Lea County’s drilling rig count has climbed out of a hole, signifying a resurgence in oilfield activity, but how long it will last and how much of a revival it is remains to be seen.
As of Friday, 16 rigs were drilling developmental wells in Lea County. It was the first time this year the county’s rig count surpassed the prior rig count at this time last year.
It also is a sharp contrast to the county’s low of two rigs in May. All of the rigs except one in November were drilling for oil and none were exploratory wells.
“These are projects that have been in the pipeline for a while,” said Karin Foster, director of governmental affairs for the Independent Petroleum Association of New Mexico. “These are happening because oil prices are back.”

Rig count numbers
Drilling rig counts are indicators of the amount of activity in New Mexico’s oilfields. The more rigs drilling, the more activity, jobs and economic activity is occurring.
In 2008 when oil hit a record $148 a barrel, rig counts for the state reached a high of 97 rigs. That number quickly fell to the upper 50s as oil bottomed out at near $30 a barrel in early January, and reached a low of 30 in April.
The same is true of Lea County’s drilling rig count numbers, which climbed to a high of 31 in 2008, but fell to a low of just two rigs in May 2009.
In the beginning of summer 2009, Lea County’s rig count as per Baker Hughes ranged from two to four per week and finally jumped to nine to 10 rigs by July. The number of rigs eventually climbed to 11 to 12 through the fall. It was not until November that it finally broke through to 15 rigs.
The drilling operations going on now are primarily coming from larger companies with financial backing to drill, and those are drilling only for oil, except in cases where gas drilling is necessary to keep leases, oil company executives said.
A warm winter and a surplus of natural gas reserves are keeping prices for natural gas below the break-even point, said Bob Armstrong, president of the IPA and owner of Armstrong Energy Corp.
“The Four Corners area is really a very active natural gas producing area and they are basically shut down up there,” Armstrong said.
Armstrong said each rig in operation has an approximately $2 million immediate economic impact in the oilfield.

Factors of oil recovery
Dan Fine, an economic analyst for New Mexico Tech, has accurately predicted the rise and fall of gas prices since the national economic recession began last year.
Fine said in an interview last month that much of oil’s return to what producers consider the point of activity is due to speculation in the market. That assessment may be true as gasoline sales remain low, according to Ruben Baca, executive director of the New Mexico Petroleum Marketers Association.
“On the retail side we are down probably 15 percent volume, and on the larger interstate (highways) it is down 20-30 percent,” Baca said. “We haven’t seen a turnaround in the market for use of fuel.”
Fuel use remains as travelers forego holiday trips and consumers remain guarded on spending. But the increase in oil’s price may be due to a reduction in production.
“Refineries are operating on 80 percent capacity,” Baca said. “That will make the supply a little more scarce.”
Oil prices climbed in the second and third quarters of 2009 to hover between $70-$80 a barrel after reaching lows near $30 a barrel in the first quarter of the year.
Many industry representatives stated in mid-2009 that oil would have to hold steady between $70-$80 for 90 days before activity in the oilfield would begin to resume.
As the price of oil has maintained its place the number of active oil rigs in Lea County has trended upward from four in early June to a high of 17 last week. Oil broke $70 a barrel for the first time this year in June.
“This (activity) is probably somewhat expected,” said Will Palmer, superintendent of Read and Stevens Inc. “Oil stabilized for about 90 days and we saw some activity pick up. I think you will see it stay steady through the first of the year if the oil remains stable.”

Widespread recovery?
Although work in New Mexico’s northern gas fields remains slow, many areas of the oil industry in Lea County and southeast New Mexico are feeling the resurgence.
“Service companies are also starting to be busier,” said Ben Shepperd, president of the Permian Basin Petroleum Association. “They are mostly doing just fine. They have shrunk their overhead, laid off a lot of people, and I think they are all encouraged. Everyone is more occupied than they were and I expect it to continue.”
Alonzo Aranda, chairman of the Hobbs chapter of the Association of Energy Service Companies, has seen work pick up slowly for service companies he works with.
“Work is picking up just a little bit,” he said. “We are still slow, but it has picked up from what it was in June.”
Troy Teague, manager of Cavaloz Energy Inc., formerly Teaco Energy, said his company’s rental tool division has been growing each month since the summer.
“Utilization in the area of well services has recently jumped almost 100 percent above where it was six months ago, and we are optimistic that this upward trend will continue in both divisions,” he said in an e-mail interview. “With respect to our drilling division, in just the last few weeks we have had the opportunity to bid more work, and we are anticipating that our activity in this area will also be increasing in the near term.”

Roadblocks to recovery
The price of oil is promising, but many factors could affect the length or success of the oil industry’s return to activity.
Financing is one of many problems for the oil industry. Others point to New Mexico’s Pit Rule as the stalling factor to oil operations in the state though it is not the only factor.
“Companies are very nervous about climate change debate going on,” Foster said. “If you think there is going to be a huge litigation and regulatory cost, then companies are going to be keeping more money in reserve. Companies are hedging their bets right now.”
Across the state line in Texas’ Permian Basin, the rebound of oil rigs mirrors Lea County’s. Rigs fell precipitously in 2009 and have just now climbed back to a little more than half what they reached during the peak months of 2008.
“It is an increase. I wouldn’t say it is a dramatic increase, but we are seeing an increase,” Shepperd said.
In July 2008, the Texas Permian Basin reached a high of 214 in July 2008. Its lowest point was 52 rigs in May 2009. Most recently, the Texas Permian Basin had 135 rigs working.
Texas does not have the Pit Rule, but activity in the Texas Permian Basin is similar to New Mexico’s while new gas plays in other parts of Texas have spurred increased drilling as companies rush to meet drilling deadlines on new leases.
Outside the state’s Pit Rule, which adds about $100,000-$250,000 to the cost of a drilling operation, according to oil executives, there is also cap and trade and a general anti-industry sentiment, Foster said.
These factors are causing oil companies to move even more slowly with drilling operations than they might otherwise, she said.
“If there weren’t this regulatory environment, we would be seeing 25 percent more rigs,” she said.
Shepperd agreed that oil and gas drilling could be rebounding more if there were not political uncertainty for the industry, but a delay in action in cap and trade legislation may be playing a factor in the current activity.
“Companies may be encouraged because it looks like there will be no action (on cap and trade) before the end of the year,” he said. “Things are starting to improve, but we haven’t seen a total recovery yet.”