US E&P firms lift drilling despite uncertain policies

Oct. 25, 2004
US E&P firms lift drilling despite uncertain policies Encouraged by strong financial performances and rising prices for oil and gas, US independent producers have increased drilling despite an uncertain political climate.

Encouraged by strong financial performances and rising prices for oil and gas, US independent producers have increased drilling despite an uncertain political climate.

While their efforts are crucial to sustaining US production of natural gas, independents must struggle to gain access to promising federal land. And they face the uncertainties of presidential and congressional elections Nov. 2 and comprehensive energy legislation that Congress has yet to pass.

Whitsitt
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The energy bill, said Domestic Petroleum Council Pres. Bill Whitsitt, contains many "helpful" albeit "incremental improvements" for producers. DPC is a national trade association that represents 24 of the largest US independents. But, even after the elections, action on the energy legislation probably will be slow.

"Our group is, by nature, an optimistic bunch," Whitsitt told OGJ. "You have to be optimistic in this business. [Exploration and production companies] are clearly going to do what they do best regardless of what happens in terms of energy policy."

But he said many operators are increasingly frustrated by leasing bans, permitting delays, and other limits on their access to E&P opportunities on federal land.

'Reassessment' period

US E&P companies are in a period of "reassessment and refocusing" about recommendations next year to Congress and the administration, Whitsitt said.

Limits on natural gas supply, for example, aren't easing by themselves.

"We know that we need the supplementary supplies," he said, citing LNG and nonconventional sources of oil and gas.

Last year, industry officials hoped recommendations from a natural gas study by the National Petroleum Council (NPC) would bolster their case for passage of comprehensive energy legislation. The study, released in the fall of 2003 and lauded by congressional Republicans from energy-producing states as well as others within industry, called for expanding gas supply and increasing conservation (OGJ Online, Oct. 1, 2003).

Whitsitt said that, as a group, DPC members are "very strongly" convinced that NPC got its figures right in its forecast for strong demand growth through 2025.

"Already, NPC's study is more optimistic than the facts on the ground right now," he noted. "You can have, for example, some ability to do more offshore [drilling] by 2005 or at least get the process started, but that's clearly not going to happen [now]."

DPC members are "attending their business" with regard to developing energy supply, he said. "Largely, particularly with things like LNG, we know we need it all. We need more conservation, we need more use of coal and nuclear, and all of those things."

Key issues

In last year's OGJ special report on US independents, Whitsitt expressed similar concerns about the upstream oil and gas business. Topping his list was access to land. When asked by OGJ if land issues had improved, he responded, "Qualifiably, there have been improvements."

The main area of land-access improvement is permitting.

"We knew that it would take a significant amount of attention by [DPC members] and focus by those in the administration to begin to make the improvements that were necessary in terms of the processes that we have to go through," he said, adding that land-use permits are now generally handled in a "more efficient manner."

Whitsitt said, "The administration deserves credit both in the Bureau of Land Management (BLM) and within the US Forest Service for putting more focus on the fact that a permit delayed is in effect a permit denied for that period of time."

He said producers see "better processes, although not perfect, to measure accountability in the field now."

Overall, "We have begun to see more attention paid to energy permitting," Whitsitt said.

Other trends

Regarding oil and gas markets, Whitsitt said, "The only comments that I hear are that volatility is not a good thing. It's impossible to make long-term decisions in an extremely volatile price environment. Recognizing that, I think that some caution is exercised."

A recent legislative victory for small producers was passage of a tax credit for marginal wells available when oil and gas prices are low. But the help is limited, Whitsitt pointed out.

"Keep in mind that the marginal well tax credit only begins to be effective when the price of oil [falls below] $18/bbl and doesn't phase in fully until [the price falls below] $15/bbl.

"And it's only 1,095 bbl/well/year that qualifies for the credit. So this credit is helpful. It's important because we have so much marginal-well production in the US, and it's important to those who have the lowest productivity wells, which tend to be the smallest operators."

He added, "It does help an important part of our industry, but it is, in aggregate, less important to larger independents and the integrated companies because we don't have as many marginal properties."

Whitsitt pointed out that independent producers are interested in LNG, saying he knew of two DPC member companies involved in LNG projects.

"The uniform view is that we need it," he said. "We need the LNG, but it is not the answer to our future energy supply-demand balance by itself. Just like nothing else is as important on its own. It will provide incremental supply at various locations and at various times, but LNG is traded on a market and whether it comes [to the US] or goes somewhere else is very much price-determined.

"It is an important part of the mix but not a substitute for domestic supply."

International focus

Whitsitt told OGJ that data DPC has received recently indicate large independents have increased their international activity again this year.

"This has been part of a steady trend," he said. "It appears that the DPC companies are now involved in more than 50 countries overseas," compared with 40 countries last year.

"Clearly, this is a dynamic industry, and our folks are very much in demand: they've got the financial strength, they've got the technology, and there are prospects both here and around the world that people want to see if we're interested in being a part of," he said.

The election

When asked about the next administration's role and its effect on the E&P industry in 2005 and beyond, Whitsitt stated, "Regardless of who is [the next US] president, our energy problems are getting worse and not better. So whoever is president has to focus on those things."

From a review of Sen. John Kerry's (D-Mass.) energy policy platform, Whitsitt believes the challenger would encourage oil and gas production from areas in the US already open to development.

"That will not do it," he said.