It was May 2009 when New Yorkers Heidi Hunter and John Bologna opened their new delicatessen in downtown Ignacio. They were optimistic that a recent lull in natural-gas and oil industry activity was just a bump in the road. But four years later, the couple realized they opened the doors of Hero’s New York Delicatessen just as the dual tides of the economic recession and declining natural-gas prices were coming to a head.
Hunter estimated that 80 percent of Hero’s business comes from workers in the gas field, so as drilling in the area started to decline, so did the number of customers.
Hero’s closed its doors today and will be opening a new restaurant in Aztec, where Hunter and Bologna hope a busier natural-gas and oil industry will again keep them busy churning out pizzas, chicken wings and pasta dishes.
“The well guys have been disbursed to other areas in the country,” Hunter said. “This town depends on the well guys.”
Like Hero’s, local governments and businesses across the county have had to cut costs and shift operations to cope with the ripple effects of declines in natural-gas prices and a horizon void of drilling rigs. Their coping mechanisms are both expected and inevitable in a place where the web of the natural-gas industry extends far beyond the wellhead.
Natural-gas and taxes
It takes only a brief look at a pie chart of La Plata County’s property-tax revenue to see the effects of the drop in natural-gas prices from 2009 until last year. The percentage of county property taxes paid by gas, oil and natural resources has slowly become a smaller and smaller piece of the pie, dropping from 60 percent in 2009 to 37 percent this year. This year, the county will see a $3.6 million decrease in property-tax revenue, which will affect the 2014 budget. That’s on top of a $920,000 loss last year.
Revenue decreases stem in large part from the drop in natural-gas prices, from $8 per thousand cubic feet (mcf) in 2008 to about $4 per mcf now. Because assessed valuation always lags a year behind prices, the property-tax revenue is just now being affected by gas prices that averaged just more than $2.50 mcf in 2012.
County Finance Director Diane Sorensen said the county will ask all departments to keep expense requests equal to or less than last year and assigned groups of employees to find ways to cut costs, find new revenue sources and measure costs and benefits of county services.
“We are focused on costs going forward in what we believe to be a changing of times,” Sorensen said.
County Commissioner Julie Westendorff said impending revenue decreases are a warning sign about the county’s dependence on natural-gas production.
“As oil and gas revenues have gone down, it’s not good planning to expect oil and gas revenues to always carry us,” she said at an April forum. “I don’t want to be dependent on oil and gas production to always pay our bills. Prices go up and down.”
Districts with a higher percentage of natural-gas and oil production within their bounds will be hit even harder than the county.
Property-tax revenue from natural-gas and oil production and infrastructure accounts for about 90 percent of revenue in Los Pinos Fire Protection District. When natural-gas prices climbed to $10 and $12 per mcf, the district held off on building a new administrative building and instead started funneling money into a reserve fund, said Larry Behrens the district chief.
“It was one of those booms we knew wouldn’t last,” Behrens said. The district lost $280,000 in revenue between 2012 and 2013 and stands to lose another $1.2 million in 2014 revenue.
The ripples
Just five companies have filed for drilling permits in 2013, compared with 328 permits filed in 2008. There are no drilling rigs operating in the county.
Gas prices generally have to be around $4 per mcf for operators in this area to consider restarting drilling programs, but every operator is different, said Christi Zeller, executive director of the La Plata County Energy Council.
Yet as the “majors,” such as BP and Chevron, lay low in the northern San Juan Basin, the small businesses that provide contract services related to drilling and production, cater company meetings and provide wellness benefits to employees feel the repercussions.
Michelina Paulek is the co-owner of CorpStrength, a two-person company that provides corporate wellness programs. CorpStrength had a contract with BP to provide wellness training, fitness coaching and health tests at the company’s Durango and Farmington offices. But in April, Paulek said she got a call from BP telling her the contract had been canceled to cut costs and reduce duplication of services.
The move forced her to lay off the company’s only employee, a divorced mother of three. As a business owner herself, Paulek said she understands BP’s decision, but it’s still difficult to deal with.
Mike Clark, president of the hydroexcavation company H2X, said his company’s operations have shifted with the exodus of drilling. The company moved its headquarters from Bayfield to Decatur, Texas, about a year and a half ago and has reduced the number of trucks working locally from six to two.
“Our business was growing rapidly but not in Southwest Colorado because the price of natural gas doesn’t support that kind of activity,” Clark said.
Across the street from Hero’s Delicatessen in Ignacio, Waci-ci Trading Co. co-owner Mel Silva said 65 percent of his customers are workers in the natural-gas and oil fields. They come to the trading company for the flame-resistant clothing necessary to satisfy federal safety standards. Sales are “way down” from the mid-2000s as activity in the San Juan Basin has dwindled, Silva said.
“I could probably be retired by now if things would have stayed at the level they were in 2006 and 2007,” he said.
Defying local realities
Yet even as drilling has slowed, local natural gas-and oil-related businesses and their employees have managed surprisingly well. In fact, the mining sector, which includes coal mines, gas production and pipeline work, was the largest private sector contributor to wage growth in La Plata County during the last decade, according to data from the Bureau of Labor Statistics. Last year, the average mining sector salary was 85 percent higher than the average wage in the county – $76,000 versus $41,000. The number of natural-gas and oil jobs in the county also has grown almost 200 percent since 2002 to 1,730 employees, according to state data.
Roger Zalneraitis, executive director of the La Plata County Economic Development Alliance suggested companies based here are doing well because they are pursuing work in places like North Dakota and Texas.
“My suspicion is, companies are still growing because they are diversifying to other states,” he said.
ecowan@durangoherald.com
