As Oil Prices Wane, So Do Prime Rib Orders at Petroleum Club
When Werner Sanz, general manager of Houston’s Petroleum Club, launched its gigantic annual Fellowship Lunch last week, he served 300 fewer prime ribs, 300 fewer oyster souffles and several hundred fewer glasses of sparkling water than he did last year.
To an experienced observer like Sanz, those figures say nearly as much about the mood among Texas oil executives as more common barometers such as the Baker Hughes Rig Count. And with oil prices at their lowest since the disastrous bust of the mid-1980s, that mood is tense, cautious, yet oddly resigned. In an industry where restaurants often double as boardrooms, life at the 53-year-old Petroleum Club is one indication of how Texas’ oil industry has peaked, plummeted and evolved.
Whatever the times, the high-rise haven maintains an air of formal luxury, with sequins, tuxedos and some of the biggest hair remaining in Texas. In 1986, one of Texas oil’s darkest years, only 900 Petroleum Club members attended the holiday luncheon. Last year, a strong one for the industry, the number bounced up to 1,600. It dropped to 1,300 this Christmas--a striking but not huge dip, considering that, adjusted for inflation, last week’s oil price of $10.75 a barrel was the lowest in 26 years.
The tempered reaction mirrors the beginnings of the Texas oil slump. In recent months, producers and field service companies have announced thousands of layoffs, including 3,500 at the Houston-based Baker Hughes Inc.
According to the Baker Hughes U.S. Rig Count, an industry tally, only 669 rigs were at work last week, compared to 1,014 a year ago. The slump also is slowing Houston’s growth rate, from 4.6% six months ago to 1.5% now, according to the Federal Reserve Bank.
Sharpening the worry is the recent announcement of a spate of cost-cutting oil industry mergers, including that between Texas-based Exxon Corp. and Virginia-based Mobil Corp., expected to prompt 9,000 layoffs worldwide. Although most firms haven’t announced where their cuts will be made, Texas likely will be hard hit. And on Monday, the Royal Dutch-Shell Group announced a 40% cutback in its chemical operations; a spokesman for the firm’s U.S. operations said that no numbers were available yet, but that the move would likely affect some of Shell’s 1,000 Houston-area chemical workers.
Despite these numbers, experts say it’s unlikely the devastation of the mid-80s will recur here. Both the oil industry and the Texas economy have changed, grown leaner and more resilient, they say. “This economy doesn’t have as many jobs to give as it did in the early 1980s,” said Barton Smith, an economist at the University of Houston. Still, he’s forecasting that as many as 25,000 energy-related jobs may be lost next year in Houston alone.
For one thing, he points out, although Texas still accounts for slightly under half of the U.S. oil industry, energy no longer drives its economy as it once did. In 1981, about 20% of Texas’ gross state product came from oil and gas extraction. Today, that figure is close to 7%, due partly to a more diverse economy and partly to the oil slowdown. Picking up the slack is a welter of new industries, including computers, foreign trade, aerospace and medicine.
Even so, Houston still reigns as the world’s energy capital, with the greatest concentration of oil company headquarters and research facilities. But the iconic Texas wildcatter who thought--and acted--as if oil never would fail him is gone.
After the last bust, economist Smith said, producers whose businesses survived grew more subdued, both personally and professionally. Those who replaced the old school oil men resemble investment bankers, more apt to spend lunch studying the stock market rather than cementing deals over a Petroleum Club highball.
“We do have a definite new generation in the oil companies,” said Amy Jaffee, oil analyst for the James Baker Institute for Public Policy, a Houston think tank. “The old business of, ‘We meet every day for lunch, we settle our business with a handshake, we grew up together’--that generation of oilman is really gone. The new generation is more technically oriented.”
Thurmon Andress, 63, managing director of Breitburn Energy Corp., came of age in the old world. “In the old days, a handshake was just about good enough for anyone doing business in oil if you were part of the group that people trusted. My partner and I were in business for 17 years, and we never had a written agreement between us,” Andress said.
He belongs to the invitation-only All American Wildcatters club, which commemorates those old-fashioned values. Qualifications: friendship with current members, success and adherence to the club motto, “My word is my bond.”
Andress’ friend, Jim Alexander, chief financial officer of two-year-old Spinnaker Energy Corp., personifies the new breed. A Yale graduate with a Harvard MBA, he said that while personal trust will always play a role in business, his company focuses on “information over iron and relationships.”
Unlike oil companies in the delirious early ‘80s, he added, Spinnaker has avoided over-leveraging itself. In general, he said, today’s energy executives are better prepared for an oil slump than in the past.
“In the early to mid-1980s, there were still a lot of excesses in the system. A lot of fat. I think that people had gotten used to riding high on the hog,” he said. “And frankly, I think now they’re used to tough times. They’re more steeled to [low oil prices] than they used to be.”
Also in contrast to the past, independent firms can afford new technology that helps armor them against plunging oil prices, analyst Jaffee said. “The gap between the technology that smaller companies have access to, and what the big companies have, has really closed in recent years,” she said.
As recently as 1990, only a handful of major companies, including British Petroleum Co. and Shell Oil Co., had the technology and money for “3-D seismic” research, which uses an imaging method not unlike a CAT scan to assess underground oil fields. Today, many smaller firms have access to the same technology, which makes mineral extraction far less risky, and so less costly.
Gone are the days when companies held carnival-like conventions, offering vast rooms full of desserts, entertainment by casts from hit musicals and exhibits like the one at San Antonio’s Museum of Science, where life-sized “dinosaurs” growled and swung their tails at the tipsy executives. Only two years ago, the price of a barrel of oil had climbed to almost $26.
But if there’s less distance to fall than 12 years ago, the industry still has plenty to lose. “Our partners all of a sudden have gotten nasty, very testy,” one oil company executive said. “They’ve had to sacrifice a lot of prospects, give up their company cars and they’re confronted with the fact that with another year like this, they may have to start laying people off.”
The University of Texas, which owns 2.1 million acres of oil-and-gas fields in West Texas, also expects lower revenues. Oil will bring in $39 million--35% less than last year--this fiscal year, said Dan Burck, UT’s executive vice chancellor for business affairs. For UT, with an endowment of $7.2 billion, the loss is relatively minor. Nevertheless, Burck said, “you hate to see any of your income stream decline.”
Houston’s arts community, elevated to national stature largely through oil donors’ largess, also is bracing for the economic impact. “Even during the dreadful oil slump in the mid 1980s, the oil companies remained fairly steady in their generosity,” says Peter Marzio, director of the Museum of Fine Arts, whose major donors are Shell and Exxon. Where the slump will hurt most, Marzio said, is in donations from oil field supply companies, the first-hit in an oil crisis. “What I’m hearing from everyone is, ‘Just be patient . . . we want to help, we just can’t do it right now.’ ”
Meanwhile, in the old-guard sanctum of the Petroleum Club, it’s hard to notice that times are lean again. In the foyer, a titanic Christmas tree soars over a model train tooting past a minute oil derrick. Corridors glimmer with museum-caliber mineral specimens and waiters slip silently back and forth among the Wildcatter Room, the Petroleum Room and the wintry, bottle-lined Vintage Room.
The big changes in these oilmen’s lives occurred a decade ago, said wildcatter Andress. Those were the times when one of his best friends first declared he’d never pay more for a bottle of wine than the price of a barrel of oil. Such habits spread, even among the old-fashioned wildcatters. Ever since, the brilliant wine cellar of the club has gone nearly untouched, and Werner Sanz has served mostly mineral water at lunch.
