Newspaper article THE JOURNAL RECORD

Heavy Demand for Services Could Boost Crude Oil Prices

Newspaper article THE JOURNAL RECORD

Heavy Demand for Services Could Boost Crude Oil Prices

Article excerpt

OSOO, Norway -- Oil service companies warned demand from major oil companies for drilling rig rental and offshore construction is increasing and could boost oil prices in the years ahead.

Drilling contractors, service companies and industry observers at a conference in Oslo said they've already seen major oil companies such as Texaco, British Petroleum and the Royal Dutch/Shell Group back off development plans on some U.K. fields because of soaring costs.

The remarks confirm what industry watchers have been saying for months -- drilling companies, aided by new technology that makes it easier to find oil, are having difficulty keeping up with demand for services and this will drive up the cost of finding new oil supplies.

"The threat of course is increasing prices -- both increasing oil prices and increasing rates" for services, said Sverre Skogen, chief executive of Aker Maritime ASA, which builds structures for offshore drillers. "Stable prices are good for the industry. There's a lot of action out there."

Industry consultants have rushed out statistics in recent months illustrating the pinch. The cost of finding oil to replace existing reserves rose 36 percent to $5.27 a barrel, the first rise since the Gulf War in 1991, according to a June study by Andersen Consulting. Petrodata, an Aberdeen oil consultant, estimated demand for drilling rigs is running 20 percent ahead of supply.

The affect of higher finding costs on oil prices likely won't be felt for years. For an industry whose timetables on development projects tick in decades, skipping projects now because prices are high will begin to affect oil output only years from now.

Even so, the industry is highly sensitive to cost. Since the world price of oil plunged to about $10 a barrel in 1986 from more than $40, companies across the industry have aggressively slashed costs. The effort helped the likes of BP, Mobil and Exxon report surprisingly strong earnings so far this year.

Now, with world oil prices in the range of $18 to $22 a barrel they've roughly maintained for the past nine years, oil companies have learned to live leaner. They cancel projects if they think they won't earn a good enough return -- even if it hurts the amount of oil they sell.

"The profitability of oil companies is more important for our company than where the price of oil might be," said Julian Thomson, a marketing manager for the offshore construction company Stolt Comex Seaway ASA. "We're facing the best market conditions we've seen in 30 years."

In fact, for some, the market is too good.

In the drilling rig rental business, daily rental rates have tripled to between $100,000 and $120,000 a day for the average rig working in the North Sea. Noble Drilling, the world's biggest contractor, put one rig back to work this year for $60,000 a day, up from $7,000 under a previous contract. …

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