Apr 23, 2020

Oil industry downturn leads to layoffs, ripples in entire Ellis County economy

Posted Apr 23, 2020 8:47 PM
As gas prices across Kansas drop to their lowest prices in decades, 87 octane fuel in Hays ranged from $1.30 to $1.51 late Thursday morning.
As gas prices across Kansas drop to their lowest prices in decades, 87 octane fuel in Hays ranged from $1.30 to $1.51 late Thursday morning.

Hays Post

The historic drop in oil prices means wells across Kansas are being shut down, potentially thousands of industry workers will be laid off and oil property tax revenue will be slashed.

The price of oil hit negative figures Monday. Even as the price rebounded to positive numbers, the price of oil was well below Kansas producers' cost to pump the oil out of the ground.

Lifting costs in Kansas run about $25 per barrel, which means it makes more economic sense to shut wells down and leave the oil in the ground for now.

 John O. Farmer IV is a lifelong oil man and the third generation in John O Farmer Inc. oil company of Russell. He said he has never seen a downturn in the industry this bad.

"This is unprecedented. We have never seen anything [like this]. Yesterday, it closed at 25 cents a barrel for Kansas common and the day before it (went negative," he said. "We have never seen that in the history of the oil and gas history. This is uncharted waters."

Corrected, Friday, 7 p.m.: To reflect more accurate oil prices.

The oil and gas industry accounts directly or indirectly for 118,000 jobs, $3 billion in family income, and $1.4 billion in state and local tax revenue annually. In some counties, taxes related to oil and gas production account for 25 percent of county revenue.

Ellis County is the largest oil producing county in the state.

Farmer said his company plans to shut down most of its wells beginning May 1. John O Farmer Inc. has 450 wells and will shut down 85 percent to 90 percent of the wells. The others likely will only be operated intermittently.

Although the company is trying to retain its core staff using federal Payroll Protection Plan funds, 30 to 40 contract employees will be laid off.

"It really kind of makes me sick," Farmer said, "because not only do we need to look at dollars and cents when we make these decisions to shut down wells, you are also looking at lives — people's livelihoods and people's abilities to put food on the table. 

"Sometimes it is not all about making money. Sometimes it is a decision that not only affects the financial wherewithal of the company or the leases but also it affects the local employees."

Nicole Koelsch, CPA who leads the oil and gas practice with Adams, Brown, Beran & Ball, said the industry will likely see workers leave oilfields for other jobs and not come back.

Marty Patterson, president Western Well Service, has laid off half of his direct staff. He is also using the PPP to keep his remaining staff employees through this crisis. 

He said he hopes to use the PPP funds to sustain his remaining staff until at least until August. He hopes the market will start to correct itself by then.

"This has taken [our business] from a viable business to zero in about three months is what it's done," Patterson said.

The company is planning to shut down all of its 50 wells in Ellis, Rooks and Barton counties.

Effect on entire Kansas economy

Many other industries are also affected when wells shut down, Patterson said. Electric companies such as Midwest Energy sell less power when wells aren't pumping. Chemical companies are not supplying wells. Pumpers will likely lose their jobs.

Yet other businesses that sell pipe and supplies to oil producers and drillers will lose business.

"Ellis County is agriculture, oil and the hospital out there and the university. You take one of those out of there. Ag has been pretty low and now oil is low, you are taking half the economy away from Ellis County right now.

"It's going to be a tough year for sure — 2020."

The property owners lose, too. John O Farmer is in the process of sending letters to the well royalty owners. As wells shut down, the oil revenue for those landowners will go to zero.

Property tax revenue slashed

Local governments collect property tax on oil-producing properties. The guide price on that valuation has been cut in half for this year from $46 per barrel to $23 per barrel.

The valuations on oil properties are still being calculated. They are required to be sent by May 1, but Lisa Ree, Ellis County appraiser, said she will likely ask for a week extension to finish the calculations.

The formula is complicated and based on the amount of oil in reserve in a producing well. However, Ree estimated the oil property tax revenue will be cut in at least half. That would be a loss of $500,000 for Ellis County. Ellis County's annual budget is about $22 million.

If a well was operating at the first of the year, then it will be considered an active well for this tax year, Ree said. However, if wells continue to be shut down into 2021, the tax will be calculated on the well's equipment and not the oil reserve.

This could mean a possible further reduction in property tax revenue from oil.

The county is not the only entity affected. Any taxing entity that depends on property taxes will be affected by decreases in oil property taxes. This includes townships, school districts, rural fire districts and Extension districts.

Bankruptcies may be on horizon

Bankruptcies, especially of some of the smaller oil companies are likely, experts like Koelsch warn. The industry is likely to see consolidation over the long term.

"I see fewer players in the game in the future," she said.

Patterson said he sees himself in a better position than some companies becuase he his not carrying debt. Those companies who have borrowed to drill will be in more peril.

Surplus on the market

Overproduction was pushing oil prices down before the COVID-19 crisis drastically dropped demand. Russia and OPEC dumped large amounts of crude oil on the market right before the COVID-19 crisis hit. Now the U.S. is reaching its limit on crude oil storage capacity.

The global market has a 30 million to 35 million barrel per day oil surplus. Ed Cross, president of the Kansas Independent Oil and Gas Association, said it could take some time for demand to catch up to supply.

Could be long wait for oil industry recovery

Producers like Patterson and Farmer are hoping for a quick rebound, but acknowledge recovery may be slow.

"I don't know how many people are going to be excited to go on vacation or get in an airplane," Patterson said. "Everybody may say we are going to wait until there is a cure for this before we do anything. ... I see at least a year before we get back to normal."

Cross said he thought it could be longer before the industry sees a full recovery.

"I think we will be up and running again in the medium term," Cross said. "We are talking a few years probably — two or three years — before we see things start to get back to where we were once before. I think that will happen eventually. I think that we have to struggle through some tough times."

Cross said experts in industry are forecasting $20 per barrel oil by summer, $30 to $35 per barrel oil by the end of the year and oil in the upper $30s or $40s per barrel in 2021.

"Those are people's opinions," Cross said. "That is not set in stone. The market will decide that."

Koelsch encouraged oil firms to reach out to their banks to see what kind of help they may be able to obtain in restructuring debt.

"There is no one-size-fits-all in surviving a bust cycle," she said.

Koelsch said the oil industry is no stranger to ups and downs. The industry experienced a downturn as recently as 2014, and was only rebounding from that downturn as recently as 2018 and 2019.

"I like to refer to it in my simple mind like riding a roller coaster," she said. "They have seen it before. They have weathered the storm. I have no doubt they will make it through this. How long it will last? We don't know."

Cross said President Trump and the U.S. Department of Energy have discussed other means to assist the oil industry this week, including purchasing oil from domestic producers to place in the strategic oil reserve. This might include the government purchasing oil, but allowing producers to keep the oil in the ground.

"I think it's really sad," Farmer said. "There is going to be a lot of people out of work and it is going to change how we live going forward. Things are never going to be the same from this."