Low oil prices forcing independents to halt production

GILLETTE, Wyo. -- Until late November, the shed next to one of George Fancher's wells here in northwestern Wyoming was alive around the clock with the chugging and hissing of pistons and pumps. They filtered water coming out of his well and injected clean water back in to keep the oil flowing.

A month later, the only sound was the low whir of a heater -- kept on to assure that in the sub-zero chill, the equipment did not freeze, crack and rupture.

After nearly three decades of running his own, independent company, Fancher is taking part in the shutdown of vast swaths of the nation's oil industry. The lowest oil prices, adjusted for inflation, since before the 1973 oil crisis have forced him to idle wells, lay off workers and cut off many contractors who depend on him. "This is the worst I've ever seen," Fancher said in a voice more gravelly than the road into here. "I've never seen prices go this low and stay this low for this length of time." And Fancher is among the lucky: He's financially strong enough that he considers his production halt only temporary. Low prices and foreign competition, which favor the Exxons and Mobils over the George Fanchers, are making the wildcatter an endangered species. Enshrined in fable for his enterprise and daring, the oilman in jeans and boots is giving way to the oilman in a suit. Except for huge oilfields far offshore or in Alaska's wilds, major oil companies consider most of the United States too expensive or played out to bother with. As the oil giants shifted production abroad, they left independents to drill five of every six new wells, producing half the crude in the continental United States. Exxon's planned acquisition of Mobil has only compounded many independents' sense of powerlessness. Exxon, the nation's largest oil company, was already insulated against lower prices, with higher earnings from refineries, chemical plants and gas stations balancing lower earnings from production. Exxon and Mobil see their deal as a way of cutting payrolls and costs even further. But independents, devoted entirely to oil or natural gas production, are less able to ride out the cycles. They shut down more than 48,000 of the nation's 573,000 wells in the first half of 1998, and prices kept on falling. Now, when oil producers gather in Oklahoma or Texas or Louisiana or Wyoming, they quietly speak of trying to form their own OPEC in the hope of pinching production and raising prices. With the nation already importing half its oil, and domestic production falling, the independents see themselves as the bulwark against even greater foreign domination. The exploration and production industry's payrolls fell to 314,000 in November, down about 25,000 from a year earlier. States like Wyoming have been hardest hit, as tax revenues that pay for schools, roads and health care dwindle. In other areas, from Oklahoma and Texas to California, the oil bust has slowed or reversed the job growth enjoyed by the rest of the nation. A robust national economy, however, has helped limit the damage. In Louisiana, welders and pipefitters who lose oilfield jobs can often find new ones in the shipyards. Texas, the nation's largest oil producer, is so diversified that its current predicament is how to spend a hefty budget surplus. Though Wyoming might not seem like the center of the oilpatch, oil is its lifeblood, natural gas its air, coal its very food. Just 100 miles or so south of Gillette lies Teapot Dome, the oilfield that in the 1920s became synonymous with Washington scandal. While Texas now has more jobs in high technology than in energy, Wyoming has little besides buried reserves and rising fears. "Everybody does like cheap gasoline prices, but Wyoming really suffers," said John Kennedy, a leading independent here who is shutting down his 125 or so wells one by one. As job losses mount and tax revenues decline, he added, "It's just a disaster looking for a moment to happen." In December, a state commission with six legislators and five citizens appointed by the governor recommended introducing Wyoming's first personal income tax. "If it's not going to be an income tax, it's going to be some rather draconian cuts in the services we have," said Shelby Gerking, a committee member who teaches economics at the University of Wyoming in Laramie. Gillette itself, population about 17,000, is the capital of the Powder River Basin, the nation's largest producer of coal. Strip- mining is so mechanized, though, that oil remains a larger local employer. The area, a rolling, windswept prairie of sagebrush and spiky grasses, is not the Wyoming of Yellowstone and the Tetons. "There's not a lot to do unless you're involved in the oil or mining business," Fancher said. "And sometimes not even then." Much of Wyoming, like California, has the disadvantage of producing crude that is heavy and sour, or high in sulfur. Higher refinery costs mean lower prices at the wellhead. Prices of lower- grade crudes have fallen even more than the higher grades because of imports, with some American refineries switching from domestic supplies to cheaper Mexican and Venezuelan ones. With oil trading recently at about $11 a barrel on the New York Mercantile Exchange, Fancher was getting $4 or less -- or $1 to $3 below his replacement cost. Shutting down a well is still a tough decision. It costs $2,000 or $3,000 initially and then up to $1,000 a month for maintenance and inspections, which sometimes require snowmobiles. Fancher, rugged and jut-jawed at 59, is a petroleum engineer and the son of a petroleum engineering professor. He still speaks of his chosen career in almost religious terms. "I had a dream and a vision," he said, looking over more of his wells where the stoic bobbing of his pumpjacks had been halted. "I got to know some of those independents who were students of my dad. I was inspired by the challenge and the rewards." A dry hole can cost a wildcatter hundreds of thousands of dollars, while in good times a strike can pay millions. Fancher has his office in Denver, where strong telecommunications and cable industries are cushioning some cutbacks in energy. Aboard the narrow 19-seat turboprop to Gillette that Fancher calls "the cigar," he began to describe how he had as many as 16 employees in the early 1980s. "You're selling yourself short," said Fred Ronanjenko, an oilfield mechanic in the next row back. "I remember when you were keeping 40 people working. You were keeping the trucking outfits going. You were keeping the rig units going." Having recently let about five employees go, at least temporarily, Fancher expected to have only four or five left by January. He drilled no new wells last year. The Energy Department's national rig count fell to 734 in October from more than 1,000 at the end of 1997. James J. Hladky, president of Cyclone Drilling, says Fancher is no different from his other customers. "This is the first time in the 23 years I've been in business where I haven't had a rig running in the Powder Basin," he said at the Village Inn diner here, where Fancher and others gather at dawn. With a sound balance sheet, nearly three decades of experience and 30 wells that can produce about 1,500 barrels of oil -- more than 60,000 gallons -- a day, Fancher was 23rd among the state's 700 or so producers in 1996. Though he is more vulnerable than some independents with billions in annual revenues, he has always considered himself more secure than the tens of thousands of "strippers," or mom-and-pop oil companies with wells that produce 10 barrels a day or less. While the strippers have been closing down for years, today's low prices have put much larger producers at risk. "This truly is an emergency," said George M. Yates, chairman of the Independent Petroleum Association of America, whose own company, in Roswell, N.M., has shut down about a quarter of its wells. "At these prices hardly anything in the lower 48 onshore is economical. There was a Washington Post story on the hardships in Russia and Indonesia because of low oil prices. Nobody seems to know we are the second- largest producing country right here."

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