Natural Gas Price Collapse Imperils Energy Industry

By Hayes, Thomas C. | THE JOURNAL RECORD, March 6, 1992 | Go to article overview

Natural Gas Price Collapse Imperils Energy Industry


Hayes, Thomas C., THE JOURNAL RECORD


"While jobs are being eliminated in North America, we will be adding new positions in international" operations, Charles L. Blackburn, chairman and chief executive of Maxus, said at the time.

The natural-gas supply glut was caused by many factors. Many big oil companies have kept gas flowing at high rates in the last two years to generate cash from domestic gas fields to invest into more promising fields abroad.

Tax incentives approved by Congress in recent years have also raised output.

Companies producing gas from underground coal layers, mainly in northwestern New Mexico and northern Alabama, and from dense rock formations called tight sands in West Texas and other sites, are eligible for big tax credits that make gas sales profitable even if prices fall below $1. The credits amount to as much as 90 cents per 1,000 cubic feet of gas produced through the year 2002 from wells drilled before the end of 1992.

In addition, a Reagan administration policy that opened hundreds of government-owned blocks in the Gulf of Mexico to drillers in 1984 and 1985 has led to rising sales of offshore gas in the last few years. Hundreds of wells developed after those lease sales in the mid-1980s are now in full production.

Leaps in drilling technology have lowered exploration costs and sharpened the eye of oil and gas explorers. High-speed computers are charting three-dimensional maps of drilling prospects by tracking sound waves reflected from rock layers thousands of feet below ground.

While the diversified oil giants and most major independent producers have adjusted to the drop in natural-gas revenues, smaller independents are struggling. Freedenthal said that small producers were ripe for a shakeout in an industry that he said had become bloated during its last boom, and has since been gradually deregulated.

The Independent Petroleum Association now has about 8,000 members, down from 20,000 in the early 1980s. As natural gas operators are shunned by Wall Street, banks and other sources of financing, the independents must pay for drilling programs mainly from their shrinking revenues. The price collapse has caused many to sharply curtail or halt their drilling efforts.

Eugene L. Ames, a small producer based in San Antonio and chairman of the independent producers group, warned Congress at a hearing last month that the exploration and drilling capabilities of domestic oil-and-gas producers were "nearing a state of economic collapse and few outside the industry know it."

A few big independents that have low debt and adequate cash reserves have restricted a portion of their gas sales. …

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