From the Editor

What with collapsed oil and gas prices, a faltering economy and everyone with a case of the fantods, it is a real pleasure to get a piece of good news. And that is exactly what the U.S. Security and Exchange Commission’s acceptance of a modernized set of rules governing oil and gas reserves reporting is.  Announced on December 29, the move recognizes “the importance of new technologies in making accurate and reliable estimates of oil and natural gas reserves as the industry develops resources in harsher environments including ultra-deep water and the Arctic, as well as more unconventional resources,” according to Leo Roodhart, 2009 president of the Society of Petroleum Engineers (SPE). The Petroleum Resources Management System (PRMS) was developed by SPE in collaboration with the World Petroleum Congress (WPC), the American Association of Petroleum Geologists (AAPG) and the Society of Petroleum Evaluation Engineers (SPEE).

The PRMS was initially issued in 2007. It updated and combined SPE’s previous reserves and resources definitions and the associated glossary into a single document. To address the uncertainties of estimating a volume that cannot be seen or physically measured, the “PRMS incorporates a central framework that categorizes reserves and resources according to the level of uncertainty associated with their recoverable volumes” on a horizontal axis and “classifies them according to the potential for reaching commercial producting status” on a vertical axis. The horizontal axis divides reserves into the familiar proved, probable and possible classifications. The vertical axix categorizes reserves (actually resources, with reserves as a subset of resources) as production, reserves, contingent resources and prospective resources. According to SPE, “in order for volumes to move from one category to the next, the technical issues which cause them to be placed into less certain categories must be resolved.

To view the full PRMS visit http://www.spe.org/spe-app/industry/reserves/index.htm

It’s a couple of days before Christmas and I can’t help noticing, again, how well our industry steps up to aid those in need or less fortunate than us. From donations to charities such as Toys for Tots, to sponsored events such as the BP’s MS 150 race or ExxonMobil’s Elves and More Bike Build and Delivery program, this industry gives to the community in many ways. It is something we can be proud of.

When someone within our own industry, someone struggling to alter our image and educate the public, has needs, it is especially important that we step up to help. As I write this, the Offshore Energy Center needs our help. The Offshore  Energy Center is a non-profit organization that has made significant inroads in energy education through its outreach and curriculum programs to teachers, students and the public and through the operation of the Ocean Star offshore museum. The Ocean Star museum resides in the Ocean Star, a restored jack-up converted to a learning center and open to the public in Galveston, Texas. The Ocean Star survived Hurricane Ike earlier in the year but not without major damage. There was damage to equipment outside the museum’s exhibits, including an overturned helicopter, but the worst damage was to the museum’s gift shop which was completely destroyed. It is important to the industry that the museum and gift shop are restored. Any help you or your company can give to the Ocean Star Hurricane Ike Repair Fund will be money well invested in our industry. Donations can be sent to the fund at: Offshore Energy Center, 200 N. Dairy Ashford, Suite 6220, Houston, TX 77079. For further information, visit the Offshore Energy Center at www.oceanstaroec.com.

Rolling towards the end of the year leads to reflection. We began the year in an increasing flurry of activity. Rigs were scarce, or completely unavailable, crews were stretched flat out, oil was headed to $150 per  barrel and the high price of oil made nationalization of resources a favorite option.

But oh how things have changed. Oil is at $46 and change, the economy is “officially” in recession, projects are being cancelled and hiring freezes and layoffs are beginning. All in the space of six months.  Many people are aghast. White beards like me are mildly irritated. We promised if the good lord gave us just one more boom we would not *&^%@ it away. We lied. We were no more prepared for this down cycle than any of the others - and that is at least four in my memory.

Okay, you are probably thinking, if you are so mature and wise and have seen it all, what happens next? Beats me. The previous downturns I have seen have been stopped for differing reasons. What I do know is that when the upturn begins, we won’t be ready and, in fact, will have done ourselves immeasurable harm by shedding valuable professionals and devaluing our inventory of equipment. We won’t have enough people, we won’t have enough equipment and we will still wonder why we didn’t see it coming.

It’s a cyclical business. Many, including myself, try every time to believe it is not. But it is, just as the economy is cyclical and life in general is cyclical.

How long will it last. The key indicator will be the early months of next year when we learn exactly how sharply companies have trimmed their budgets. If the cuts are deep, don’t look for much recovery next year short of a war - driven elimination of a major supplier.

