In the petroleum industry, the number of active working oil and gas rigs serve as a primary indicator of oil and gas demands. As rig counts dwindled at the start of 2016, so did oil and gas jobs, investments and royalty payments.
What are Oil and Gas Rig Counts?
For over 70 years, economists and oil industry professionals have relied on the weekly Baker Hughes Rig Counts official count of working oil and gas rigs in North America. On the fifth working day of each month, they report on international rig counts. These numbers are direct indicators of the health of the drilling industry. When the rigs are active, oil and gas drilling and production are in-process which means work for petroleum professionals and royalties for investors and mineral rights owners.
The United States rotary rig count for the last week of February 2016 was down 12 rigs, for a total of 502. Within this count, 102 are drilling for gas, while the remaining 402 focus on oil. This overall rig count is a little over 60 percent less than it was a year ago. The current rig count is the lowest in the U.S. since April 1999 when there were just 494 active rigs.
When oil and gas rig counts decline, it affects oil and gas industry employees, investors, landowners and every industry that relies on oil and gas supplies. As of the end of February, crude oil prices are 34.1 percent lower than last year. Gas prices are also down 41.2 percent over last year.
The Impact of Current Rig Counts
The declining weekly oil and gas rig count and prices have wide-reaching effects. In a Forbes article from January 2016, Petroleum Geologist Art Berman noted drilling companies have been relying on funds from secondary shares, bonds, and equity capital, but they are still running out of money due to the plummeting price of oil, which now hovers just above $30 per barrel.
When the price of oil declines sharply, there’s not much profit to pay oil and gas workers or investors. Layoffs, bankruptcies, and business closures aren’t uncommon. This trickle-down effect is sometimes also felt in small drilling communities. As workers lose their jobs, they don’t have money to funnel into the local economy, and often move away to find work, leaving businesses in their communities struggling to survive.
When rigs close down, and production ceases, that also means mineral rights royalties payments dry up for landowners. In turn, demand for drilling declines overall, leaving investors without many opportunities and dwindling overriding royalty interest (ORRI) payments to fuel their businesses.
As the current oil and gas rig counts decline, there are a few segments of the population who appreciate the downswing in the industry: commuters and homeowners. From families heading out on spring break vacations to the trucking industry, drivers certainly appreciate the lower prices at the gas pumps. People who heat their homes and cook with natural gas are also enjoying the lower prices each time they get a utility bill.
If you’d like to learn more about the oil and gas industry and investment strategies — whether it’s selling or buying land — we’d be happy to answer your questions. Please send BWAB a message online or give us a call at (303) 295-7444.