Fallout From OPEC’s Production Agreement and Increased Consumption : Oil Industry Beginning to Show Signs of New Activity
When C. Craig Folson of Dallas journeyed north to a government auction of some Kansas oil and gas leases on Sept. 24, the independent oilman figured he couldn’t miss. In today’s miserable energy climate, he and a handful of other bidders would grab up valuable properties for a song.
“I thought I was going to an intimate little party and I’d walk away from it looking like a genius,” Folson recalled. “But I knew I was in trouble when I walked in and saw they were setting up extra chairs.”
Far from the distress sale which many bidders expected, the auction of about 6,600 acres of already-producing gas and oil leases in the southwest corner of Kansas attracted an overflow crowd that coughed up $2.5 million in winning bids--nearly triple the projections of the U.S. Bureau of Land Management.
“The response was fantastic. We haven’t seen those kinds of figures for a long time,” said Darwyn Pogue, geologist and minerals appraiser in the BLM’s Santa Fe office. “We didn’t anticipate there would be the kind of interest there was.”
It was one of several recent signs that life is stirring in the oil patch, at least partly in response to the effects of the temporary agreement of the Organization of Petroleum Exporting Countries to trim production in an effort to shore up crude-oil prices.
OPEC members are gathering again today to discuss extending the agreement from Oct. 31 to year’s end. The agreement is aimed at trimming the OPEC-caused glut that dropped the price of a 42-gallon barrel of crude oil from $31 a barrel last November to below $10 this summer--a windfall for consumers but a nightmare for the energy business with serious implications for the nation’s future oil supplies.
Already, the accord which took effect Sept. 1 is credited with boosting prices to $14-$15 a barrel--enough to persuade some U.S. oilmen that things are looking up. There is also a measure of confidence that prices, which a few months ago seemed to be tumbling toward the vanishing point, might stabilize at $15 or higher.
At the same time, the cost of finding oil has fallen along with the price that oil commands. As a result, in some cases it’s possible to make as much money from a $15 barrel of oil as could be had a year ago from a $28 barrel.
The result of these shifting economics has been a steady, week-by-week climb in the number of active drilling rigs, a sharp rebound in auction prices for oil field equipment, stepped-up seismic surveys on behalf of big oil companies and renewed interest in buying oil and gas properties.
People in the oil industry are quick to tell listeners what this doesn’t mean--a big resurgence in exploration and drilling or a halt to the sharp rise in oil imports that have accompanied this year’s collapse in the price of a barrel of crude.
Because of the nature of most U.S. oil fields, it costs more to bring crude oil to the surface here than in such prolific regions as the Middle East. This year’s price collapse made thousands of small wells unprofitable, and U.S. producers began shutting them down while slowing their search for more oil.
Meanwhile, the lower prices for gasoline and other oil products have boosted the nation’s appetite for oil, and the Persian Gulf producers--some of whom can pump oil profitably at $2 a barrel--have happily met the need. Oil imports have jumped to about 40% of U.S. demand this summer from less than 30% last winter.
The recent uptick in prices works against this trend by offering an incentive to drill, but the movement so far doesn’t amount to much in the scheme of things. Instead, it signals a conviction that the worst is over and that there’s money to be made once again.
“Many good operators are now starting to realize that $15 is a stable number that they can depend on,” declares Houston consultant Dale W. Steffes, an oil prognosticator who believes the OPEC agreement will hold.
“That’s not adequate for the United States on a national-security basis. But drilling costs and so forth have come down far enough to make some drilling successful in the $15 range. There’ll be a whole bunch of people failing at $15 oil but there will also be a whole bunch of people succeeding.”
Much of the increased tempo is of the cautious variety--an interest in buying known oil and gas properties that are already in production, such as the gas reserves auctioned off in Kansas, as opposed to embarking on high-risk wildcat drilling schemes.
Thus, while public investment in drilling programs has virtually vanished this year, Robert Stanger & Co. of Shrewsbury, N.J., recorded a 52% surge in investments through August in oil and gas income funds which buy existing, producing oil and gas properties. Presumably, investors figure they can get in at fire-sale prices and then ride crude-oil prices on their inevitable climb back up.
Meanwhile, Houston investment banker Strevig & Associates says the third quarter has seen nearly twice as many acquisitions of producing oil and gas reserves as occurred in the second quarter, another reflection of renewed confidence. The 44 transactions nearly equaled the number of last year’s fourth quarter, normally the most active season because of the approaching close of the tax and budget years.
Ironically, however, bargain-hunters aren’t always finding the prices they had in mind for existing reserves--striking evidence of just how certain the oil patch is that prices will rise again. Buyers paid the equivalent of $5 a barrel for the reserves they acquired in the second quarter, said Kerry Thornhill of Strevig & Associates, down just 17% from $6.02 a year earlier while crude prices fell by more than half.
