Independent Oil Firms Face a Bleak Future : Price Collapse to Leave Permanent Scars but Survivors Will Be Stronger

Rent is due. Investors skeerce.

Bankers at the door growlin’ fierce.

Oil wells gone dry. Gas wells shut in.

Merry Christmas. Let’s drill agin.

--Greeting on Christmas card sold in Texas

Oil prospectors are an indomitable breed. The eternal optimism and blind pursuit of black gold inspiring that Christmas card sentiment is as tough to wring from an oil man as is the prize from an oil-ribboned sandstone plateau.

And yet the sudden collapse of oil prices this year has endangered even that aspect of America’s oil exploration and production industry. Despair is so prevalent at strategy meetings that Sydney Lawler, a geologist with B&G; Energy in this west Texas city, has stopped attending such gatherings.

“It got so all they talked about was how bad business is,” she says. “It was demoralizing.”

Few doubt that the domestic oil industry will be permanently scarred by the 54% drop in oil prices since November and the uncertain duration of that collapse. Long after the current flurry of bankruptcies and well closings, many believe, the behavior of the U.S. oil and gas exploration and production business will resemble that of the generation of Americans who lived through the Great Depression--sober, cautious, skittish about taking on debt and unwilling to accept big risks.

Yet some see at least a small silver lining in the clouds. Bringing a bloated industry down to size isn’t all bad, they say, and after the trauma subsides a battered industry usually emerges stronger and better managed.

“There is still a lot of enthusiasm about the future of the business, but a lot more caution,” observes Stephen E. Berg-Hansen, executive vice president of the California Independent Producers Assn. “The watchword for a long time to come will be risk analysis and financial prudence.”

The industry already is seeing much better researched and higher-quality drilling projects and the “threshold for going ahead on projects will continue to be much higher,” Berg-Hansen predicts. Oil companies that will survive the price collapse also are likely to be more efficient. Their personnel and equipment excesses have been squeezed out, marginal people and companies have gone by the wayside and long-overdue cost controls and strategic plans are being worked out.

“This industry used to run on a lot of euphoria,” says Douglas K. Brown, president of Mission Resources in Oakland. “Nobody ever did a long-range business plan. Now the industry’s starting to be run more like a business.”

Independents--the hearty breed of drillers and producers who work without the protective umbrella of a major oil company--are particularly active in devising ways to survive. Brothers Production Co. of Midland is diversifying. It now markets a business computer to the oil and gas industry and sells a computerized accounting system to other independent oil and gas companies to help them keep their expenses in check.

William Morrow set up a law practice when he lost his executive position with Magnatex, another Midland oil and gas company. His practice is thriving because he chose to specialize in helping other oilmen restructure their debts and alter their business practices so they can survive the crisis.

A friend of Morrow’s took a similar approach, switching from oil and gas to consulting. He helps companies tighten their inventory controls.

“What a switch!” Morrow observes. “There never was a problem with inventory control before. Keeping inventory was the problem.”

And Midland independent Bruce Burrow adopted the ancient custom of bartering to keep himself in business at a time when money is scarce. By swapping oil field pipe for fuel or the use of rigs for a cut of the oil he finds, Burrow has been able not only to keep drilling, but to actually increase his business.

With this approach, he completed one project recently for only $60,000 instead of the $159,000 he estimates that it would have cost on an all-cash basis.

Even before the price collapse, the industry was going through a period of wrenching consolidations, exploration and production cutbacks and debt restructuring. Thousands of oil field workers and oil professionals had already lost their jobs.

As long as the price of oil continues to hover around $15 a barrel, the casualty list will continue to grow, experts say.

A recent study commissioned by the American Petroleum Institute and conducted by the Coopers & Lybrand accounting firm, concluded that 200,000 more jobs will be lost by 1987 if the price of oil doesn’t move past $15 and that another 100,000 oil industry employees will be out of work if the price remains at that level by 1991.

The long-range concern over such dislocations is that even if prices do recover, the ranks of talented oil finders and producers will be so depleted that the industry’s competitive position will be seriously weakened and the nation’s reliance on imported oil aggravated.

Independents predict that the business will be set back at least three years, and perhaps as many as five years, because the universities that historically have supplied the industry with geologists and engineers have sharply curtailed their classes or dismantled them entirely, and with the back-to-back busts, there has been a mass exodus of geologists, petroleum engineers and oil field services providers that many consider permanent.

