Sunday, February 8, 2009

When Natural Gas Prices Down, Some Wells Shut Down

Even as the national economy went into a tailspin, resource-rich towns like Parachute, Colo., were doing fine. Then natural gas prices began to plunge, and the pain began to rise.
By Nicholas Riccardi - Los Angeles Times -
February 7, 2009
Reporting from Parachute, Colo. -- Robert Knight was about to install wireless transmitters on eight new drilling rigs joining the thousands that dot the ravines and mesas here when he got the startling news: All but one of the rigs were coming down.

Falling natural gas prices had led energy firms to abruptly curtail their work here last month, battering the last sector of the U.S. economy that had prospered despite the recession.
"Boy, it was quick," said Knight, who has a business installing communication equipment and who serves as the town manager. "It was like the difference between night and day."

The sky-high oil and natural gas prices that burdened consumers during much of the decade were a blessing to residents of this tiny town and other energy-rich communities from Alaska to Arkansas. Even as the national economy went into a tailspin in early 2008, home prices in boomtowns like Parachute kept rising and the streets were packed with shiny new pickups.

But prices suddenly began to drop in September -- natural gas is down 50% from its peak and oil has plummeted from a high of $136 per barrel to about $40.

The plunge brought some relief to recession-racked consumers, but has raised anxieties in Parachute, a town of 1,500 that bears the scars of busts that followed previous energy booms.

In better times, "you couldn't find a hotel room, you couldn't find a campground, you couldn't find a place to rent," said Laura Diaz, the town planning clerk. That's changing fast.

"On Christmas Day there were three U-Hauls in my neighborhood," she said. "It is a little frightening for the people who have been here and know the history."

According to the energy service company Baker Hughes, the number of active oil and gas drilling rigs in the U.S. has dropped 13% since its peak in August. Gary Flaharty, the company's director of investor relations, said the decline matches the industry's response to previous price drops.

Energy experts say the state of the economy could prolong this energy downturn. "The boom, absolutely, is over for the moment," said Pete Stark, vice president for industry relations at IHS in Englewood, Colo.

But energy-rich communities still have stronger economies than much of the rest of the nation. The seven states with budget surpluses can thank the energy industry, said Arturo Perez, a budget analyst with the National Conference of State Legislatures. Wyoming posts the nation's lowest unemployment rate, 3.4% -- less than half the national rate.

Nonetheless, the reversal has been striking.

Last summer, New Mexico held a special legislative session to spend a $200-million surplus fueled partly by energy revenue. Now it is scrambling to close a $400-million deficit.

Alaska, which socked away billions in oil revenue over the last decade, warns that unless oil prices rise, it will face a budget deficit.

In Parachute, 200 miles west of Denver, the change has been dramatic. The town straddles I-70 along the Colorado River, in the shadow of massive mesas and buttes.

On the slope of one mesa sits a subdivision of about 5,000 people that relies on Parachute businesses. Built to house expected oil and gas workers in the 1980s, the development emptied out when the energy industry killed oil shale exploration in the Grand Valley in 1982.

It had filled back up by this decade, as high natural gas prices made exploration in the rugged land of the Piceance Basin economically feasible. The streets of Parachute and similar towns were clogged with flatbed trucks hauling drilling equipment. Hotels were booked for months in advance.

The region barely felt the recession that followed the dot-com bust in 2001, the recovery that followed, or the brutal downturn that began in late 2007.

"We've had an economic bubble over us for some time," Knight said. "We've been pretty well sheltered."

Then in December, it all changed. Rumors began circulating about energy companies cutting jobs. "For Rent" notices appeared on homes and in local newspapers. Three hotel projects were put on hold, and the few existing hotels began to post vacancies.

"We were known as the only one-stoplight town that had a traffic congestion issue," Knight said. "Compared to that, it's almost like a ghost town."

At VJ's Outlaw Ribbs, the regular flow of customers slowed to a trickle. Some began stopping in to say goodbye -- they'd been laid off and were heading back to their home states of Texas, Louisiana and elsewhere.

"People we used to see every day, we just don't see anymore," said waitress Lori Ross. She tried to look on the bright side -- when she rented a house last year there were 50 applications per open rental. Now, she said, "there are rentals everywhere."

Last week, Del Dawson, a local real estate agent, did what had been unthinkable in Parachute for several years: He cut the prices on two homes.

Like some other local business leaders, Dawson remains optimistic about the region's long-term prospects. He expects energy firms to redouble their efforts when the price of gas creeps back up -- local expectations are that will happen this summer or spring 2010. And many companies are maintaining a sizable workforce for their already drilled wells.

"We still feel it's a boom," said Hayden Rader, a developer who has two projects underway in Parachute. "People are saying there's not enough work here, but we've still got more than anyone else."

Yet residents are feeling the pain. Amy Beasley and her husband run the Old Mountain Gift & Jewelry store downtown and a neighboring shipping business. Their revenue has fallen this month, and people they know in the energy industry who had talked about an unending boom have abruptly lost their jobs.

A fourth-generation Parachute native, Beasley, 35, has been ambivalent about the industry that keeps the town alive but has industrialized the wild lands where her family homesteaded. She and her husband have discussed whether to close their shops given the severity of the downturn.

"We're going to stick it out and try to weather the storm," she said. "It may slow down for a few years, but it's going to be back. They're never going to leave us alone."

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