But, maybe you know more than we do. Actually you probably know more than we do. Given that, try your hand at our new online contest. The reader who guesses closest to the Dec. 31close of NYMEX sweet, light crude will win a $100 American Express gift card. Good luck.

Bill

I had a good conversation with my old friend John Westwood (Douglas-Westwood) about the reaction of the industry to the financial crisis and falling oil and gas prices.  John had just sent a note that he was opening an office on Wall Street in New York, a rather gutsy move if the doom and gloom sector is to be believed. The day before, I had received Douglas-Westwood’s thoughts on the current situation in a document entitled “Turmoil in the Credit Markets: The Impact on the Oil & Gas Sector.” You can find it at www.dw-1.com.  John and his company are long-term thinkers - hence the new office in New York. Their conclusions in the recent white paper are:

a short-term outlook that includes demand destruction, high levels of uncertainty and budgets hit by a lack of confidence, but large order backlogs that should carry a number of service/equipment companies through;

a mid-term outlook that includes oil prices still above most hurdles (around $80/bbl), slow downs in exploration rather than ongoing field developments, and reduced costs of inputs such as steel;

and a long-term outlook that includes a supply situation that is unchanged coupled with another sharp “supply crunch” when the global economy recovers.

To quote the final conclusion of the report, “In the longer-term, our views are  unchanged and global oil supply limits are likely to be tested again during the next decade.” So, if you are in this for the long-haul - and I can’t imagine that many of you are not - now might be the time to make a strategic investment or two, like John.

The U.S. presidential election day is November 4. It is amazing how little speculation there has been about the effect of the election of either candidate on the oil and gas industry. Oh sure, recent high oil prices figured in the early campaign days but, since the fall in prices, oil and gas have become non-issues. That is because, all bluster aside, Americans really don’t care about oil and gas until it hits them squarely in the pocket book. Since the price of gasoline has fallen, all issues have moderated.

Every president since Richard Nixon, Democrat and Republican alike, has publicly promised an end to foreign oil imports at some time during their presidency, usually during a time of elevated oil prices. None has ever come close to fulfilling that promise. When the price moderates, the discussion abates. No wonder, then, that the U.S. has never had, and will likely never have, an energy policy, viable or not. Not much chance that either Obama or McCain would seriously attempt anything resembling an energy policy.  It’s just one of those things that is not done here.

As I sit here typing this blog entry, I gaze up occasionally and fix my glance on the yellow, orange and red colors rolling over the hills in the distance.  Fall -  what a gorgeous  site.  That scene exists, of course, on the map on my wall, given to me by the petrol station across the street. My real view rolls over high rises, parking lots and shopping centers in metropolitan Houston. In a way, this is a fitting metaphor for the current economic crisis - the map with the rosy economic future on it was given to us by the folks in government who are busy bailing out the world’s banking system.

The economic view outside my window does not coincide with the economic map, as I really had hoped it would. There are a number of reasons for my pessimism, the most basic of which are that we are simply switching debt from a limited number of the population to the entire population. The debt has not gone away nor has most of the debtors’ inability to repay it. As the government assumes the debt, it borrows from the public to finance the assumption betting that the pay back of the debt can be financed with new debt, a bet made by many individuals that, collectively, got us into this mess in the first place. Add to that the fact that we have not yet gotten around to the problem of the enormous pile of unsecured credit card debt and I see no reason to be overly optimistic about the economy for the next few years. Demand will fall, and with it the price of oil and gas. Many suggest OPEC may step in and limit supply. Indeed, they may but recall that the move has back fired when tried before, costing OPEC dearly in market share, and that raising energy prices in the midst of a global recession will hardly buy OPEC any friends. My bet (and I am often wrong) is that OPEC production cuts will be limited, the price of oil will not rebound dramatically and we are in for some tougher times than many anticipate. How tough? The near collapse of the industry in the early to mid 80s might be a good point from which to begin speculation.

If you see it differently, let me know.

Every once in a while, but less frequently lately, I read or hear something about the oil camps. Oil camps in the U.S. were built in remote fields where little, if any, social or economic infrastructure existed. Their make up ranged from a full-service city to a plot of a few houses.

I grew up, partially, in a small oil camp three miles outside Iraan, Texas. The camp abutted the huge and prolific Yates field, which is still in production. The town of Iraan was named for ranchers Ira and Ann Yates whose ranch sat atop the Yates field.

