US, Canadian drilling execs see fourth quarter oil field services demand soften

Oil field services demand will soften during the fourth quarter, but it should rebound throughout 2003, drilling managers at US and Canadian exploration and production companies told Gerson Lehrman Group Inc.

By OGJ editors
HOUSTON, Dec. 17 -- Oil field services demand will soften during the fourth quarter, but it should rebound throughout 2003, drilling managers at US and Canadian exploration and production companies told Gerson Lehrman Group Inc.

New York-based Gerson Lehrman started a quarterly survey to gauge oil field service capital expenditure trends. Twenty drilling and asset managers polled in October and November expect the portion of their company's capital budgets for which they are responsible to increase by 29% in 2003 compared with 2002 to a mean $68 million.

On a cumulative basis, the managers surveyed said they were responsible for procuring $999 million in capital expenditures in 2002 and nearly $1.3 billion in capital expenditures in 2003.

US regional spending
Nine managers expected year-on-year capital expenditures to increase in their area of responsibility while 11 expected outlays to remain flat or decline. In aggregate, respondents expected no major geographic shifts in US capital spending plays YOY.

"As has been the trend for at least the past 10 years, the majority of firms are focusing their efforts on multi-year development programs in their existing core producing areas as opposed to aggressively seeking out new higher risk exploration areas," said Gerson Lehrman associate Allan Stepa, who conducted the survey.

Respondents included executives working for majors, both large capitalization and small capitalization independents, and also private companies. By geographic region, respondents represented the Gulf of Mexico Continental Shelf; the Gulf Coast; Texas, Oklahoma, and New Mexico; the Rockies and West Coast; and Canada.

The deepwater Gulf of Mexico was excluded because of longer lead times and lower operational volatility associated with those projects.

Respondents expected Canada to experience increased E&P spending in 2003.

"On a weighted basis, Canada should see 6% of our respondents' 2003 capital budget as opposed to only 3% in 2002. One respondent explains that 'investment opportunities have developed in Canada that were not present before, thus a shift to Canada in 2003,'" Stepa said.

Oil field services demand
Many companies have spent their 2002 capital budgets already so demand for oil field services is expected to be weak through Dec. 31, he said. Short-term demand for all service product lines was expected to decline, with seismic services demand falling the most at 23% in this year's fourth quarter compared with the third quarter.

"However, respondents were much more optimistic regarding their demand for most oil field services over the next 12 months vs. their current utilization. Expected demand for hydraulic fracturing and pumping services on an aggregate basis was notably higher, up 16% over the next 12 months," Stepa said.

"That figure indicates a strong desire on the part of companies to maximize production from existing wells before committing additional capital to new drilling initiatives," he said.

Demand for all service product lines was expected to increase in 2003 except for seismic services, which respondents expect will drop by a weighted average of 4% YOY.

Stepa told OGJ that drilling managers revealed they still have significant seismic data inventories that need to go through before they look toward other exploration prospects. Managers also need to obtain more seismic data, he said.

"Such a bearish outlook is indicative of an E&P sector that is concentrating on exploiting its existing portfolio of low-risk infill drilling opportunities as opposed to seeking out high-risk, high potential exploratory targets," he said. "In general, the use of seismic services tends to be more leveraged to the exploratory phase of an E&P company's capital budget as opposed to the development of pre-existing discoveries."

Suppliers' market share
Each major oil field services supplier has its strong and weak product lines, respondents said. They do not expect suppliers to steal market share for the various product lines from one another during the next 6 months.

Many E&P companies have multi-year agreements with service companies, which limits their ability to substitute provides.

"In return for signing procurement agreements, the E&P companies typically benefit from larger discounts to book prices than would otherwise be received. That being said, if a service provider consistently underperforms, the likelihood that their long-term contract will be renewed is greatly reduced," Stepa said.

Access issues hurting exploration
Since the 1980s, the industry has struggled for access to public lands previously off limits to oil and natural gas drilling.

"But whether it be the United States Supreme Court denying oil industry attempts to drill in the Lewis and Clark National Forest or delays by the Wyoming Department of Environmental Quality in issuing permits for coalbed methane wells, the industry has failed to obtain access to any significant new exploratory acreage in the US," Stepa said.

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