IPAA: Independents seek relief from low crude oil prices

Anne Rhodes
Associate Managing Editor-News

Independent petroleum producers say they are suffering as a result of continuing low oil prices.

"We are an industry under siege," said Gil Thurm, president of Independent Petroleum Association of America (IPAA), at the organization's annual meeting in New Orleans early this month. "We are facing a very serious price crisis."

Thurm assured independents that IPAA would work to get a marginal well tax credit passed in 1999, although he acknowledged that a number of hurdles remain, among them the requirement that any federal tax cut must be tied to offsetting revenues.

Collectively, these wells account for 1.3 million b/d of oil production in the U.S., a quantity equivalent to U.S. imports from Saudi Arabia, said Thurm.

"We're not asking for a bailout, we're asking just for what's due us. And we don't need the government trying to dump oil onto the market by selling oil out of the strategic petroleum reserve. We need to get some reality focus in Washington."

Another issue on IPAA's agenda is the large discrepancy between the International Energy Agency's supply and demand figures in the second and third quarters of this year. According to IEA data, global oil supply exceeded demand by 3.4 million b/d in the second quarter. This difference implies a huge inventory buildup-whether real or a statistical anomaly-and IPAA believes more accurate figures might have changed speculators' behavior and possibly improved oil prices.

IPAA has asked the General Accounting Office to investigate the accuracy of IEA's numbers (OGJ, Oct. 19, 1998, Newsletter). A preliminary report is due shortly.

The IPAA meeting included an event called Emerging Technologies Energy Conference (ETEC), cosponsored by IPAA and Petroleum Technology Transfer Council. This session focused on the role that technology can play in helping independents compete in today's low oil price climate.

Missing barrels?

The supply excess implied by IEA's statistics has been termed "missing barrels." In the second quarter, this excess amounted to about 300 million bbl.

Matt Simmons, president of Simmons & Co., Houston, says there is no physical way to store that much excess oil: "We are either hiding someplace over 300 million bbl of petroleum, or our supply/demand numbers are off by 1.5 million b/d (each)."

Simmons says the problem is one of accuracy: "(A) 1.5 million b/d discrepancy is only 2.5%-not very muchellipseI don't think our industry has the ability to estimate our supply to the tune of 0.5%, let alone 0.1%."

Allen Mensch of Southern Methodist University's Maguire Oil & Gas Institute, Dallas, also sees lack of accuracy as the culprit. He estimates that about one third of IEA's data for any given reporting period are actually projections, rather than historical data. Many developing countries do not have the necessary systems in place to determine those numbers in time for IEA's deadlines, says Mensch.

He also believes the data from members of the Organization of Petroleum Exporting Countries are "pretty bad."

"Will it ever be found?" asked Mensch. "It will be found in maybe a couple of quarters, when we go back and revise this quarter's numbers."

Scott Espenshade, IPAA's vice-president of economics and information services, acknowledged that the missing barrels issue was "a data problem." He believes that errors in all three categories-supply, demand, and inventories-have had an additive effect, resulting in a large discrepancy.

"We want to work with IEA and the reporting countries to improve the data that's going into IEA," said Espenshade. IPAA's goal is to make the data more transparent, so that the markets are acting on more accurate data.

Mensch agrees that errors are probably present in all three numbers. "Looking at the numbers, I would guess that those demand numbers are probably wrong."

Espenshade and Mensch both stressed the importance of educating the financial community about how to properly interpret the IEA supply/demand data.

Service firms' role

Recent years have brought about a restructuring of the oil industry, and this shift is altering the role that oil field service and supply firms play in the industry. This is the view of Jed DiPaolo, senior vice-president of global business development for Halliburton Energy Services, Houston.

As a result of layoffs, major oil companies are reducing their technology skills, said DiPaolo at the ETEC session. "Every time there's a cut, there seems to be more and more technology being pushed out. That has caused a significant change for us."

In the past, said DiPaolo, the majors focused on applied technology, and the service companies on product development around these applications. While service firms were able to develop products that were successful in the field, they didn't really understand why they were successful, because those companies didn't have the necessary reservoir experience, he said.

"The scary thing is that, as the majors start cutting back on this applied technology, we're having to change," he continued. "That resource that we could rely on is drying up."

As a service provider, Halliburton is going to have to spend more on applied technology development, said DiPaolo: "We didn't have that requirement before. We didn't really have the expertise. We're having to develop that."

Halliburton also is having to learn how to integrate its technologies across different business units.

"We're starting to understand that, the more they interact, the more value you can create." For this reason, said DiPaolo, service firms will have to devise new development methods.

"There's a whole group of technologies that's going to have to evolve," said DiPaolo, "and the evolution will be different than it was in the past."

He predicts that the future of E&P technology will include:

• Riserless drilling.
• Rigless drilling.
• Composite drill pipe and tubing.
• 3D pay-zone steering.
• Expanded casing.
• Ultra-extended-reach wells.
• Downhole processing.
• Real-time reservoir management.
• Virtual reality.

DiPaolo says that, as the majors put increased pressure on service terms to develop new technologies, independents can benefit: "Previously, the major oil companies had the money, resources, reservoirs, and technology to dominate the industry. As service companies understand technology more, independents can implement new technologies previously beyond their grasp.

"But don't get enamored with just technology," DiPaolo warned. "You must integrate it, and you must commercialize it."

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