By Brendan LaChance on January 19, 2021
CASPER, Wyo. — Wyoming’s oil production began to stabilize in fall 2020, but new drilling of oil and gas wells remains down, according to the Wyoming State Geological Survey (WSGS).
Only four rigs were operating at the end of December 2020 compared with over 30 in Dec. 2019, the WSGS said in their annual Oil and Natural Gas Resources of Wyoming report released on Tuesday, Jan. 19.
The report provides a snapshot of what happened to Wyoming’s oil and gas industry throughout the year.
“This time last year, oil and gas production in Wyoming were on a seemingly predictable path,” the report states. “Oil production was expected to again break records, and gas production was forecast to gradually decline, as it has since 2009.”
“Within months, however, a perfect storm of dynamic national and international market conditions and a global pandemic drastically changed the trajectory of Wyoming’s production, especially of oil. Although the pandemic has dominated headlines, it is not the only factor contributing to Wyoming’s tenuous oil and gas outlook—a challenge the state has faced before.”
The WSGS said that Wyoming had been on track in early 2020 “to produce oil in quantities not seen since 1991” with the United States becoming a net petroleum exporter.
“Crude oil production from the Powder River Basin consistently increased by more than 20 percent year-to-year from 2017 through 2019,” the report states. “However, economists and industry experts began warning of potential oversupply issues in both national and international markets.”
“In an attempt to offset looming downward pressure on oil prices, OPEC+ agreed in late 2019 to cut production through March 2020, and as the pandemic escalated, they extended the cuts through July 2020. Yet new production continued to match or outpace withdrawals, and by April 2020, global crude oil storage was nearing capacity and U.S. inventories remained higher than average.”
OPEC+ started to ramp up production in August and again in January, aiming to regain market share, adding to the global supply glut, according to the WSGS.
“However, during their January 2021 meeting, Saudi Arabia announced surprise production cuts of one million barrels per day for February and March, improving the short-term supply outlook,” the report said.
Oil and gas oversupplies have also been impacted by lower levels of consumer demand both during and prior to the pandemic.
“At the beginning of 2020, fluctuating export opportunities, energy efficiency and fuel economy gains, cheaper renewable energy costs, and warmer-than-normal winter temperatures had already lessened demand for U.S. oil and gas,” the WSGS said. “When the COVID-19 pandemic lockdowns abruptly slowed most of the economy, the combination of an already oversupplied market and severely diminished demand worsened the supply-demand imbalance and briefly forced April oil prices into the negative.”
“Wyoming’s crude oil prices, which typically track $4–6 less than national benchmark WTI prices, averaged less than $11 per barrel in April—a monthly average that had not been seen since the 1980s.”
That led to a halting of new drilling and the WSGS said that many existing wells either temporarily stopped producing or were shut in.
“As a result, the state’s oil production this past May plummeted to less than 60 percent of the production from May 2019,” the WSGS said.
While oil production has stabilized somewhat, the WSGS said that demand for oil is not expected to return to pre-pandemic levels until at least mid-to-late 2021.
Wyoming’s oil production had rebounded to about 85% of pre-pandemic levels as of Sept. 2020. The WSGS said this likely occurred due to horizontal wells drilled early in the year coming online along with some shut-in wells producing again.
“However, unless crude oil prices increase and new wells are drilled to offset natural production declines in aging wells, this rebound may be temporary,” the report states.
Natural gas production, which has been in gradual decline in Wyoming since 2009, was less impacted by the pandemic compared to oil.
“Gas prices, both nationally and at Wyoming hubs, were somewhat insulated from the worst of the economic shock by increased residential electricity use as people stayed at home more,” the WSGS says. “In fact, Wyoming gas prices began to climb in August, an increase attributed to rising electric power sector demand amid warmer than-normal temperatures.”
“As fall and winter weather has increased heating needs, Wyoming gas prices have continued to climb, breaking $3 per thousand cubic feet at the end of October.”
Wyoming has two of the nation’s ten largest natural gas fields and horizontal drilling has proven successful in both the Jonah and Pinedale fields, according to the WSGS. However, a national supply glut of natural gas is also impacting Wyoming’s natural gas sector.
“On the production side, this glut was caused by pipeline capacity expansions allowing record amounts of associated gas, shale gas, and liquid natural gas products to flood U.S. markets,” the WSGS said. “From June into November, natural gas inventories were well above the typical five-year range, and hovered at near record-breaking levels.”
“Because long-term oversupply keeps prices low, Wyoming operators are limited in their ability to profit from gas production. As such, from 2010 to 2019, Wyoming’s natural gas production declined an average of 4.4 percent each year, with a 13 percent decline in the first nine months of 2020.”
The WSGS says that if natural gas prices continue to climb, operators could be incentivized to begin drilling new wells.
“Any subsequent slowing or reversal of the state’s long-term decrease in natural gas production will be subject to gas prices remaining elevated and storage remaining below capacity,” the report states.
The WSGS says that Wyoming remains in a position as “a major player” in the oil and natural gas industry.
“When supply, demand, and price factors again align, Wyoming’s oil and gas industry is well positioned to rebound,” the report states. “Unconventional reservoirs in the Powder River and Denver basins contain substantial oil and associated gas reserves.”
“In the Greater Green River Basin, horizontal drilling has greatly increased the production potential of Wyoming’s large gas fields. Recent investment in pipeline infrastructure ensures the continued distribution of the state’s resources. Overall, Wyoming is in a position to remain a major player on the national oil and gas stage for years to come.”
The full WSGS 2020 summary report is available online.
