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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Shale Bust Hits Rural Communities As Oil Royalties Plunge

The oil price collapse is hurting not only U.S. shale firms and their drilling activities. The crash has severely crippled the royalty payments to a dozen million American oil and gas royalty owners of land on which companies pump oil. 

The value of the monthly checks to royalty owners in South Texas—home to the Eagle Ford shale play—has plummeted since the beginning of the year, due to the declining activity of oil firms which hastened to idle rigs after oil prices collapsed in early March, Reuters correspondent Jennifer Hiller reports

Paul Ruckman, a royalty owner in DeWitt County, for example, has seen the value of royalty checks crumble by 70 percent since the beginning of the year. The value of those checks will further drop in coming months, Ruckman told Reuters.  

The lower royalty income to residents in the oil communities in Texas and in other oil-producing states including North Dakota and Oklahoma is also diminishing household spending and tax revenues for the oil towns, putting further strain on the economy in these areas, on top of the effects of the layoffs in the industry and the coronavirus pandemic. 

The regular paychecks to landowners across the U.S. shale patch have helped the local communities thrive when U.S. oil production was booming—royalty owners were funding local initiatives and counties were using oil money income to fund construction and repairs. 

In DeWitt County, for example, during the 2018 boom, mineral values added $529 million to the county tax base “following a steady year of drilling and completions of Eagle Ford Shale wells,” the County said in its latest annual financial report for the year ended September 30, 2019. Overall, the county tax base rose by 13 percent, with the increase mostly attributable to growth in the mineral value component which grew to $3 billion. For the fiscal year 2020, the county was planning to repair county roads damaged by oil and gas activity and use tax revenue raised from mineral values to support the repairs. 

Related: Driving Season Won’t Save Gas Demand

The average owner of oil land has received around $500 per month in recent years, according to data from the National Association of Royalty Owners cited by Reuters. But the payments are expected to shrink in coming months. 

As the oil price crash crushed royalty payments, landowners are bracing for months of very low paychecks from oil royalties and counties may suspend investments in revitalizing the communities. 

The significantly lower oil royalty incomes for millions of American landowners come amid rising unemployment rate in the oil towns and counties as oil firms slash budgets, jobs, and drilling activities. 

In April 2020, the Railroad Commission of Texas issued a total of 456 original drilling permits, including 416 permits to drill new oil or gas wells. To compare, in April last year, the Commission had issued double that number of drilling permits—909.   

In the Midland district, the most active area in the Permian shale basin, the Commission issued 263 new drilling permits last month—down from 375 permits for Midland issued in March.  

Unemployment rate in Midland jumped to 3.1 percent in March 2020 from 2.3 percent in February, according to U.S. Bureau of Labor Statistics. In DeWitt Country next to the Eagle Ford shale basin, the unemployment rate rose to 3.5 percent in March from 2.6 percent in February. 

April and May unemployment data are expected to be much worse, considering the businesses battered by the COVID-19-related lockdowns and the collapsing drilling rig count across the U.S. shale patch. 

In North Dakota, as of May 15, a total of 7,500 wells were shut-in for 510,000 bpd of shut-in production, according to the North Dakota Department of Mineral Resources. Active drilling rigs numbered just 14 on May 25, down from 65 active rigs on the same day last year. 

Oil towns in North Dakota, Alaska, Wyoming, Texas, and Oklahoma are accustomed to the boom-and-bust nature of the oil industry. But this time around, the economic prospects and job losses are aggravated by the layoffs in the hospitality and entertainment industry during the lockdowns, and the oil towns and counties could take years to recover, officials fear. The crash in oil prices is also crushing the value of monthly paychecks that royalty owners collect from the oil industry.    

By Tsvetana Paraskova for Oilprice.com

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