An examination of Oklahoma’s oil and gas industry

 

From the Enid News and Eagle.

 

ENID, Okla. — There are a number of different industries that help to sustain Oklahoma, but none may be more important than the oil and gas industry.

“The economic impact is massive. There’s no other industry that’s even close to being as impactful, and I think, particularly with Northwest Oklahoma, when oil and gas does well it sure makes it easier to be in the ag business, too,” said Chad Warmington, president of the Oklahoma Independent Petroleum Association – Oklahoma Oil & Gas Association.

Warmington said it’s important particularly for Northwest Oklahoma to help ease out of the cyclical nature of the agriculture industry.

“If you look at just in terms of dollars and cents, obviously it’s extremely important. But it’s bigger than that in terms of just its impact for that industry because it floats the boats of other industries and it always has,” he said.

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Where play happens

The industry is one that’s facing a number of daunting challenges in Oklahoma, but Warmington believes the future is bright. For one, the SCOOP, STACK and Merge plays are still the hot spots of the state.

There are 116 rigs operating in Oklahoma, and 83 of them are in the SCOOP, STACK and the Merge, Warmington said. The South Central Oklahoma Oil Province (SCOOP) covers a swath that stretches from west-central to south-central Oklahoma. The Sooner Trend Anadarko Basin Canadian and Kingfisher Counties (STACK) encompasses a circle that covers a major portion of Blaine and Kingfisher counties and parts of Dewey, Logan, Oklahoma, Canadian, Custer and Caddo counties. The Merge play is located between the two, hence the name, according to an EnergyHQ.com map.

“It’s a significant area of interest, and obviously the bulk of production that’s coming is coming from there … there’s some other places that are kind of new and a little bit exploratory in kind of the south-central part of the state, maybe a little bit southeastern … but the bulk of the activity is taking place in the SCOOP, STACK and the Merge,” he said.

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Keeping oil flowing

The advent of new technology for the industry, most notably horizontal drilling, has become the new standard, keeping the state’s oil flowing. Without that, Warmington said the existing drilling wouldn’t be possible.

“It’s technology, and it’s Oklahoma technology that has turned these unconventional formations that just weren’t able to be developed into 90 percent of the production of Oklahoma,” Warmington said. “We’ve got to be smart about continuing to encourage that growth and development and understand the industry’s changed significantly. And modern oil and gas companies are not drilling vertical wells, they’re drilling horizontal wells.”

Fighting headwinds

In mid-March, Oklahoma crude oil prices were $54.98 a barrel for Oklahoma Sweet and $42.80 a barrel for Oklahoma Sour, according to OilMonster, which tracks live crude oil prices in the United States and other countries.

However, the number of rigs operating in Oklahoma is down to 111 on March 15, compared to 116 the previous week and 124 in March 2018, according to the weekly Baker-Hughes national rig count. Warmington said Oklahoma is the only state that’s seen such a significant loss of rigs in that time frame.

In the past year, New Mexico has gained 18, Texas has gained nine, North Dakota has gained three, Colorado has gained five and Wyoming has gained six, according to Baker-Hughes numbers.

“If you look at the major competitors, there’s a pretty big discrepancy. We have significant amount of headwind and significant rig loss, so you got to chalk that up to a couple things,” Warmington said.

The first, he said is that Oklahoma has become a more expensive place to drill, with about $600 million worth of tax increases. Second, plays in other states have become more attractive and have good rock.

“So there certainly are headwinds that are pushing against us, and I think the most significant headwind is the industry is being shaped by … the finance guys in the industry, not necessarily the rock and the geology guys,” Warmington said.

By that, he means oil and gas companies are being demanded to have a better rate of return, and the demand can cause a contraction in the number of rigs. He said it’s become about profitability and rate of return.

Future of play

Oklahoma, specifically Northwest Oklahoma, he said, does well when there’s a lot of active rigs running because they generate revenue. The loss of rigs this year has had an impact, at least for the short term.

“You’re seeing a shrinking of those rigs in Oklahoma, but it’s a long way of saying I think that’s probably better for a healthier industry for a longer period of time,” Warmington said. “I think what we’re seeing though is those companies are getting better at what they do and able to do it with fewer people, fewer rigs.”

Ultimately, despite the industry facing its fair share of challenges and the state making it more costly do to business, Warmington believes the future is still positive.

“We just have to be smart about how we kind of weather this next few years and have to understand the people that finance these drilling operations,” he said. “They’re demanding better rates of return and that in turn is going to impact the number of rigs and that in turn is going to impact Northwest Oklahoma because there’s going to be fewer of them that are running, and the normal is going to be that.”