Bonanza to Little House on the Prairie

Low Prices Hit State Coffers

Last year, when the price per barrel hovered around $150 a barrel, oil producing states in the Rocky Mountain region were swimming in black ink, energy companies were being vilified as being greedy and the industry seemed on its way to even bigger spending this year.

And now for a cliché: What a difference a year makes.

With the price per barrel wallowing between $30 and $40 per barrel, the industry, temporarily at least, is off the public relations chopping block. The good news is, the industry is no longer the villain. The bad news: There’s a whole bunch of bad news out there.

And nowhere is that bad news more immediate than in the spending budgets of oil producing states, including those in the United States’ Rocky Mountain region.

There are several ways to quantify just how bad the news might be, but one easy way is by taking a look at drilling activity – and in this case, the rig count statistics show a drop, sometimes dramatic, from last year levels.

Unrest in the West

The general consensus among western state officials is that everyone could live, and would be more or less happy, in the $60-80 range.

In Alaska, for example, where oil funds 90 percent of the state budget, legislators built proposals and legislation on an average of $82 per barrel price.

Unlike Alaska, which has a $5 to $7 billion rainy day fund as a cushion, the states listed below have more rain, if you will, than umbrellas.

A brief rundown of conditions in the western United States includes:

  • New Mexico – According to the New Mexico Independent, the oil and gas industry makes up 18 percent of all state and local revenue, which explains, in part, why the state has an estimated $454 million budget shortfall for fiscal year 2009.

To put it succinctly: “New Mexico is facing a deficit because of low oil and gas prices,” wrote Deborah Seligman, the state’s vice president of governmental affairs.

  • Montana – In 2008, with a barrel of oil hovering at near $140, Gov. Brian Schweitzer was salivating at the 40-billion barrels of oil that were possibly lodged in the eastern part of the state. Today, with oil at less than $50, the urgency is gone.

More troublesome is that the decrease in oil and gas revenues has contributed to the state’s $250.9 million revenue decline.

  • Wyoming – The state hasn’t experienced the monetary shortfall as significantly as other states, but it has seen a 28 percent drop in drilling permits over the past year, which, while not a definite trend, according to officials, is troublesome nonetheless, especially considering crude oil and/or natural gas is produced in 20 of Wyoming’s 23 counties.

Further, and anecdotally, a recent Bureau of Land Management sale of 137 oil and gas parcels around the state recently netted approximately $2.4 million – and that amount is down 87 percent from a similar sized lease sale conducted last year that netted about $18.3 million.

  • Colorado – According to a report in The Denver Post, both the state and the industry are feeling the pain of reduced revenues.

Companies reportedly are slashing operating budgets, and according to the Center on Budget and Policy Priorities, smaller oil revenues will be a factor in the state facing a $604 million budget gap.

  • Utah –The state faces a $302 million deficit for the fiscal year, or about 10 percent of the total state budget, and analysts there point to the decrease in oil revenues.

And while production volumes have not dropped significantly, John R. Baza, director of the state’s division of oil, gas and mining, says, “Already with the current oil and gas prices we have seen a 50 percent drop in our statewide rig count, from a high of 50 rigs in August 2008.”

He went on to say that his regulatory permitting statistics were highest in 2006 when price was in the $60-$65 per barrel range, which is where he believes the target should be.

“I think it needs to stay in that range to encourage significant exploration in Utah,” Baza said.

Who Knows?

Nationally, the drop in oil prices has had a sort of yo-yo effect on the economy. People like the lower prices at the pump, but the incentive to find new and alternative fuels isn’t as great.

The good news, though, is that analysts believe that today’s low oil prices will start to rise as soon as international government bailouts take effect. AAPG member T. Boone Pickens predicted at the end of February oil will climb back to $75 barrel by the end of 2009.

Long-term he’s even more bullish.

“If you don’t think we’ll see $200 to $300 oil in 10 years, you are kidding yourself,” he said. “You think OPEC is a free market? We have no control over what is going on.”

Of course he, and everyone else, has been wrong before.

As Utah’s John Baza says, “Based on my past lack of success at predictions, I had better remain silent.”

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Emphasis: Offshore Developments