It’s perhaps an understatement to say the last few years of impressive commodity prices and all-out activity in the oil and gas industry have been exciting for everyone involved in the business.
And although volatility is a hallmark of oil and gas prices, the most recent, unusually vicious freefall in prices seemingly was not on anyone’s radar screen.
“Those of us with gray hair have seen it all,” said Steve Mitchell, vice president and division manager at Fairfield Industries. “We saw it go from $70 to $10 pretty quickly, but not as quickly as this particular fall came.
“Most everyone wasn’t looking over their shoulder enough, because we got slammed in the back with this one,” Mitchell added.
“Plus, there’s the news media blitz of recession, recession, recession, making you think you’d better hunker down before you want to because the market’s down,” he said, “so deciding where you need to conserve can become a very delicate line.”
Riding the Cycle – Again
But this is a business rife with risk takers who have become adept at weathering the down times – and equally adept at taking advantage of these troughs to prepare for better days ahead.
“You naturally go into a survival mode, knowing that budgets and projects are going to be cut,” Mitchell said, “and that the service contractors have gotta dance.
“Yet by the same token, as you ax, cut, conserve cash you know it will come back,” he said. “And the one thing you have to do is keep the technology going – not just R&D but getting the product to market – so you’re not a has-been when it does come back.
“Technology is such a buzzword, but what’s key is technology that can be readily seen to save money for both the contractor and the client,” Mitchell said. “When the end-user oil company can see it will cost less yet give the same quality data or better, that’s when you’ve got a winner.”
Mitchell noted the healthy companies that exercised discipline during the recent high-flying times are continuing to develop new technologies despite the current slowdown in the industry and the global recession.
In addition to the contractors, certain E&P companies are doing their part in designing and developing new tech applications with an eye to the future.
“We know the business is cyclical and will turn around,” said AAPG member Mike Bahorich, executive vice president for exploration and production technology at Apache Corp. “And we know there are a lot of things the industry needs to do to be more successful when it does turn around – and I’m absolutely comfortable the industry will come out of this.
“What happens when times get tough, people are forced to innovate,” Bahorich noted. “As the saying goes, necessity is the mother of invention, so as we have lower prices we’re forced to come up with new methods for doing things more efficiently to produce oil and gas at a price the market will bear.”
The Silver Lining?
Industry downturns can actually be advantageous for certain companies.
An example is TGS, which is 95 percent-focused on multi-client seismic, using a business model that entails putting together multi-client projects and then chartering other companies to acquire the data.
“In down times like now, the oil companies will start putting downward pressure on day rates for geophysical vessels,” said AAPG member Robert Hobbs, COO at TGS. “Because we’re only taking charters for these vessels for individual projects or a short-term string of projects, we can take advantage of these lower rates.
“Because of this very flexible business model, we look at times like this as opportunity to gain market share,” Hobbs noted. “We can put together multi-client projects at very efficient rates by taking advantage of the lower vessel costs.”
“We’re careful about evaluating new projects,” Hobbs emphasized. “Part of that is thinking ahead to when there’s an upturn.
“We want to make sure projects we acquire are in areas we believe will see enhanced E&P activity and, therefore, enhanced sales when things pick up,” he added.
There are a number of innovations currently in progress that may increase efficiency in the industry, according to Bahorich.
He cited, for example, advances in horizontal drilling.
“There are new technologies out there that may enable a much larger number of frac stages in a single horizontal lateral,” Bahorich said. “Once you’ve drilled a horizontal well and put in a number of frac stages in that well, the net developing cost for one additional frac stage is very low because you have the horizontal drilled and all the infrastructure is in.
“So it’s just the amount of money needed to put one set of perfs and one additional pump job of proppant and fluid,” Bahorich noted. “The development cost in that case can be fifty cents an Mcf.
“Driven by that, you’ll see rate acceleration, higher EURs and lower development costs through much more densely stimulated wells,” he said.
Eyeing the Innovations
Regarding the geoscience side of the industry, Bahorich views high density seismic on land to be one of the most exciting technologies to emerge. He noted the combination of very high-density sources and very high-density receivers is “just around the corner.” The result will be still-more improved, more cost-effective imaging.
Marine seismic is one focus of Apache’s technology expertise.
“We have a patent pending on a new method for shooting marine seismic,” Bahorich said. “It’s a new method for designing infill that involves a unique shooting geometry.
“It saves 10 to 20 percent of the cost and gives you equivalent data,” he said. “Considering that seismic boats can run a half million dollars a day, savings of this magnitude can be quite significant.”
The company also has a patent pending on a logging technology for exploration of unconventional reservoirs.
The technology solves the problem for certain zones where there’s no log response associated with pay. It enables the operator to see gas pay where, in some instances, it’s invisible with traditional logs.
Bahorich emphasized Apache develops ideas in-house and works with outside partners to develop them.
Besides spurring technical innovations, industry downturns offer numerous opportunities for large companies as well as the not-so-large to gain muscle by acquiring assets and/or whole companies at attractive prices.
Apache appears well positioned to take advantage of the situation given that it has close to a cool $2 billion sitting in its coffers, according to president and CEO Steve Farris.
“We’re very interested in making significant asset acquisitions, both domestic and international,” Bahorich said, noting the company typically buys assets as opposed to companies.
Lay Off the Layoffs
One of the dark holes of previous downturns in the industry has been that old bugaboo: layoffs.
There’s optimism this time may be different given the major effort to staff-up over the last few years after letting so many employees go during past rough patches in the industry – the late ‘90s being the most recent trough.
To date, there’s only been a trickle of announced cuts in personnel.
Most companies appear to be maintaining the status quo or – in some cases – beefing up staff to be prepared for a rebound in commodity prices. Devon, for instance, is said to be expanding its U.S. intern program this year by 15 percent.
Brazilian NOC giant Petrobras, which is sitting on billions of barrels of newly- discovered oil offshore, announced it’s hiring personnel and cutting costs in other areas.
Apache has decided to avoid layoffs at this point, according to Bahorich. This mirrors the path the company took in 1998 when its peers were downsizing staff. In fact, he related they went to such extremes to cut costs via other means they actually followed one employee’s advice to get rid of all styrofoam cups in the building.
“We didn’t think it would save much,” Bahorich said, “but we were looking at every possible cost savings.
“Right after that, the turnaround came,” he said, “and we were back in business.”
Despite the general consensus that the current slump is temporary, Mitchell noted he thinks the business is facing a tough year – or perhaps slightly more.
“After that I think all of a sudden, it’s gonna be like it was in the ‘90s,” he said. “We’d all been beaten up so long, and all of a sudden we turned around and it’s getting better – you don’t realize it.”