Kill the drill

Sunday’s edition of the New York Times had a front-page report on the steep drop in drilling activity that has followed plunging oil prices in recent months. Since last summer, the number of oil and gas rigs deployed to tap new energy supplies across the country has fallen by half, and the drop is accelerating, especially for natural gas production. The Times quotes Oklahoma’s Devon Energy as Exhibit A of the drilling hangover era:

“The big bonanza is over,” said Jay Ewing, the completion and construction manager for Devon Energy in the Barnett Shale field here, where so far this year his company has brought its rig count from 35 to 8. “Everyone is really shocked how fast everything has turned.”

Energy experts and company executives warn that oil and gas companies now cutting back on investments will be unable to respond quickly to a future economic recovery. John Richels, Devon’s president, said that if the slump lasted two years, it could then take 18 to 24 months for companies to reassemble rig crews.

This development obviously has far-reaching implications for Oklahoma’s economic and fiscal outlook. And the impact is already being felt: the state’s general revenue collections from gross production taxes (primarily natural gas but including some oil) were averaging $87 million per month for the first six months of the current fiscal year; in January and February, GPT revenues averaged $38 million.

The good news, if any, for the industry is that as production falls off, supplies will eventually tighten, which should send prices heading back up. But for the near-term, at least, it looks like it’s gonna be another bumpy ride.