2000 Saw Record Gas, Oil Prices

So, Where's the Party?

In a year when West Texas Intermediate crude prices never fell below $23 and gas prices tripled over where they were last year, one would think there would be a lot of joy in the oil patch.

However, 2000 didn't seem like much of a party year, despite some grand occurrences that otherwise would make it a year of wine and roses.

Consider:

  • The lowest oil price of the year was $23.85. This was higher than the top price in 1998 ($17.83). It also was more than the average per barrel since 1993. The 2000 highest price hit $37.20 in late September. Average for 11 months of the year was over $30 a barrel.
  • Gas prices were $2.14 per mmbtu on the first trading day of 2000. On Dec. 1 the price was pushing $6, and by mid-December the price had topped the $10 mark.
  • The prices over the course of the year certainly caught the attention of the consuming public over the world. Fuel prices drew angry protests in England and throughout Europe. Carping by U.S. consumers prompted discussions in Washington, D.C., about energy policy that have been on the back burner since the times of Jimmy Carter's presidency.
  • An executive from the industry was nominated -- and then elected -- vice president of the United States.
  • More geophysical data at good prices became available to the industry, and the new drilling and technology were put to task in deep waters.

But the industry, exhibiting more angst than elation, reacted as middle-aged professionals who have the BMW, the two-story house with a pool, wonderful spouse and college-bound kids, and still wonder why they are not happy.

Hiring levels remained low, drilling activity was average and merger-related layoffs and downsizing continued.

Merger activity certainly is having its effect on the psyche of the industry, with the blockbuster Chevron-Texaco and BP Amoco-Arco deals being done in 2000.

Figure 1  
Merging Companies # of AAPG Members
Chevron 471
Texaco 350
BP Amoco 422
Arco 172
Vastar (included in Arco's member counts)
Amerada Hess 82
Lasmo 33
Chesapeake Energy 13
Gothic 1
Anadarko 132
Union Pacific Resources 40
Devon Energy 37
Santa Fe Snyder 34
Number of members as of 11/1/2000

The major mergers of 2000 in Figure 1 notes the number of AAPG members in the affected companies. These mergers alone directly affect about 1,800 active members.

Invariably, the number of geologists remaining with the merged entity is less than the sum of the two in pre-merger days.

Figure 2 notes the number of AAPG members affected by recent mergers, with double-digit percentage declines seen in the number of professional explorers in the ranks of the merged entities.

It is also startling to note the effect the decade-and-a-half industry downsizing has had on the AAPG membership -- even in pre-merger days.

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In a year when West Texas Intermediate crude prices never fell below $23 and gas prices tripled over where they were last year, one would think there would be a lot of joy in the oil patch.

However, 2000 didn't seem like much of a party year, despite some grand occurrences that otherwise would make it a year of wine and roses.

Consider:

  • The lowest oil price of the year was $23.85. This was higher than the top price in 1998 ($17.83). It also was more than the average per barrel since 1993. The 2000 highest price hit $37.20 in late September. Average for 11 months of the year was over $30 a barrel.
  • Gas prices were $2.14 per mmbtu on the first trading day of 2000. On Dec. 1 the price was pushing $6, and by mid-December the price had topped the $10 mark.
  • The prices over the course of the year certainly caught the attention of the consuming public over the world. Fuel prices drew angry protests in England and throughout Europe. Carping by U.S. consumers prompted discussions in Washington, D.C., about energy policy that have been on the back burner since the times of Jimmy Carter's presidency.
  • An executive from the industry was nominated -- and then elected -- vice president of the United States.
  • More geophysical data at good prices became available to the industry, and the new drilling and technology were put to task in deep waters.

But the industry, exhibiting more angst than elation, reacted as middle-aged professionals who have the BMW, the two-story house with a pool, wonderful spouse and college-bound kids, and still wonder why they are not happy.

Hiring levels remained low, drilling activity was average and merger-related layoffs and downsizing continued.

Merger activity certainly is having its effect on the psyche of the industry, with the blockbuster Chevron-Texaco and BP Amoco-Arco deals being done in 2000.

Figure 1  
Merging Companies # of AAPG Members
Chevron 471
Texaco 350
BP Amoco 422
Arco 172
Vastar (included in Arco's member counts)
Amerada Hess 82
Lasmo 33
Chesapeake Energy 13
Gothic 1
Anadarko 132
Union Pacific Resources 40
Devon Energy 37
Santa Fe Snyder 34
Number of members as of 11/1/2000

The major mergers of 2000 in Figure 1 notes the number of AAPG members in the affected companies. These mergers alone directly affect about 1,800 active members.

