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'Boom' Feels Like a Bust -- For Now

Nirvana Scenario?

We're living through the petroleum industry's best moments in the past 15 years.

Crude oil prices have more than doubled since 1988.

During the same period, natural gas prices have almost tripled.

Executive salaries?

Through the roof.

The worldwide active drilling rig count dropped to 1,156 in the dark days of early 1999.

By mid-2003, the rig count was climbing toward 2,300.

So if this is an oil and gas boom, why doesn't it FEEL like a boom?

Conventional wisdom says the oil and gas industry can't believe in continued good times. Too many boom-and-bust cycles fried too many hopes.

"A lot of guys sitting at the top of the industry have been burned before, or almost burned," said David F. Morehouse, senior petroleum geologist for the Energy Information Administration's Office of Oil and Gas in Washington, D.C.

"A lot of them have been through two cycles," he said. "They aren't stupid -- they're going to learn."

Still... we could call it a little boom, right?

In today's industry, "some people are doing quite well," Morehouse noted.

Those include companies working coalbed methane or tight gas, and any other margin-sensitive operation where a $1 increase in the price of natural gas makes a huge difference.

But how can a boom feel more like a bust to service companies, geophysical contractors and many drillers?

The Stealth Boom

"I think the reason it doesn't (feel like a boom) is that it isn't the hyperbolic explosion of activity that we saw the last couple of times around," said Dennis Smith, director of corporate development for Nabors Industries Ltd. in Houston.

Smith thinks that's just fine for Nabors, a major driller with almost 600 land rigs, 970 workover and well-service rigs, 44 platforms and 17 jack-ups.

Instead of a boom-then-an-inevitable-bust, Smith foresees a sustained favorable period for the industry.

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We're living through the petroleum industry's best moments in the past 15 years.

Crude oil prices have more than doubled since 1988.

During the same period, natural gas prices have almost tripled.

Executive salaries?

Through the roof.

The worldwide active drilling rig count dropped to 1,156 in the dark days of early 1999.

By mid-2003, the rig count was climbing toward 2,300.

So if this is an oil and gas boom, why doesn't it FEEL like a boom?

Conventional wisdom says the oil and gas industry can't believe in continued good times. Too many boom-and-bust cycles fried too many hopes.

"A lot of guys sitting at the top of the industry have been burned before, or almost burned," said David F. Morehouse, senior petroleum geologist for the Energy Information Administration's Office of Oil and Gas in Washington, D.C.

"A lot of them have been through two cycles," he said. "They aren't stupid -- they're going to learn."

Still... we could call it a little boom, right?

In today's industry, "some people are doing quite well," Morehouse noted.

Those include companies working coalbed methane or tight gas, and any other margin-sensitive operation where a $1 increase in the price of natural gas makes a huge difference.

But how can a boom feel more like a bust to service companies, geophysical contractors and many drillers?

The Stealth Boom

"I think the reason it doesn't (feel like a boom) is that it isn't the hyperbolic explosion of activity that we saw the last couple of times around," said Dennis Smith, director of corporate development for Nabors Industries Ltd. in Houston.

Smith thinks that's just fine for Nabors, a major driller with almost 600 land rigs, 970 workover and well-service rigs, 44 platforms and 17 jack-ups.

Instead of a boom-then-an-inevitable-bust, Smith foresees a sustained favorable period for the industry.

"Prices are going to average higher than people expect, and the same thing on rigs," he said.

Current conditions for drilling companies reflect the addition of rigs (Rig Count) to the available fleet in 2000 and 2001, according to Smith.

"Effectively, the industry in the Lower 48 ran out of rigs that were serviceable when the Baker-Hughes rig count got to 850," he said.

Drillers began adding refurbished rigs and drilling barges to available supply, and drilling demand has not yet caught up with capacity, Smith noted. So rig rates have increased but not spiked.

He described three major effects on current exploration demand, mainly involving large independents and the major integrated oils.

"The first thing we observed was that the public E&Ps learned something coming out of the downtrough in 1998-1999," he said. "They really embraced capital discipline over growth."

Second, the majors now tend to view most of North America as a fairly mature gas province.

"What really became clear is that the majors weren't going to be as active this time around," Smith noted.

And third, the industry is finally seeing some daylight as sustained higher prices provide impetus for activity.

"They're starting to get more active as gas prices have stayed higher than people expected," Smith said.

Canadian Comeback

For more sunshine, listen to Bruce McIntyre, president and CEO of TriQuest Energy Corp. in Calgary.

McIntyre also served as president of the Canadian Society of Petroleum Geologists last year.

"In my 27 years of experience in this industry, I've never seen investors so willing to invest in oil and gas as they are now," he said.

According to McIntyre, this year brought an early start to activity in advance of Canada's winter drilling season, the period of "prime frozen ground activity."

Coupled with a prolonged spring-thaw season earlier in 2003, the early start portends a strong advance, he said.

