Economic worries rein in exploration investment
Americans are feeling the slowdown in the economy, and many are a bit fearful of what is to come. Unfortunately, these misgivings are not misplaced. In fact, for the general population, there is arguably less anxiety right now than the situation warrants.
In the interest of gauging the seriousness of the situation, it would be advantageous to take a look at some of the things going on in our industry. Some of the recent news has not been positive. Businesses are cinching their belts in anticipation of a prolonged recession, and a lot of “guaranteed” projects that have been on the books for months could be shelved.
The following news bites give a little more insight into the big picture.
Oct 22 - Baker Hughes Inc. said it expects about 200 drilling rigs in North America will be idle in 4Q 2008 because of the tighter credit markets and the declines in oil and gas prices.
Oct. 23 - Suncor Energy announced it would delay construction of an oil sands upgrader for the C$20.6 billion Voyageur expansion by one year to 2013.
Oct. 23 - Nexen Inc. and Opti Canada delayed a decision on the second phase of the Long Lake oil sands project to sometime in 2009. Expansion would double production of synthetic crude to 120,000 b/d. The first phase, which cost C$6.1 billion, is now just starting up.
Oct. 24 - Newfield Exploration Co. announced it will cut back 2009 spending by 21% and that it has trimmed its production outlook for 2009. The company expects to spend $1.65 billion, down from its previous estimate of $2.1 billion. Newfield reports it is “matching its capital budget with cash flow expectations.”
Oct. 24 - Jim Mulva, CEO of ConocoPhillips, said the company will keep its 2009 capital spending plan flat at its 2008 level of $15 billion, adding “We want to live within our means.” In an Internet broadcast, Mulva said that as the company moves forward, the primary goal is to maintain a strong financial balance sheet position with flexibility and credit capability. “Second,” he said, “we want to fund those capital commitments and opportunities we have as a company.”
Oct. 24 - Steve Farris, CEO of Apache Corp. said the company plans to spend about $1.2 billion on exploration projects in the coming year. During a conference call with analysts, Farris said Apache will operate its business within its cash flow. The company plans to start looking at assets to buy, he added, saying the “economic reality is a lot better today than it was four or five months ago.”
Companies that previously cut 2009 spending plans include Chesapeake Energy Corp., Petrohawk Energy Corp., SandRidge Energy Inc., and ATP Oil & Gas Corp. Others are joining this list daily.
The many predictions that painted a rosy picture of our industry through 2012 are being revised in light of the present economic climate. That climate is changing, and it will have a volatile effect on investment and project execution in both the near and long term.
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October 30th, 2008 at 6:35 am
It is likely that there can be job losses in oil industry from 2009 -Q2
October 30th, 2008 at 10:06 am
I agree that there will be some slowing in our industry. But I also believe that “the sky is falling” mentality does our industry no good. How about discussing the positive things still going on in our industry like natural gas drilling in the Rockies continues to stress services to the maximum and the Bakken play is the brightest spot on the horizon in our industry in about 15 years.
Thanks for otherwise useful commentary in your publications.
Dale
October 30th, 2008 at 12:33 pm
Even with interest rates at the historically low levels we’ve recently experienced, drilling up one’s cash flow has always been the prudent way to operate. Reserve borrowing for aquisitions. What companies are now doing is simply reverting to normal operations. I’ll never complain about $60 oil and $7 gas.
October 30th, 2008 at 5:26 pm
Price downturns are a fact of life in our industry. The storm clouds were building when the price went so high, so fast. We could anticpate a short span of high prices and then a sharp downturn in price that dropped faster as then they went up. No supplier should have increased prices to operators and no operator should have made any business plans more than their normal oprations until the prices had leveled off for a period of months. This is what I did as an outsouce for operators. I held my prices steady and even cut some. Good business judgement always beats the odds everytime. Most of the companies above are going ahead with business as usual, doing what they did last year.
October 30th, 2008 at 8:29 pm
Most of us who have been in the business for a while have seen booms and busts, it’s just the nature of the beast. The very troubling aspect of this downturn, at least for me, is the coincidental decrease of oil and gas prices with the financial crash. Prudent operators have invested revenue in new drilling or acquisition and various financial instruments to finance these activities. Even if oil and gas prices went south, sound financial investments softened the impact. I am not a pessimist, but I am an experienced optimist; this is going to be a tough one.
October 31st, 2008 at 11:10 pm
As yet, we have not had a financial crash but we have had a financial crunch much like tight money situations in the past. There is money, one just has to figure out how to get one’s share. No one deserves to buy more than they can afford just because the Federal Government said to loan them money. This why we have subprime mortgages which caused part of the crunch. Lack of business judgment on the part of lenders. Why make a loan to someone who can not pay it back. The hedge funds are the second part of the crunch. Gambling with the rise and fall of the market. There were some big loosers. Most of them hurt only themselves, but one, SEM Group hurt their oil suppliers because they gambled with their money and lost it. OKLA. has a law requiring oil purchsers to keep that money safe. This could be a crime depending on how the law is written. One must operate a business so as to do no harm the way SEM Group did and some of the banks have done.