Facing Terrible Problem

Because of this talent drain, “we’re going to have a terrible problem in the early 1990s, because we won’t have the number of people we will need,” predicts Alan E. Byars, a former Bank of America vice president and now a senior vice president with Midland’s Home Savings Assn.

There is also growing consensus among independent producers, economists and analysts that the survivors of this crisis, while much leaner and efficient organizations run by much better managers, will be so weakened financially that it could take a decade before they can afford--or will have the courage--to take the risks necessary to find new oil reserves in America’s picked-over fields.

Most independents have been losing money since the drilling boom of the late 1970s went bust in 1982, in part because they had gone heavily into debt to increase their drilling while demand was strong and profits were good.

Oil prices collapsed just as many were finally starting to adjust to the economics of $28 a barrel oil instead of the $40 they were getting for West Texas crude oil at the height of the boom.

“The only ones who have any money in this business either had it before or were lucky enough to be from wealthy families,” observes David Donnell, an independent land man in Midland.

The prospect of continued slow business in the oil patch is worrisome to many. Even during the drilling boom, when about 4,300 drilling rigs were at work, U.S. oilmen weren’t finding enough oil to replace the amounts Americans were consuming.

Today, all but 720 of those rigs are idle and oil companies this year have curtailed their exploration and production spending by at least 25% from last year’s already lower levels, ensuring that production will decline still more.

Huge Production Drop

The American Petroleum Institute survey found that production of crude oil and natural gas will decline from the 1985 level by more than 30% if by 1991 oil is bringing only $15 a barrel.

That translates to a daily loss of nearly 5 million barrels of oil, which will have to be made up by foreign oil, boosting America’s dependence on imports to 70%.

“We are setting ourselves up for a real oil crisis--one that will make those of the 1970s look mild,” Chevron Vice President L. W. Funkhouser predicted at an industry production meeting recently.

“We will emerge stronger all right,” Atlantic Richfield’s Executive Committee Chairman Robert O. Anderson told the same gathering. “The trick is emerging (at all).”

Those that do were trim when they entered the crisis, had little or no debt and possess enough cash so they can virtually shut down the business and live off the cash flow from existing production.

Because even some of the most efficient oil industry performers have started falling by the wayside, some industry leaders are turning to Washington for help. Many are lobbying to have the industry’s tax and regulatory shackles removed.

If natural gas were deregulated, the Fuel Use Act repealed and the windfall profits tax killed, they say, the industry would be able to survive the collapse and compete effectively.

The windfall tax is a key target. During the run-up in oil prices, this tax on the oil industry generated about $80 billion for the federal government. But at today’s low oil prices, it isn’t generating anything. But it still requires administration and paper work by the oil industry.

Still Need Accountants

“The other day I had to make a decision what to do with my limited money,” Midland independent producer Clayton Williams says. “So I looked around and saw that I had seven accountants and one geologist. And you know what? I had to let the geologist go because I have to have the seven accountants to keep all the windfall profits records.”

There are some who argue, however, that the petroleum industry’s only salvation is for the government to tax imported oil immediately.

Without a tariff on foreign oil, gas and petrochemicals, says Houston independent producer George Mitchell, “the nation’s in deep trouble by 1990. Our rigs are running at only 16% of capacity. That’s a disaster. All hell would be breaking loose if steel was only at 16% capacity.”

Few in Midland agree, however. Inured by past experiences with the government, they shrug off talk of an import fee as a waste of time and instead spend their time devising strategies for survival.

To counteract such frustration and weariness as Bolger’s, oil patch towns such as Midland have organized community pep rallies, wellness clinics and promotional campaigns.

The media in the Texas “petroplex” of Midland and Odessa recently contributed $800,000 to the cause, part of which was spent on billboards urging residents to “feel good about the Petroplex.”

Some think that it’s working. “This may be one of the best things that ever happened to this town,” says Jack Swallow, a young independent whose work has ground to a virtual halt and whose income has been halved. “I can’t believe how people have pulled together.”

Whatever the reasons, the oil patch still seems remarkably capable of laughing at itself. In Midland, for example, there are two jokes making the circuit. “Ethiopians are telling Texas jokes,” one goes.

And the other: “They’re giving away oil rigs and toasters over at the bank. They’re almost out of toasters.”