“We’ve been looking for producing properties but we’ve had trouble finding them at bargain prices,” said Robert Vinson, an independent oilman who is a director of Snyder Oil Co. in Fort Worth. “The sellers are loathe to part with them. They believe it’s going to go higher.”
By contrast, the cost of drilling a hole in the ground has fallen sharply--and those often-risky projects are attracting a considerable amount of interest.
The clearest sign has been a steady increase in the number of drilling rigs operating in the United States. The count maintained by Hughes Tool Co. has climbed nearly every week since reaching a low of 663 rigs in July. Last week saw the biggest jump yet, a 42-rig increase that brought the total to 806.
As the year winds down, oil experts say, an acceleration in drilling will probably owe as much to seasonal factors as to an improved price for crude: investors might be rushing to spend in the current tax year and companies might be emptying their drilling budgets before year’s end.
In any case, the current rig count is still meager by recent standards. A year ago, more than 1,900 rigs were operating. In 1981, the total exceeded 4,000. Says consultant Steffes, “We’re not going to go back to 4,000 rigs. But I wouldn’t be surprised to see 1,000. When you take into account technology and efficiency, 1,000 rigs will find as much oil as 1,500 rigs used to.”
Further evidence of stepped-up activity is offered by the people at Superior Auctioneers of San Antonio, Texas, where general manager Gary Young reports sharp increases in prices commanded by used oil-drilling equipment and in crowds attending auctions throughout the Southwest.
An auction at Abilene last week saw five drilling rigs go for $950,000 instead of the expected $500,000, Young said, continuing a pattern that began in mid-August.
“Prices are back up to where they were last summer and fall,” he said. “And more of the rigs are being sold to contractors and end users rather than speculators.”
L. Decker Dawson, whose Dawson Geophysical Co. of Midland, Texas, does seismic work for big oil companies in search of oil and gas, says business has picked up as a result of “a loosening of the purse-strings in the last two or three months. It’s not a boom, certainly, but at least there’s something going on. Before, there was almost a complete shutdown.”
Oilman Vinson, who is also president of Sterling Petroleum, a family business in Wichita Falls, Texas, says his company has joined five drilling projects this year that were “too good to be true,” both because it cost less to drill and because the slowdown in drilling earlier this year has left more attractive deals available.
This pace, drastically slowed from earlier years, “isn’t going to solve the nation’s energy problems,” said Vinson. “But there are some windows of opportunities out there.” He said today’s climate affords a “golden opportunity for drilling.”
Sopac Energy Corp. of Santa Monica recently raised $1.75 million for a 10-well drilling project in Oklahoma--and then notified investors that costs had dropped enough in the last two months to permit the drilling of 11 wells for the same money.
Some reasons: a farmer used to command cash bonuses of $50 to $100 per acre for leasing his property, plus royalties of 18.75% to 25%, and require drilling within six months. Today he might accept $10 to $25 per acre and royalties of 12.5% to 15% and offer a three-year lease.
Seismic work can be bought today for less than half the rates of a year ago, says geophysicist Dawson: “There is unbelievable price competition. We’re bidding lower and lower. We’ve been operating at a loss for two years. We’re all crazy.”
Meanwhile, a drilling rig today can be rented for $5.50 per foot versus $7.50 a year ago and $12.50 in 1981, when oil prices peaked and drilling reached an all-time high. Not only that, Sopac says, but drilling contractors no longer charge for the time when a rig is standing idle--a cost that once amounted to $200 an hour.
As a sign of the times, Sopac chief executive Mark Greenfield tells of his drilling contractor’s reaction when a rig tipped over a few weeks ago as it was being towed over a temporary, muddy road to reach a remote drilling site in Okfuskee County, Okla.
“If that had happened in 1981, he would have told me I should be ashamed of myself for building such a poor road. He would have made me pay for the bulldozers to right the rig and he would have made me pay to fix it and paint it, and he would have charged me for the time the rig wasn’t in use.
“Instead, he said, ‘I’m sorry, I should have seen that rut in the road.’ He cleaned up the whole thing himself.”
The layoffs of thousands of geologists this year has had its salutary effects on costs, too, from the standpoint of those who are hiring.
Greenfield says if he needed an experienced geologist in 1981 he’d have needed a headhunter and been prepared to pay $50,000 to $60,000 plus a royalty interest in oil production. Today, he says, “We’re looking for a geologist and an engineer so we ran an ad in the local paper and were deluged with over 100 resumes from some incredibly bright people.”
Probable salary: around $30,000.
As long as that kind of climate persists, there will be buyers and investors. Oilman Folson is entering into several other deals while preparing for another auction of Kansas mineral leases in November.
“Last time, I walked away with nothing,” he says. “Now I’ll fine-tune my bidding. Meanwhile, I just obtained a five-year lease on a property in New Mexico for $60 an acre. Two years ago, the off-setting acreage went for $325 an acre.”
