Price Still Sets the Industry’s Beat
The good times continue to roll in the oil and gas industry -- tempered with a soupcon of caution on the part of a number of the participants.
In fact, most “old hands” in the business have learned never to stop looking over their collective shoulders, always cognizant of the volatility indigenous to their chosen profession.
If you were to ask what weighs heaviest on these shoulders today, the answer likely would come as no surprise: The never-ending uncertainty of commodity prices.
This was the chief concern cited by companies polled via a recent survey of upstream U.S. energy companies -- the fifth such survey in a series conducted by accounting, tax and business advisory firm Grant Thornton.
The effort, which took place between mid-December and mid-January, focused on both large and small independents, and for the first time also included oilfield supply and service companies.
“The service companies directly impact this segment through such things as drilling budgets and capital spending,” said Reed Wood, partner-in-charge of Grant Thornton’s energy practice. “Because of their structure, operations, activity, they can be viewed by independent operators as an early sign as to things that will happen in other segments of the industry.”
The survey questionnaire was sent to more than 200 companies, and more than 80 responded, according to Wood. The breakdown in response from public and private entities was 40 percent and 60 percent, respectively.
The Survey Says ...
In addition to the overriding concern over price uncertainty, the tabulated results indicate that crude oil appears to be gaining more respect on the domestic front.
In fact, Wood noted there was a balance in the concern and focus on oil and gas, whereas the previous two surveys showed a greater emphasis on gas. This time, 51 percent of the respondents indicated they will focus their activities on a combo of natural gas and oil, compared to 46 percent registering a sole focus on natural gas in 2006.
These folks also zeroed in on price thresholds considered critical for operations.
- Forty-one percent said the 2007 average price of natural gas must be $8.43/Mcf to justify more than a 20 percent increase in U.S. drilling activity.
- Over half indicated a price below $5/Mcf would curtail natural gas production.
- Only 10 percent expect natural gas prices to be high enough to support an increase in drilling this year.
Regarding crude oil price:
- Ninety-three percent said the average per barrel price of WTI crude would have to exceed $60 to justify increased drilling activity this year.
- Sixty percent indicated crude oil drilling would be curtailed if prices sink to $40.
Another survey finding Wood found to be particularly significant relates to environmental issues.
“There appears to be a clear awareness of environmental initiatives, potential for legislation agendas and increased expenditure with respect to what some call the green agenda,” Wood said. “Forty-six percent of the respondents will spend more money on environmental remediation or study in the future as compared to current levels.”
Demographics and the relative dearth of new recruits anticipated to become available has become an ongoing hot button topic in the industry -- and employment issues were addressed in the survey.
Sixty-nine percent of the respondents anticipate difficulties in hiring and retaining employees, compared to 65 percent who expressed this view in 2006; only 20 percent registered this same opinion two years ago.
A printed intro to the survey’s findings -- “View from the Top: Energy Perspectives for 2007” -- by long-time industry notable Robert A. Mosbacher Sr. offered insightful comments on this topic.
“Although there are many independents who obviously will be adding to their employment there are many others, with whom I agree, that think the gap between the cost of pipe, drilling and other services and the present price for crude and natural gas has narrowed to a degree that net profits will not be increasing,” Mosbacher said.
“Many of us believe the amount of drilling will not increase,” he said, “but might decrease with the extremely high costs of all oilfield services. This leads me to believe that additional employment for independent companies that have been in business a long time is not likely.
“The companies which are newer will need additional personnel in several disciplines,” he added, “and may continue to increase personnel.”
Where the Action Is
The Gulf of Mexico continues to hold the most potential for oil and natural gas discoveries, according to survey results both this year and last. Next in line is the Rocky Mountain region, while Alaska has the third highest potential (replacing Canada from 2006).
Mosbacher noted there will be more true exploration wildcatting in the Rocky Mountains and other less heavily drilled areas than in the Gulf Coast.
When it comes to 2007 capital expenditures, 65 percent of the respondents anticipate increased outlay, compared to 89 percent in 2006. On capital requirements, 79 percent expect to need more capital in the next five years, owing to robust capital spending budgets.
Mosbacher cited good news on this front.
“Equity has been remarkably easy to tap over the last year,” he said, “and with a tremendous amount of money globally chasing relatively few opportunities, equity should continue to be available.”
Wood believes the survey’s findings “show an industry that is generally optimistic and strong but somewhat apprehensive about projecting increases in capital spending and drilling activities when the prices of natural gas and oil remain uncertain for the most part.”