INDUSTRY RECESSION TO PERSIST

The depressed U.S. oil and gas industry is not likely to recover soon, witnesses told the Texas Railroad Commission's state of the petroleum industry hearing.

Major companies and independent operators agreed the U.S. petroleum industry is near a state of collapse. Many said producers are despairing about the chances of surviving the latest economic downturn.

"The fourth quarter of 1991 and first quarter of 1992 make the toughest times of the past decade pale by comparison," said independent Steve Howell, president of Sandlin & Howell Inc., Marshall, Tex. "These are dark days for independent producers. Old hands are saying these are the worst times they have seen."

Boone Pickens, chairman of Mesa Inc. and a 40 year oil and gas industry veteran, agreed. Despite efficiency improvements by Texas operators, Pickens said, "Things have never been as bad in our industry as they are today."

Witnesses said federal offshore leasing moratoriums and increasingly burdensome regulations are forcing major companies and larger independent operators to shift exploration and production spending overseas.

Producers said neither government leaders nor the American public understand or care about the need to maintain a strong U.S. oil and gas industry. They said policy makers don't recognize the potential for finding and developing U.S. oil and gas reserves.

Industry speakers repeatedly called on TRC commissioners to intervene at state and federal levels of government on behalf of the beleaguered industry.

Said Howell, "Until our federal and state governments take decisive action and use their clout to make natural gas the preferred fuel for industry and electrical power generation, remove the alternative minimum tax from the tax code, provide reasonable incentives for producers to find and produce U.S. oil and gas reserves, and dramatically decrease the influx of cheap imported oil and gas, most independents do not look for the current climate to improve."

ACTIVITY SLUMP

Among the ominous indicators of U.S. oil and gas industry malaise, witnesses cited:

Persistent counts of less than 650 active drilling rigs, about 20% of the U.S. fleet and the lowest indicator of U.S. drilling activity in more than 50 years.
A 30% decline in well completions in the past year and a 33% decrease in drilling permit applications.
Loss in the past 10 years of 206,500 oil and gas industry jobs in Texas and 411,000 jobs nationwide.
Only 79 seismic crews working in the U.S., compared with 744 in September 1981.

Witnesses said activity is depressed because of flat oil prices and low gas prices, federal tax laws that discourage oil and gas investment, state and federal environmental requirements with unreasonable cost-benefit tradeoffs, and lack of access to the most promising exploration prospects.

Ed McFarland, vice-president of U.S. Gulf Coast and offshore production for Marathon Oil Co., said lack of a coherent, sound national energy policy and confusing-often conflicting-regulations in some states is forcing companies like Marathon to refocus investment on non-U.S. opportunities.

"In fact," added Bob Walker, vice-president of supply and transportation for Conoco Inc., "a Texas-based oil company has as good a chance of making a discovery in Odessa, Russia, as in Odessa, Tex."

With major oil companies diverting U.S. revenues and proceeds from sales of U.S. properties to explore for oil and gas overseas, said Howell, "independents soon will be the only oil and gas industry this country can claim as its own."

Noting the TRC's historical support of Texas oil and gas development, McFarland said, "Now is a time when cooperation between this commission and industry has never been more important."

Richard A. Zartler, president of Grace Drilling Co., Dallas, said TRC commissioners could help oil and gas producers by supporting repeal of inclusion of intangible drilling expenses and percentage depletion as preference items in calculating alternative minimum taxes. He said the cost of drilling oil and gas wells in Texas could be reduced by deregulating the state's trucking industry and changing workers compensation laws.

Zartler suggested drilling also could be promoted by declaring royalty holidays on drilling or by allowing tax credits for exploratory drilling.

"Clearly, there are opportunities to quickly increase employment in our industry and put our people back to work," he said.

IRRESPONSIBLE ACTIVISTS

A. Grier Brunson, chairman of the National Association of Royalty Owners Inc., Ada, Okla., criticized a lengthy list of villains-led by "utterly irresponsible environmental activism" -with the "economic lifeblood of Texas" on their hands.

"The value of a barrel of West Texas intermediate crude oil depends upon the quota squabbling of Arabs, a handful of yuppie commodity traders, and the U.S. foreign policy of the moment," he said.

Brunson called on:

TRC commissioners to husband oil and gas resources by setting allowables that protect correlative rights of producers and royalty owners.
Texas Gov. Ann Richards to stop the raid on Texas natural resources, keep stripper wells operating, discourage foreign purchase of Texas refineries, and promote uses of gas.
Federal lawmakers to defeat attempts to enact another "windfall profits" tax and avoid reclassifying as hazardous wastes oilfield brine and drilling fluid.

He said oil company corporate officers seeking to "make this industry whole again" should start in their own board rooms.

"Choke down production, release some acreage, drill a wildcat, simplify your division orders, write a fair lease, clean up an abandoned location," Brunson advised.

LIQUIDATING RESERVES

Patrick Collins, president and chief executive officer of Plains Resources Inc., Houston, warned the continuing liquidation of U.S. oil and gas reserves and infrastructure will lead to another U.S. energy crisis and new wars in the Middle East.

The U.S. petroleum industry will be blamed for Washington's inability to create an effective national energy strategy, Collins said.

J. Michael Talbert, president of Lone Star Gas Co., the gas utility division of Enserch Corp., Dallas, said stability of long term gas supplies is threatened by producers selling gas for less than replacement cost and a lack of exploration for new reserves.

"There is a real danger the federal government won't appreciate the extent of dismantling of the U.S. oil and gas industry until it's too late," Talbert said.

Joey Aboussie, executive vice-president of the North Texas Oil and Gas Association (Ntoga), Wichita Falls, Tex., said pessimism has intensified among producers in North Texas as circumstances have worsened.

"North Texans have settled into a 'hang on' mode, and their fingernails are weakening," Aboussie said.

Aboussie said state and federal regulators must fully assess effects of any decision that might accelerate well plugging and abandonment. Only prudent judgment will avoid an exponential increase in abandonments of stripper wells, he said.

MISGUIDED POLICIES

Mobil Exploration & Producing U.S. Inc. Pres. Charles E. Spruell said Congress in the name of protecting the environment impedes exploration and development in areas with greatest hydrocarbon potential. Federal bans on oil and gas development in the Arctic National Wildlife Refuge and offshore areas outside the Gulf of Mexico likely will increase chances of environmental harm by increasing oil imports, he said.

Ntoga's Aboussie agreed. "Some of our lawmakers, through ignorance of our industry and its effects on the environment, seem bent on driving as many nails in our coffins as they can," he said.

Minerals Management Service statistics show from 1971 through 1990 drilling and workover operations on the Outer Continental Shelf resulted in 120 blowouts that spilled 908 bbl of oil or condensate. During the period more than 20,000 wells were drilled and more than 6.8 billion bbl of oil produced on the U.S. OCS.

By comparison, even without 1990 reporting complete, tankers during 1974-90 accidentally released more than 1 million bbl of imported crude oil into U.S. federal waters, MMS data show.