Growing up in the early 1950s in an oil camp miles from the nearest large city (10,000 population or more was large to us) had its moments. The camp, a Gulf Oil Company production camp, was comprised of two rows of houses facing each other over a single street. At one end stood the company warehouse and at the other, the company field office. The houses had been moved to the camp from a similar camp near Burkburnett and dated from a 1920s oil boom there. Although they housed families, they were designed as gang houses composed of a common room followed by a couple of bedrooms placed end to end (in other words, the house was only one room wide), then a kitchen and, finally, a bathroom/back porch combo. Each room had its own exterior door, much

like the house from the Texon camp pictured here. Hot water, and heat, came from field gas. Scorpions, poisonous spiders and poisonous snakes were fairly common, so common in fact that we gave them little thought save for a back -of-the-mind wariness.

There were several kids in the camp. In a way, every mother was a mother to all of us. That made it tough growing up because there was always a set of parental eyes on you. Consequently, we were almost always in some kind of trouble. My worst, and most frequent, transgression was slipping through the piping and hiding under cattle guards to watch cars and trucks pass overhead. I couldn’t explain the fascination today, but it was high style back then.

We had little in the way of entertainment. We occasionally drove the 50 or so miles to see a movie. On truly lucky weekends, the local oilfield supply store secured a movie which was projected on the side of their two-story building to a crowd assembled in lawn chairs on a near by lot. Otherwise, it was pretty much rock throwing wars, foot races and other such juvenile foolishness.

Had we lived in the big camp at Texon, oh how different things might have been. It was a metropolis. Built between 1924 and 1926 by the Big Lake Oil Company (BLOC) to house its employees and their families, the camp counted 1,200 residents by 1933. According to The Handbook of Texas Online (www.tshaonline.org), the BLOC provided a grade school, church, hospital, theater, golf course, tennis courts and a swimming pool for the camp. BLOC president Levi Smith was an avid baseball fan and sponsored the Texon Oilers, a semi-professional baseball team. The camp also housed commercial ventures including a drug store, a cafe, a boarding house, a tailor shop, dry-goods store, grocery store, barber and beauty shops, a service station, a dairy, an ice house and a bowling alley.

That’s a far cry from our 10 house outpost in deep West Texas. Still, I am guessing that they did not have a lot more fun than us.

If you grew up in an oil camp, or know someone who did and passed on some stories, please let me know at wpike@hartenergy.com.

Bill

Photo by TexasEscapes.com

Ever wonder how your company stacks up? If you are in the U.S. and work for one of the top 40 operators Ernst & Young’s new Global E&P benchmark study throws considerable light on the subject. Some of the interesting conclusions: exploration costs have risen 165 percent over the past five years (1993-1997) and development costs over the same period have risen 180 percent. Revenues from oil and gas operations in the U.S. increased 12 percent in 2007, to US141.5 billion but the bottom line increase amounted to only 4 percent due primarily to rising production costs and increases in depletion, depreciation and amortization.

To take a look at the preview of the report, go to: http://www.ey.com/Global/assets.nsf/US/Industry_Oil_and_Gas_Global_E&P_benchmark_study/$file/Global_E&P_Benchmark_Study.pdf

Bill

They say you can’t teach an old dog a new trick. I am an old dog. Blogging is a new trick. When I was growing up, Spam was a compressed luncheon meat (and mighty tasty, as it still is) and wireless meant you were not connected because you had lost the cord. Never mind that computers were not around; television was not yet commercial.

The good old days? Most certainly not,  unless you count as good drilling wells from a semi-submersible  with a bumper sub as motion compensation for the string, or you count as good kick-starting  8 1/2 X 10  Ajax engines all day. Aside from old friends, there is not too much good to go back to in this industry, especially in terms of technology.  So, this should be an enjoyable new trick. There is a new generation out there that is much more savvy about all this than I am, but I will catch up.

That brings me to a topic of some interest. Exactly how different is the new generation of professionals from the old dogs of my generation? We certainly hear a lot about the differences. And the industry and the societies are accommodating young professionals as though they were a different group altogether. (Check out Rhonda Duey’s blog for more comments on the new, young professionals.) To be sure there are some differences. However the challenges of finding and producing oil and gas remain daunting, as they always have. While the equipment may improve and innovations such as intelligent energy may change the way we develop fields, my bet is that the mentality, drive and perseverance are the same in the old guard and the new. We probably just don’t organize and communicate in the same ways.

Your thoughts?

Bill