US producers expect to increase their North American production of natural gas this year, but even at today's higher commodity prices, oil field service companies see no signs of increased drilling activity yet, industry representatives said late last month at a Houston conference sponsored by Deloitte & Touche LLP, the US arm of Deloitte Touche Tohmatsu.
"Every day we look at the prices and ask, 'Where is the activity?'" said Daniel R. Pickering, managing director of Houston-based Simmons & Co International, a financial consultant specializing in the oil field service sector.
Pickering expects US operators to increase spending in early 2003. "Industry surveys indicate that 2003 spending levels will be flat or down (from 2002), but that is not likely at today's commodity prices," he said (see related story, this page). "As they become more confident, US companies will begin spending more."
"We have sat down with a lot of our customers and talked about this, and all have different answers," said James C. Day, chairman and CEO of offshore drilling contractor Noble Corp., Sugar Land, Tex. "It's a balance sheet issue for some, so they don't have as much (financial) reach."
In many cases, however, Day said, companies have not generated a portfolio of good prospects to replace those they've already drilled. "Prospects on the shelf in the Gulf of Mexico are getting worse, and worse, and worse. Some independents are asking themselves whether they really want to be on that squirrel cage," he said.
Strong natural gas focus
Mark G. Papa, chairman and CEO of EOG Resources Inc., and Bobby S. Shackouls, chairman, president, and CEO of Burlington Resources Inc., said their respective Houston-based companies are strongly focused on North American gas in their separate attempts to grow production in 2003.
"Natural gas will be the sweet spot in North America for the next several years," said Papa at the conference, which is scheduled to be an annual event.
The mature US gas market is subject to slow growth in production, but it is "a rapidly self-correcting system. So we will see, at some time in the future, when demand (for gas) is rationed by price to equal supply," Shackouls said.
While US market prices for natural gas recently pushed past $5/Mcf for the first time in 2002, EOG Resources is "gearing for $3.60/Mcf" in its projections, he said. In addition, EOG Resources plans to leverage its gas price exposure by lightly hedging its 2003 production, as it did in the fourth quarter.
Although the company will be "cautious in our spending," Papa said, its capital budget will increase to $900 million next year from around $750 million in 2002.
"North American finding costs clearly are trending up," said Papa, primarily "because we're dealing with poorer quality reservoirs or having to drill deeper" in mature areas.
EOG Resources expects to increase its North American production by 4% in the coming year, primarily from its onshore US and Canadian operations. Like other large independents and major oil companies, it sees few opportunities in the mature shallow waters of the outer continental shelf in the Gulf of Mexico. However, Papa said his firm expects to "layer in a higher production growth rate" from its operations off Trinidad.
He noted, "Investors insist on strong returns (on their oil and gas company stock investments), but punish stocks that miss their production targets."
Shackouls said Burlington Resources expects to achieve both production growth and a good return-on-investment "by being a full-cycle, low-cost player." He said producers must maintain capital discipline to manage their balance sheets through both the up and down phases of a business cycle.
"There is an increased focus on natural gas because it exists in abundance around the world," said Clarence P. Cazalot Jr., president and CEO of Marathon Oil Corp., Houston.
However, he said, "There is no question of the sluggish economic conditions around the world." Cazalot also noted, "OECD (Organization for Economic Cooperation and Development) countries are concerned over the security and stability of their energy supplies."
Day said natural gas prices are now "in a reasonable range," above $5/Mcf on the US spot market. However, he said, Noble's operations are "not as sensitive to natural gas prices" because of its limited employment by smaller independents. "The key for Noble is that we are really driven by oil. We work 70-80% of the time for national oil companies and the megamajors who have the money to spend on projects," said Day. Many of those projects are in deep waters, frequently in international markets.
"Most international projects have a life of their own, irrespective of oil prices," Day said. In some of the bigger fields, he said, "The cost of the projects is so low per barrel that they don't have as much pull-back."
Pickering agreed. "The big projects are strategic and tend to be less influenced by midterm factors," he said.
