Responses more gradual than dramatic to economic slowdown, falling demand

The US Energy Information Administration's latest Short-Term Energy Outlook said it all on Dec. 9: "The current global economic slowdown is now projected to be more severe and longer."

The US Energy Information Administration's latest Short-Term Energy Outlook said it all on Dec. 9: "The current global economic slowdown is now projected to be more severe and longer than in last month's Outlook, leading to further reductions of global energy demand and additional declines in crude oil and other energy prices."

While record prices earlier in the year led EIA to forecast an average West Texas Intermediate crude price of $100/bbl for 2008, it now expects WTI prices to average $51/bbl next year, under current economic assumptions and assuming no major supply disruptions. A month earlier, EIA projected a 2009 WTI average price of $63.50/bbl.

"The US economic recession is also contributing to lower natural gas wellhead prices. The Henry Hub spot price is projected to decline from an average of $9.17 per thousand cubic feet in 2008 to $6.25/ Mcf in 2009," it added.

Companies are reacting cautiously so far, industry observers told me. "We're seeing a gradual, rather than a dramatic, response so far," said Frederick Lawrence, vice president of economics and international affairs at the Independent Petroleum Association of America.

Uncertain time frame

"We're definitely starting to see some of the bigger companies cut back their capital expenditures for next year. Everyone is somewhat unsure about the time frame right now, but it looks as if demand might be weaker next year. It's not certain whether it will last far into 2010," he said.

Service and supply companies are making contingency plans, said Gary C. Flaherty, Baker Hughes Inc.'s investor relations director. The Houston company is already seeing a reaction in its drilling statistics, he explained. "We peaked at 2,031 rigs in the US at the end of September. Looking at the credit crisis and the price of oil and gas, we think we're on pace to exit the year at 1,840," he said.

He said that Baker Hughes has noticed that drilling for conventional gas in the Mid-Continent and Rocky Mountains has fallen, while drilling for unconventional gas from the Haynesville and Marcellus shales has stayed fairly constant.

'High-grading prospects'

"I think we're seeing operators high-grading their prospects that have the biggest impacts on cash flow. They may be more expensive, but they also have the initial production that provides a positive contribution," Flaherty told me. Service and supply companies have set up contingencies, he continued. "In a nutshell, we're doing a lot of planning right now," he said.

"Everyone knows how important workforce retention is. I think companies will hesitate to let crews go because they've put in such a big effort to build them. They may reduce the number of hours, but we're not hearing about layoffs," Lawrence said.

IPAA expects to get a better indication early next year from both a private capital conference it is sponsoring as well as the North American Prospect Expo. "So far, I've heard that the numbers for NAPE are high, particularly for the international side," he said.

Contact Nick Snow at nicks@pennwell.com

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