Invariably, the number of geologists remaining with the merged entity is less than the sum of the two in pre-merger days.

Figure 2 notes the number of AAPG members affected by recent mergers, with double-digit percentage declines seen in the number of professional explorers in the ranks of the merged entities.

It is also startling to note the effect the decade-and-a-half industry downsizing has had on the AAPG membership -- even in pre-merger days.

In 1990, there were 568 AAPG members employed by Amoco; in 1998, before the BP-Amoco merger, there were a total of 568 members in both companies.

This occurs in the face of the most positive price environment for two decades.

"In my 72 years in the oil business, I've never seen anything like it."

Those are the words of legendary Houston wildcatter Michel T. Halbouty, who's been around the industry in both good times and bad.

"In other years when we got a dollar a barrel price increase, we'd be happy and we'd use it and go out and find some more oil," Halbouty said. "Now, we have $35 a barrel, and there is very little extra drilling."

Observers, including Halbouty, see recovery from a downturn in 1998-99 as a major culprit in the current slightly funky feeling of the industry.

"Companies are buying reserves and paying off debt," Halbouty said. "They're not drilling wells. I thought that when the price stabilized at $25 that we'd see more activity.

"Maybe it's because we don't have the rigs and we don't have the manpower," he continued. "We could have 100 rigs and still not be able to drill."


Past AAPG president James A. Gibbs, principle of Dallas-based Five States Oil and Gas Co., agreed with Halbouty, noting that the spot price for oil in Oklahoma was $8 a barrel for a time in 1999.

"A lot of people are getting their balance sheet back in shape," Gibbs said.

"Those who have production are smiling now, but nobody's jumped in with a big amount of money to do some big deals."

With only the big companies able to play in the deep Gulf, and plays such as the coalbed methane that is long term, capital intensive and not conducive to a singular creative action.

"The coalbed methane play is not a one-well deal," Gibbs said. "In the past an independent could drill a well or two and be just fine. Times have changed. Now it's more like we are conducting a war rather than engaging a skirmish."

"There is also a high degree of skepticism -- particularly on oil -- on how long the higher prices are going to last," he added.

Gibbs sees more confidence in gas prices, "but the prices have gone up so far so fast, the investors outside the industry haven't gotten the word yet."

Gibbs also pointed out that there are companies who have staked out large claims in basins, such as Mitchell Energy's Barnett Shale play in North Texas and the coalbed methane play in the Powder River Basin.

"There are a lot of plays that are tied up," he said.


William L. Fisher, also an AAPG past president and L.T. Barrows Professor of Geological Science at the University of Texas at Austin, concurs with Gibbs' assessment, with "mid-sized independents are gearing up to increase their mix of gas" in proportion to their oil reserves.

Fisher saw 2000 as a "mixed bag," with drilling rates 40 percent higher than in 1999.

"The outlook for gas is quite positive," Fisher said. "However, oil is more complex. There's much less confidence outside the industry as to where prices are likely to be, even at the end of 2001.

"The market doesn't think that $35 oil could be back, and could even go to $10, depending on the response to the market and the imprecise method to calibrate supply and demand."

Fisher said he sees the majors holding back, taking a conservative approach in trying to help maintain the price and bolster the profits and the share prices, which have not had nearly the jump a price environment in the mid-30s would suggest.

Fisher also sees companies looking to "hire a few young people."

"The companies know they are desperately behind in having young people in their mix," he said, "and the efforts to hire new young people have been fairly selective."

Fisher said that while the demand for geoscientists is conservative, the supply of geology and geophysics majors has shrunk tremendously as well.

"Students have a remarkable way to respond to the marketplace," Fisher said, "and they do so quickly."

With fewer geoscientists around, who is going to do all the work that is being required?

"The amount of prospect generation, from a practitioner aspect, is substantially greater than it has been before," Fisher said. "The new technology, where a geologist can sit in a Houston office and can monitor drilling amplitudes in real time on a well in Thailand, means a whole new manpower economy."

Add to that the way 3-D data can be downloaded onto a workstation -- and the functions that can perform -- and it's clear that fewer people are required to generate prospects.

Additionally, Fisher added, some are saying their new technology is providing a 35-50 percent new field discovery ratio.

Now that is a reason to smile.