineral rights.

“We run some wells at a loss to keep the lease active,” he said.

To be sure, many of these mom-and-pop shops have already cut production to conserve cash and the longer oil prices remain low, the harder it will be for them to keep pumping.

Darlene Wallace, who inherited her company Columbus Oil after the passing of her husband over a decade ago, has shut in four of her 25 wells in Oklahoma, cutting about a third of production, and is now focusing on overhead costs.

Ms Wallace says she has done everything from getting rid of a postage machine, which saves just $300 a year, to asking her three employees to cover 20 per cent of their health insurance costs, which she estimates could result in annual savings of $10,000.

“I hate to do that to my employees, but we’re all going to have to cut back,” Ms Wallace says.

Some stripper operators are even deferring necessary maintenance, others are turning to temporary workers to cut employment costs. Many are so small that their owners can roll up their sleeves and do the work themselves if necessary.

The stripper well operators who spoke with Reuters said many of their peers are taking similar measures to survive.

Ponderosa Advisors, a Denver-based energy, agriculture and water consultancy, reckons debt-free companies can cover their operating costs even with oil below $35 a barrel. Some produce at a cost as low as $18.

That means prices can fall further before any major shut-ins.

In the meantime, many stripper operators are manoeuvring carefully around clauses in their lease agreements to stay in the business. Most can only turn off their wells for a brief period without losing their rights.

In Texas, for example, the cessation period for which a well can get idled without the operator losing the lease is typically 60 to 90 days, according to Richard Hemingway Jr, the head of the oil and gas practice at law firm Thompson & Knight.

“I have clients that are masters at working that,” he said, referring to a technique in the industry known as “stop-cocking”, where producers wait until the very final day of the cessation period before turning back on production.

Ken Hunter of Vaquero Energy, a stripper well company with several hundred wells in California, says in some cases operators may chose to produce from just a single well on a lease that includes up to 10 to remain in compliance.

Such techniques could lead to deeper production cuts if the crude downturn persists, but as long as stripper producers keep their leases they should be able to crank up output again once prices recover.

“We could easily fill the void with production from incremental drilling as soon as the price rebounds to even $50,” according to Bernadette Johnson, a managing partner at Ponderosa Advisors.

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