A Spurt of Optimism in Oil Patch as Rig Count, Prices Inch Up
Some of it is rooted in favorable economics and part of it might be wishful thinking, but optimism is clearly returning to the Oil Patch after an extraordinarily bleak 18 months. Much of the credit, if that is the word, goes to OPEC.
Oilmen and industry observers say the latest steps by the oil cartel to rein in its crude oil production and firm up prices have persuaded many in the industry that the recent $20 prices for a barrel of crude oil weren’t just a mirage.
With the added fillip of tanker bombings in the Persian Gulf nudging some prices above $21 a barrel, confidence has broadly grown--freeing up cash from the coffers of an industry that had slimmed down to break even at a paltry per-barrel price of $15. Suddenly, there is money left over, and some of it is being used to hire drilling rigs to look for oil.
“People are smiling and telling jokes and buying each other lunch again. It’s kind of nice,” says L. Decker Dawson, president of Dawson Geophysical Co., Midland, Tex., which does seismic work for big oil companies. “Everybody is extremely optimistic.”
The belief that the Organization of Petroleum Exporting Countries would be able to maintain the production ceiling that it established last December apparently took hold this spring, leading to a May and June surge in drilling activity. The perception was strengthened two weeks ago when the cartel agreed to limit its production further later this year.
Philip C. Crouse, a Dallas oil consultant, predicts a 35% increase in U.S. oil and gas drilling in the second half of 1987 versus the first six months of the year because prices are higher and more stable than the industry had expected. He says there could be as many as 1,200 active drilling rigs by year-end, compared to the current 872 and the mid-1986 trough of 663.
“The attitude change is a material change,” said Crouse, a former industry executive. “The increased confidence alone will cause 10% to 15% more drilling. If OPEC holds to its quota of 16.6 million barrels a day in the fourth quarter and there isn’t too much cheating, it’s going to be a pretty tight market. I think prices might be even higher than a lot of people think.”
This growing bullishness is already reflected in the price of oil-related stocks, which have been rising. Now, investment analysts are projecting sharply higher petroleum-based earnings, especially for oil-field equipment and service companies.
Stocks in companies that specialize in offshore drilling, for example, advanced by 21% in May, anticipating what Salomon Bros. calls “the beginning of a several-year recovery in the offshore-drilling industry.”
Permits issued for new onshore wells in the United States surged by 34% in May over April and rose further in June, ignoring normal seasonal flatness, according to Petroleum Information Corp., Denver. Thus, while the completion of drilling projects this year is down from the same period last year, the indicators of future drilling are up sharply.
“It appears this momentum will continue through the rest of the year,” said Jack Ekstrom of Petroleum Information. “It’s not dramatic compared to 1981, but this is a pretty dramatic move upward, in my opinion.”
The reference to 1981 is meant to show that as oil booms go, the recent increase in activity is modest by historic standards, and the current price range of $19 to $21 a barrel remains about one-third below the levels of late 1985. Moreover, few expect the kind of skyrocketing prices that followed interruptions in supplies in 1973 and 1979.
After peaking near $40 a barrel in 1981, the price of crude gradually weakened due to energy conservation efforts, increased supplies of oil from non-OPEC nations and greater availability of other forms of energy. The steepest collapse began in December, 1985, when Saudi Arabia flooded world markets with oil and the price plummeted from $30 to $10 in about six months.
OPEC’s member nations were devastated by the collapse, which served to instill new discipline in the cartel and enabled it to unite behind production quotas that have gradually raised prices to today’s range.
Just as the OPEC economies were weakened, hundreds of independent oil producers and suppliers went out of business in the United States, exploration was cut back radically, domestic production fell and most major oil companies retrenched severely. Employment was slashed and other costs were cut so that profits could be earned with oil prices at $15 to $18, depending on each company’s expectations.
Despite the rebound in prices to above that level, analysts say the depth of the oil recession has made producers extremely cautious about committing themselves to new exploration and drilling. And there are built-in problems that will tend to limit any resurgence in the U.S. Oil Patch.
Many firms, such as Phillips Petroleum and Unocal, have gone deeply in debt for various reasons in the past few years and will probably use much of the extra cash flow to continue to reduce their debt, said analyst Stephen A. Smith of Bear, Stearns & Co., New York.
There is also a well-established trend toward overseas exploration and drilling at the expense of the overworked, declining U.S. oil basins, meaning that this country will see proportionately less of the industry’s activity.
‘Cautious Hiring’
“But this industry has never been able to keep money in its pockets,” Smith said. “So to the extent that they were expecting $15 oil and all of a sudden they’re getting $20, a lot of cash flow’s going to come pouring out. We’re very clearly moving into a period in which the more adventuresome are going to jump back in.”
The companies themselves, perhaps for competitive reasons, aren’t broadcasting any big surge in activity. Atlantic Richfield and Unocal, for example, while conceding a new optimism in the industry, say they haven’t increased their exploration budgets or changed their long-term outlook for oil prices.
Don C. Brown, an energy manpower consultant in Dallas, sees only “cautious hiring” in the cards for the oil industry and says some firms are implementing new rounds of layoffs. He predicted no sharp improvement of the climate that saw only 28% of petroleum engineering graduates get oil-related jobs last year.
But consultant Crouse bases his forecast of a 35% drilling increase on the plans of the 20 biggest oil companies. While he says each firm views the future differently, one major producer has nearly doubled its 1987 U.S. drilling schedule to 850 wells from 450 in the wake of higher oil prices. Overall, he said, it is the biggest percentage drilling increase from the first half of the year to the second half since 1983.
Oilman Dawson said his customers, the major oil companies, are hiring geologists and other professionals for the first time since 1985 in preparation for expanded exploration programs. But he said some producers cut back their exploration divisions so severely that it will take months to regroup.
“We’re getting a lot of conversation about projects, and we’re seeing the companies actually hiring people,” Dawson said. “But the exploration departments of the majors were practically decimated. You can turn those programs off and fire everybody with a single phone call. But you can’t turn it back on that quickly.”
Spurt in Rig Count
In addition to the higher prices, experts say drilling activity is being spurred by the increasingly urgent need for oil companies to replace reserves that have dwindled during the slump. In some cases, they face deadlines to drill or lose leases.
Despite the resurgence in activity, the statistics that document it also show its limits. At best, most industry observers continue to argue that the United States can only slow the decline of domestic oil production because of the high per-barrel cost of producing oil here and the poor prospects for major new oil discoveries.
The most commonly cited barometer of drilling activity, the drilling rig count maintained by Baker Hughes Inc., spurted by 59 rigs to 872 last week and is 30% above the number of active rigs on the same date last year. But this remains a fraction of the 4,500 rigs active in 1981--and is barely half the estimated 1,500 rigs and crews available to work.
“Even at $25 a barrel, you’re still going to see a 3% or 3.5% annual decline in domestic production,” analyst Smith said.
