There have been some mighty volatile movements in the price of crude oil lately, with prices gyrating markedly.
Oil’s current trend, however, is more of a “straight down” movement.
Ditto for natural gas, which, in fact, has been on a downward slide from summertime’s $13-plus heights to perch at early October’s $7-plus level – even dipping slightly below that at press time.
Welcome to the evolving reality that has hit the geophysical industry – among others.
What the heck is going on, you ask?
For starters, when oil peaked near $150 per barrel in July, this was an unrealistic price in the minds of many industry watchers.
“You don’t have to go back even a year ago, and it was $70,” said AAPG member Bob Peebler, president and CEO at Houston-based ION Geophysical. “How did we get into our minds we have to have even $100 oil? What is different from a year ago on supply and demand?
“I don’t think the Saudis ever believed $150,” Peebler said. “They said it was speculation, and I agree.”
He noted he didn’t see many people adjusting plans in tandem with escalating prices and would be surprised if price decks are even at $90.
“If oil prices stay even between $80 and $100 or $110, I think people could live with that,” Peebler said. “And unless we get into some situation where oil and gas really collapses, I doubt if we’ll see a huge change in activity.”
A Volatile Situation
Steve Mitchell, vice president and division manager at Fairfield Industries, noted that “prices have dropped more than 40 percent.
“But I don’t think demand has dropped all that much,” he added. “I think there’s been a lot of knee-jerk reaction where a lot of people are getting real conservative real quick, in large part because of the credit crunch.
“If you take the credit crunch out,” he said, “you have to wonder where we’d be right now – it’s that mentality, all the psychology of it that made the price per barrel come down.
“The volatility of pricing is much greater than the actual changes in true demand for the product,” Mitchell noted. “You get a 10 percent swing in demand, and you can get as much as a 75 percent swing in commodity price – and we’re already seeing a 40 percent drop, so where’s the true value per Btu?
“I think pricing will smooth out because a certain basic fact remains: hydrocarbons are the cheapest energy per Btu value,” Mitchell said.
There’s no doubt people are still using copious amounts of energy, and it’s noteworthy that in the United States there’s a significant decline curve in the case of natural gas, particularly in the ubiquitous shale plays.
“The shale plays have huge decline curves,” Peebler noted. “All you have to do is stand still a little while.”
Mitchell concurs wholeheartedly, while also pointing out that a lot of production is slowing in the Gulf of Mexico shelf and elsewhere.
“We also all question if the Middle East is at peak or not,” Mitchell said. “And don’t forget, there’s that ongoing concern that we’re one bomb away from serious problems in the wrong place when it comes to supply.”
‘Big Bear Looming’
Given the current price picture, some North American contractors report they’re seeing business get a little slow, according to Peebler.
“I think there’s some growing capacity on the contractor side in North America, where a year or two ago you couldn’t get a crew.
“I haven’t seen this yet in marine and international,” he added, “which tend to be longer-term contracts.”
The geophysical contractors are more sensitive to the front-end geophysical work versus the volatility one sees in drilling activity, which domestic natural gas players often rely on as a major way to control costs.
Still, even if operators see a little softening they might opt to proceed with planned work in order to take advantage of unanticipated access to crew capacity and drilling rig capacity. With a lack of concern over access, the operators might be inclined to follow the ups and downs a bit more, indicating some of the swings in the United States are tied closely to the shorter-term swings of commodity prices, according to Peebler.
But there’s a great big bear looming over the whole scene.
“I’ll speculate here like everyone else because there are so many moving parts, but I think the bigger risk is not commodity prices in the short to medium term,” Peebler said. “I think it’s the whole credit crunch.
“We haven’t seen it yet from the point of view of our own customers,” he said, “but I know it’s going to be impacting people. Like us, people have a line of credit to use for inventory management.
“One way or another, if this continues where that whole credit market is sort of frozen up,” Peebler said, “then that will ultimately flow into all of our businesses.”
Indeed, there likely are companies wanting to buy equipment or expand, and they need working capital and the banks they have may be belly-up. For those folks, a credit market thaw would work near-wonders.
“We all need to hope our politicians can quit fighting with each other and do something smart for a change,” Peebler said, “whatever that smart is.”
For now, the industry’s activity levels on the international scene are respectable.
Peebler reported there’s “a helluva lot” of oil and gas activity going on in Russia, the Middle East, India and China, where most of the companies are not publicly traded.
These countries all have an energy strategy.
“In the United States we have a little distortion, because everything is so goofed up here right now,” Peebler said. “In China, where they’re feeling good about the Olympics, they’ve launched a spaceship and buying cars, this thing is afar.”
However, if the crunch is not contained domestically and spirals into real trauma, e.g., a deep global recession, all bets are off and commodity prices and consumption could nosedive worldwide.
At press time, European nations such as Germany reportedly were scrambling to prevent a growing credit crisis there from bringing down major banks. (As this article was being written European stocks experienced their worst one-day selloff ever.)
The Long Run
Despite the current messy state of affairs, particularly on the home front, Peebler is sticking with his earlier belief that the oil field services industry is in the midst of a very long cycle, albeit one that may have some blips.
“In almost any case, more capacity is coming into the market,” he said, “and I think now you have to go back to where you’re differentiating yourself more on quality, quality of crews, technology and all.
“The oil companies still have a lot of work they need to do,” Peebler said, “and I think the guys that have the technology edge versus the capacity-driven edge will carry the growth going forward.
“Remember, the geophysical industry because of 3-D basically grew year over year in the ‘80s when the industry was really in a tough situation – and it happened because 3-D added so much value to productivity,” Peebler noted.
“So I think people selling productivity and new technology to help productivity, this might be an easier sell in a little tighter market,” he added. “It’s hard to sell new stuff when people are making money hand over fist just by showing up.”
As Mitchell said, “You’ve got to be on top of technology.
“The strong will survive,” he said, “and the strong includes those who have kept up with technology and managed their company well and their cash.”
A Sliver of Hope?
If you’re concerned the whole big kerfuffle of sliding prices, financial angst, declining production and the like may indicate “here we go again,” it ain’t necessarily so.
“We’re cautious but not panicked,” Peebler said. “I do think in ’09 we’re all going to have to work a lot harder.”
The potential for another downturn is nothing new, Mitchell noted, emphasizing the industry has experienced many ups and downs through the years.
“The only signpost I have that scares me the most is this year the SEG is in Vegas,” Peebler said jokingly. “Anytime someone builds a new building or we have a conference someplace like that it normally is a marker for end of game. That’s my superstitious side.
“I think the big question is going to be how bad is the global economy going to get and how much this thing is going to spread,” Peebler said. “If it really spreads into Asia in a big way and Europe and the rest of the world, and the economies really start dropping and consumption really drops, then it could get ahead of itself.”
Meanwhile, Mitchell voiced an encouraging comment for the E&P folks:
“If you have a really good prospect,” he said, “there’s money available to drill.”