"A lot of our drilling in Western Canada is given to seasonal fluctuations," he noted. "Right now, it is definitely picking up. It certainly seems much more like a boom."

McIntyre contrasted the industry position of a Canadian exploration and production company with that of a typical U.S. independent.

In Canada, he said, "the industry is bookended" with large upstream companies and small companies. Mid-size, U.S.-type independents are rare.

"Those companies are gone. They've been absorbed into the larger companies," he explained.

Smaller, nimble, publicly traded companies can go directly to the capital markets for funds -- and they don't have to raise a fortune.

McIntyre called this "scrambling to attract equity."

TriQuest is listed on the Toronto Stock Exchange and has a market capitalization of about $80 million. Since November, the company has raised $16 million (Canadian) through private placements, he said.

Some Price Protection?

Looking ahead, McIntyre sees a continuation of bullish natural gas prices -- a good sign for Calgary producers,

"I'm a believer," he said. "I'm sure we'll see price swings, but the lower end of the price ranges will be higher than they have been."

That won't necessarily lead to a boom, he added. For one thing, Canadian operators are encountering smaller average reservoir sizes, which mitigates the effect of higher prices.

"The pools are so much smaller these days, it seems to take more of a move in prices to move equipment into the field," he said.

But, barring a serious deterioration in gas demand, prices seem likely to stay firm, McIntyre observed. He said big new supply sources, like McKenzie Delta production, won't come on line within the next five years.

Call McIntyre net-positive on the price outlook.

"There's no apparent easy fix for the natural gas supply situation," he said.

Smith agreed that "we'll see a higher band" of natural gas prices, with near-term fluctuations.

"Weather will vary it," he said. "If we have a warm winter and a cool summer, the price will come in."

In the longer term, gas supplies may be supplemented by North Slope production, LNG imports and more of the world's stranded gas finding its way to North American markets, Smith noted.

Those additions won't have a big impact any time soon, however.

"We're probably at least a decade away before that makes a difference," he said.

Where Are the Jobs?

"Good times" usually don't come with layoffs.

This time they have.

Companies continue to reduce staff after mergers, or to reorganize for operational savings.

EIA's Morehouse said petroleum companies are "getting more efficient. A lot of things that people used to do, machines are doing now -- everything from well monitoring to SCADA systems."

Additional mergers, new technology and more cost-cutting make scattered layoffs likely. And instead of pumping out new jobs, the industry is producing a steady trickle of openings.

Onshore exploration clearly won't drive hiring. "Nobody is going out in this country and drilling wildcats," Morehouse said.

Even so, the softness in prospect drilling seems strange.

"Part of the thing is a view of prospects and the status of prospects. I've seen reports say companies have all sorts of prospects. They just can't drill them," Morehouse said.

"Mainly it's a capital problem, as far as I can see. And in some places there's an access problem," he added.

This doesn't feel like a boom to Morehouse, and he has no trouble describing what one would look like.

"Rig counts zooming. You suddenly have a shortage of skilled rig labor. The prices of everything from drill bits to cement goes through the roof," he said.

His own agency's studies project modest oil and gas prices ahead, but with a coming crest of world oil production.

What that future holds, boom or not, probably won't be settled in North America, according to Morehouse.

"It depends on what happens in the Middle East," he said. "It depends on what happens in places like India and China. As they grow, it ultimately changes the world dynamics of the entire industry."

Potential for Prosperity

To Smith, a handful of constraints keep industry activity from booming. With continued strong prices, most of those can be overcome.

Here are the keys:

  • Current development and infrastructure projects have to be completed and producing, especially in the Gulf of Mexico.
    "On deepwater projects, you're looking at spending hundreds of millions of dollars, if not billions, over five to seven years. You want to get the cash flow coming before you start the next round of exploration," Smith said.
  • Independents need access to drillable prospects, and it has nothing to do with national politics.
    "Majors hold a significant amount of acreage and a large number of potential prospects they aren't drilling. Smith described them as "prospects that will work at $3.50 gas, but not at $2.50." "Over time, those prospects will either get farmed in or sold, and they will be much more meaningful to the smaller companies," he said.
  • The industry has to get used to the reality of higher gas prices, and start the multiyear process of planning drilling programs.
    "If you get started today, you're looking at four years to drilling, or three. Then you have another three or four years to production and payout. "You need to have real faith in the future of gas prices," Smith said.
  • Companies have to start hiring in earnest, to add capable and talented new employees.
    Smith blamed "restraints on intellectual capital" for a slowness to respond to current opportunities. "This industry didn't hire anybody for 10 or 15 years," he said.

Prosperity for the entire industry may be just a matter of time -- for instance, the time it will take to work through a glut of seismic data. Smith prefers it this way.

A boom? Who needs it? Who would even want it?

Smith looks forward to years of a strong, sustainable market, and said:

"I think this is more the nirvana scenario for the petroleum industry."

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