Limited Growth Market Factors Keep Most Drillers from Expanding Exploration

Article excerpt

Despite a surge in oil-and-natural-gas prices beginning last winter, labor and infrastructure problems in the drilling industry have prevented all but a handful of Oklahoma companies from dramatically expanding exploration, according to industry officials.

"Rig availability has been a serious issue," said Mickey Thompson, executive vice president of the Oklahoma Independent Petroleum Association. "The supply and demand on rigs has gotten all out of whack."

Due to extremely low oil prices in 1998 and `99 -- as little as $8 per barrel -- many drill rigs were put out of commission and many workers left the industry.

"We pretty much set a lot of these rigs aside in graveyards. We took them apart and used the steel for other uses," said Corporation Commission Chair Denise Bode, who previously served as president of the Independent Petroleum Association of America.

Because of the rock-bottom oil prices of the late 1990s, she said much of the industry's "basic infrastructure for drilling" was "gone" by the time prices rebounded. As a result, when prices did bounce back in 2000, the demand for rigs far exceeded the supply and only the largest companies in the state were able to obtain rigs with any ease.

"The smaller producers that I talk to say that they have not been able to do some things that they wanted to do to either bring production back online or maybe increase existing production because the cost of the rigs is just too high," said Liz Fajen, executive director of the Commission on Marginally Producing Oil and Gas Wells.

Manpower issues have further complicated the picture, since many of the workers who left the industry in the late 1990s aren't returning and few are coming forward to replace those experienced crews. The average oilfield worker is now in his 50s.

"They're having a hard time finding people to work on the rigs, which jacks up the cost of the rigs," Fajen said. "And most of the small guys can't afford to pay those costs."

That situation could affect the majority of oil producers in Oklahoma. Of the 3,600 operators in the state, Fajen said roughly 80 percent are small businesses. A handful of medium-sized independents dominate the remaining 20 percent.

Thompson said the companies making up that 20 percent represent the only economically realistic target for most rig operators

"The equipment and the manpower to drill new wells has deteriorated to the point it won't support everybody that wants to play when times are good," Thompson said. "So who gets to play? Well, the guys who get to play are the ones who can put the most money and the most prospects for ongoing business. The ones who can put that on the table are the ones who get first dibs."

While consumers may have felt prices for gasoline and natural gas this year were outrageous at times, the impact on production in Oklahoma was actually quite small. Oil production in the state remained constant between July 2000 and July 2001, while natural gas production increased 2 percent.

Those numbers are still "a huge deal," according to Bode, who noted production numbers in both segments of the energy industry had been falling for the past decade. Fajen noted that 6 percent declines were the annual norm until this year.

One reason production numbers haven't jumped higher, Bode said, is that debt carried since 1998 and 1999 prevented many companies from increasing their drilling budgets, despite higher prices.

"Initially, they were just trying to pay off the bank and pay off bills," she said.

Bode said 70 percent of all domestic production in the country is conducted by independent producers, and those producers get 80 percent of their exploration budget from existing revenue and profits.

Fajen echoed Bode's assessment.

"We did not have a lot of drilling because you have to have capital to do that," she said. …