Just a few months ago, Alice-Sidney Oil Co. was busy pumping oil out of the ground in Kansas and east Texas. Then crude prices plummeted, sending the global market into turmoil and halting drilling activities for the El Dorado-based exploration and production company.
"We had been busy up until December or January," said Tim Ingram, geologist and production manager for Alice-Sidney.
And now, he says, the company is not drilling at all.
"We're just trying to keep ourselves poised and busy," Ingram said. "And when it gets back, we'll take off running again."
Like the rest of the industry, Arkansas oil producers have scaled back their operations -- in some cases terminating drilling plans altogether -- in response to the price plunge in the global oil market.
The companies say they are working to keep busy until prices rebound. When that happens, producers will be tested on how quickly they can get production back on line, analysts say.
"Even though the cutbacks came at a very fast rate ... I don't think [production is] going to come as quickly as it fell," said Phil Flynn, an energy analyst with Price Futures Group.
Record production from U.S. shale fields has flooded the global market, leading to an oversupply of crude during a period of modest demand. The oil glut has cut prices in half since mid-2014, even sending them to the low $40s in March for the first time in six years.
Energy companies, to curtail domestic production and push prices back up, are reducing their capital spending plans for the year, idling drilling rigs and eliminating jobs.
U.S. producers shut down 31 rigs last week, bringing the oil rig count to 703, said Baker Hughes, an oil-field services company, in a weekly report on Friday. A year ago there were 1,534 oil rigs operating in the United States.
Oil production has been slow to decline -- in part because there is a lag between rig activity and well production -- but analysts have said they expect the flow of domestic crude to peak this month and then decline until August.
Domestic inventories of crude grew to 489 million barrels last week -- the highest level in more than 80 years -- according to the U.S. Energy Information Administration. There were 397.7 million barrels of oil in stock in the U.S. during the same time a year ago.
Prices have started to rebound, but analysts and industry members disagree on whether oil's rout has ended. The continued surplus in global crude coupled with the conflict in Yemen has kept the market volatile.
However, the continuing decline in active oil rigs is leading to "a greater sense that production in the U.S. is going to fall," Flynn said.
On Tuesday, Brent crude continued to fall from its highest price in four months -- $65.28 on Friday -- after Saudi Arabia said Monday that it would maintain current production levels, potentially furthering the oil glut. Brent for June delivery fell 19 cents to $64.64 a barrel on the ICE Futures Europe exchange in London.
West Texas Intermediate crude rose 7 cents to $57.06 a barrel on the New York Mercantile Exchange.
Analysts say the recovery in production and drilling will be slow as companies will be hesitant to invest as much as they did during the height of the shale boom and will bring back only a small number of the tens of thousands of workers that have been laid off as a result of the price collapse.
"It's not that they couldn't put the rigs on quicker," Flynn said. "It's the lack of confidence that prices are going to stay at that area."
He added, "People are less inclined to throw billions of dollars at something where prices could continue to go down."
Robert Reynolds, president of Shuler Drilling Co. in El Dorado, said it takes longer for companies to restart operations than it does to shut them down.
"Depending on how long this price depression lasts -- a minimum of six months and as much as two years," he said when asked how long it would take for there to be an uptick in drilling activity. "The longer [the rout] goes, the longer it takes to ramp back up."
Shuler Drilling, which employs five workers, has laid off an undisclosed number of employees, Reynolds said.
And while waiting for the oil market to bounce back, the company is being more discerning with the types of wells it drills. Shuler, which drills both vertical and horizontal wells, is focusing on shallow wells in south Arkansas that would not have to be "fracked," Reynolds said.
Hydraulic fracturing, or fracking, has helped push U.S. oil production to its current levels by making crude in shale rock formations more accessible. During the process, sand is mixed with water and chemicals and then injected into wells to break apart the rock to release oil and natural gas. Fracking is also more costly.
"What we have to do is be more selective in the projects we pursue," Reynolds said. "$40 oil will pay for fewer projects than $100 oil."
U.S. production will initially increase once prices rebound because there is a backlog of thousands of uncompleted wells, said Andrew Lipow, president of Lipow Oil Associates LLC in Houston.
"If prices were to rise above $60 and $70 you would see a rush by these [exploration and production] companies to complete these wells and get the oil out of the ground," he said.
Bill Herbert, an analyst with Simmons & Co., said bringing back the tens of thousands of workers who lost their jobs as a result of the price collapse will be a challenge, though.
Lipow said that close to 100,000 employees in the industry -- including workers for oil-field services companies and parts manufacturers -- have lost their jobs because of the drop in oil prices, with most of the layoffs occurring in the U.S.
"The ability to re-attract those people that have been laid off remains to be seen," said Herbert, who expects prices to recover by the middle of the year.
There will be some rehiring of workers, said Carlos Newall, equity research associate for Raymond James and Associates.
"But not to the levels before," he said. "Something like this is good for the industry in the sense that you take a step back and value what you have internally."
A Section on 04/29/2015