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Low Oil Prices Pose Threat to Texas Fracking Bonanza

Longhorns near a new well being drilled in Karnes County, Tex., which leads all Texas counties in crude oil production.Credit...Michael Stravato for The New York Times

KARNES CITY, Tex. — No place in Texas produces more oil than Karnes County, but suddenly the roaring economy here is cooling fast, chilled by the plunging price of crude.

Workers who migrated from far and wide to find work here, chasing newfound oil riches, are being laid off, deserting their recreational vehicle parks and going home. Hay farmers who became instant millionaires on royalty checks for their land have suddenly fallen behind on payments for new tractors they bought when cash was flowing. Scores of mobile steel tanks and portable toilets used at the ubiquitous wells are stacked, unused, along county roads.

“Everybody is waiting for doomsday,” said Vi Malone, the Karnes County treasurer. “Everything was good, and everybody was getting these big checks, and everybody waited for their land to be leased, and then it all came to a screeching halt around the beginning of the year.”

That screeching was the price of oil cracking — to under $45 a barrel from more than $100 a barrel last summer. After a brief revival in the spring, the benchmark American price has swooned again by more than 25 percent, plunging this week to a new low since the recession.

Record production in the United States, along with a drilling frenzy in Iraq and Saudi Arabia, as well as the prospect that Iranian oil will again flood world markets, have spooked traders into abandoning their positions. What’s more, the very productivity here in the heart of the Eagle Ford shale fields, and the efforts by the oil companies to make them increasingly efficient, are contributing to the glut as well.

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Raymundo Villareal, 38, in his rented trailer in Kenedy, Tex. Since oil prices have fallen his work hours have been cut in half.Credit...Michael Stravato for The New York Times

The plunge has rippled far beyond the markets, sending the economy here and across the entire oil patch into turmoil. Nowhere is the sharp turn in fortunes as evident as in places like Karnes County and other parts of Texas, North Dakota, Louisiana, Colorado, Pennsylvania, Arkansas and Ohio that had little oil or natural gas production until drillers figured out how to tap into hard shale rocks deep underground.

“People didn’t have to work anymore,” said Elliott Skloss, a sign maker for the county road and bridge department. “Now they’ll have to work or panhandle if the oil price doesn’t go back up.” His family farms had five oil and gas wells that earned monthly checks worth $50,000 just a year ago, but they now earn one-tenth as much because of the decline in prices and well production.

Mineral rights that once sold for $40,000 an acre for the field’s sweet spot here in Karnes County now go for $15,000. The total county tax base dropped this year for the first time since 2010, by more than 20 percent.

Many oil companies, including Royal Dutch Shell and Chevron, have had to slash their payrolls this summer. Chesapeake Energy, which has prized assets here in the Eagle Ford, recently scrapped its dividend to save cash. Another Eagle Ford producer, Linn Energy, an energy producing partnership structured as a limited liability company, stunned Wall Street recently by announcing its intention to suspend payments to investors to conserve cash.

Producers that have been shielded by contracts that allowed them to sell oil at higher than benchmark prices are gradually being exposed as those agreements expire. The depressed oil price is limiting the ability of companies to borrow as they have to write down field assets that are used as collateral for loans.

One result, analysts say, will be a painful consolidation among oil producers as the weak and indebted are forced to sell to the strong.

The consulting firm IHS recently studied 66 companies and found that in the first quarter of the year alone they had to write down nearly $29 billion in the value of their assets, easily exceeding the total for the full year of 2014. The sale of cheapened assets from one company to another has already begun here in the Eagle Ford, and more consolidation is expected.

Swift Worldwide Resources, an oil industry recruiter based in Houston, estimates that worldwide oil field layoffs have reached more than 176,000.

Just five years ago, Karnes County was a speck in the oil patch, its production a rounding error in a state historically tied to oil.

Then came hydraulic fracturing, or fracking, and the surge in oil production it unleashed.

Crumbling towns here reinvented themselves with new restaurants, markets and hotels as money and jobs poured in. Construction began on several new schools and a major hospital to accommodate the new residents.

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Portable toilets, normally at oil drilling sites, sit idle in Karnes City, Tex.Credit...Michael Stravato for The New York Times

Today, even with the price of oil plummeting, no county in Texas comes close to producing as much crude as Karnes County — 6.8 million barrels in June alone. Twenty rigs operated by giants like ConocoPhillips, EOG Resources and Murphy Oil continue to churn through hard rock thousands of feet below ground.

Most local officials say the county is still far better off today than before the shale boom, when it was one of the poorest in the state. Back then, the biggest employer was the local jails, and local ranches were forced to sell off their livestock after years of drought.

Despite the downturn, the oil still flows, thanks to producers’ advances in efficiency.

During the second quarter of the year, Marathon Oil, for instance, averaged 32 percent more oil and natural gas production in the Eagle Ford than in the same quarter a year before.

But even those days are set to end. With the number of rigs now drilling in the core Eagle Ford counties dropping to 79 from a peak of 206 only nine months ago, and with production from a shale well declining as much as 60 percent the year after it is completed, output is bound to begin a steep decline in the coming months unless prices rebound.

“With the amount of oil we’re sitting on top of, it’s devastating that we can’t go get it,” said Matt Kibodeaux, the local project manager for Energy Maintenance Services, a Houston company. The company, which lays pipes to connect well pads to larger pipelines here, employed 186 people here a year ago but is now down to 18.

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A pawn shop in Kenedy, Tex., had a spike in business when oil prices fell, as customers sold tools for cash.Credit...Michael Stravato for The New York Times

In a shed behind Mr. Kibodeaux’s office, a group of workmen hung out on the back of a pickup truck the other day trying to stay in the shade to endure the 100-degree heat.

“When you come to work, you don’t know if they’ll tell you to go home,” said Omar Marquez, 69, a project safety coordinator who had just returned from inspecting workers who spray-paint pipes. “I’m working to pay off my debts, but now that looks slim the way the oil business is going.”

The local service companies are suffering because the major operators are cutting costs by forcing them to slice their prices and fees.

Supreme Vacuum Services, which hauls fracking fluids and oil well waste water, is being paid 20 percent less this year for its services. With revenue and profits down considerably, it has reduced the hours of its drivers, released the least efficient drivers and installed new software in the office to replace secretarial help. From an average payroll of 92 last year, it is down to 75, according to the local management.

“There is a point where I can’t reduce my prices anymore,” said Brooks Holzhausen, the company’s chief operating officer here. “Any more cuts, you sacrifice safety and quality, and I am not going to do that.”

For all the grief, local officials here say their county is still destined to have a great future once the oil price recovers, as they say it surely will.

“We will probably be the last field to decline, or bust, if you will,” said Don Tymrak, the city manager of Karnes City. “But we will also be the first to feel the recovery.”

A version of this article appears in print on  , Section A, Page 1 of the New York edition with the headline: Sinking Oil Prices Are Lowering Boom in Texas . Order Reprints | Today’s Paper | Subscribe

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