Rig, labor shortfalls seen reining U.S. E&D

Modest growth in U.S. oil and gas demand is likely to occur this year.

At the same time, the U.S. exploration and production industry expects continuing shortfalls in the number of available drilling rigs and skilled industry personnel.

Those are the key findings of the latest annual survey of top U.S. upstream executives by the Houston-based energy practice of Arthur Andersen. Theh firm unveiled its survey results last month (OGJ, Dec. 15, 1997, Newsletter).

Survey overview

"This year's survey shows that top executives of oil and gas exploration companies harbor growing concerns about shortages of drilling rigs and skilled personnel," said Victor A. Burk, managing director of energy industry services. "At the same time, the survey responses show confidence that oil and natural gas demand will continue to grow at least modestly and that current price levels will hold through 1998, then rise slightly in the following years."

The annual survey of U.S. E&P company executives also reveals industry's plans for increased spending in 1998, both to find and develop new reserves and to locate and hire skilled workers.

"Most companies are increasing their exploration and development spending and adding to their work forces because their managements believe current opportunities are better than at any time during the past 15 years," said Burk. "However, many companies are now beginning to adjust their strategies to address the new challenges related to a lack of attractive drilling prospects and shortages of drilling rigs and skilled personnel.

"They are doing this in several ways, including alliances, partnerships, and mergers and acquisitions aimed at gaining access to more drilling prospects, more people, and more rigs."

E&D spending

Almost 75% of survey respondents indicated that their companies plan to increase U.S. E&D spending in 1998. However, of the nine major oil companies that participated in the survey, about half say they will reduce U.S. E&D spending.

Overall, about 45% of survey respondents plan to increase non-U.S. exploration spending in 1998, although larger companies' plans run counter to the trend. Of the majors and large independents that participated in the survey, 63% and 57%, respectively, plan to increase spending outside the U.S.

With regard to non-U.S. development spending, 38% of surveyed companies intend to boost their outlays, while 52% will hold spending levels steady.

Nearly half of respondents (47%) plan to increase expenditures to acquire producing properties in the U.S. Majors and large independents lag the overall trend, with, respectively, 38% and 43% planning increases in this category.

Only 20% of survey respondents plan to spend more on acquisitions of non-U.S. producing properties, although 38% of majors and 29% of large independents intend to do so.

Spending decisions

Arthur Andersen asked executives to list the areas of the world they find most attractive for exploration and development investments (see table, p. 29).

Overall, respondents ranked the U.S. first, followed by Venezuela, Argentina, and Canada. Majors ranked West Africa first, followed by the U.S. and the North Sea. Large independents chose the U.S. as the most attractive, followed by China and Venezuela.

Within the U.S., the deepwater Gulf of Mexico was listed as the most favorable, followed by Alaska and the overall Gulf of Mexico outer continental shelf.

While the availability of attractive drilling prospects remains the most important factor in making capital spending decisions, projected oil and gas prices also play an important role.

Factors listed for the first time in the most recent survey are the availability of skilled personnel and drilling rigs-ranked, respectively, fourth and fifth, overall. Eighty-two percent of respondents believe there will be a shortage of offshore rigs in the U.S. in 1998, while 59% say their companies are experiencing a shortage of skilled workers. Of the majors, 75% reported a lack of skilled personnel.

Interestingly, 90% of respondents forecast increased employment in the E&P industry in 1998, although only 78% foresaw hiring increases at their own companies.

Market factors

"Oil and gas executives are optimistic that U.S. demand for oil and natural gas will continue to grow during the next 5 years," said Arthur Andersen. Of those surveyed, 57% predict growth of 2-4%/year for gas demand, while 55% believe oil demand will increase at that rate (see chart, p. 28).

Gas demand growth will be driven largely by growth in gas-fired electric power generation. Sixty percent of survey respondents expected this demand source to have high growth (see chart, p. 28).

Forty-three percent of respondents say gas prices will have to be $2.50/ Mcf or more to warrant an increase in the reserve base. For oil, 38% said a price of $25/bbl or more would be necessary to significantly increase reserves.

The executives' outlook for West Texas intermediate spot prices were a median $20/bbl in 1998 and 1999, rising to $21.50/bbl by 2002. For Henry hub gas spot prices, respondents predicted a median $2.30/Mcf in 1998 and 1999, increasing to $2.50/Mcf by 2002.