Energy & The Economy

Oil and Natural Gas Drilling in the West Nears 20-Year High

By New West Editor, 6-22-11

	An oil rig in Wyoming, the nation's second-largest energy-producing state. According to a new report, oil drilling has led the recovery of the drilling industry.

Oil and natural gas drilling in the United States has returned to pre-recession levels and the drilling rig count is nearing a 20-year high according to a new graphical analysis by the independent research group Headwaters Economics based in Bozeman, Montana.

Since a recession-induced low in 2008, oil and natural gas drilling “has made a strong recovery,” said Julia Haggerty, the report’s author. Market prices and advancements in drilling technology account for most of the increases, she said.

By late May 2011, national drilling activity was at 91 percent of a 20-year high last reached during the 2008 natural gas surge (2,031 rigs). Rig activity plunged in late 2008 in response to the global economic downturn and lower energy prices. Since then, the national rig count has steadily recovered. As of the week of May 27, 2011, the number of active drilling rigs is more than 1,800.

The Headwaters Economics fact sheet graphically analyzes several key indicators: trends in drilling rig counts by energy type compared to market prices, drilling rig activity by technology type and trends in drilling activity by state, with an emphasis on the energy-producing Rocky Mountain states (CO, MT, NM, UT, and WY) and North Dakota.

“When it comes to land-based oil and natural gas drilling in the United States, there is little evidence that state and federal regulations are hampering industry’s ability to respond to market signals,” said Haggerty. “Price and the ‘primeness’ of resource plays, determined by how well resource qualities fit with drilling and production technology, are the key drivers of the location of drilling.

The recovery has been driven by oil drilling.

While only about 15 percent of all active rigs from 2004 and 2008 were drilling for oil, the share has climbed steadily since late 2009 from 30 percent to more than 50 percent today. This corresponds with a tripling in the price of oil between early 2009 and May 2011 (as compared to natural gas price, which has not recovered since the recession).

In addition, the location and pace of drilling is sensitive to a variety of factors: primarily price, but also technology and the discovery of new resource plays. Drilling activity can shift quickly between geographies and resource types. The mobility of drilling activity helps to explain why energy-producing areas can be so hard hit by boom-bust cycles of energy development, according to the report.

The level of drilling activity is a good indicator of trends in oil and natural gas employment, the report concludes. Because a majority of oil and gas industry jobs are associated with the drilling phase, drilling activity, as measured by rig counts, can serve as a good proxy for employment trends.

Jim Ives, a retired environmental manager from the energy industry and former executive director of the Rocky Mountain Oil & Gas Association, the predecessor to the Colorado Petroleum Association, agrees with the analysis.

“Drilling is alive and healthy in the West, thanks to high oil prices and the innovation and ingenuity of the oil and gas industry,” said Ives. “There’s a clear lesson to learn from these numbers, conservation and a healthy energy industry can coexist.”

In a WyoFile report, Matthew Garrington of the Checks & Balances Project said that claims of a disconnect between production figures and actual drilling as well as the complaint that the West is under siege by bureaucrats bent on slowing down the process are simple politics. High energy prices, said Garrington, are held up as evidence of too much regulation when evidence shows actual production remains tied to market fundamentals.

“We have more active rigs in the U.S. than all the countries combined,” Garrington told WyoFile. “For the last four of the past five months, the U.S. has been a net-exporter of petroleum. … If we do more drilling there’s no guarantee those resources will stay in the U.S.”

Earlier this spring, Headwaters Economics completed a report, Fossil Fuel Extraction and Western Economies, that compares the importance of the fossil fuel economy in the five Rocky Mountain energy-producing states: Colorado, Montana, New Mexico, Utah and Wyoming—and analyzes the relative success that states and communities have had in maximizing benefits and minimizing the costs of energy development.

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