YEARAHEAD-Oil service costs soar, but producers can pay up
By Gelu Sulugiuc
NEW YORK, Dec 28 (Reuters) - Soaring drilling rates are straining oil services capacity, leaving oil and gas companies worldwide stuck between the promise of handsome returns on new production and hefty exploration costs, an industry survey shows.
Oil service costs are expected to set new highs next year, but exploration & production (E&P) companies are enjoying record cash flows and should have no problem footing the bill, analysts say.
A record number of participants in a Salomon Smith Barney annual survey expressed concern about oil service capacity, with nearly all polled expecting further price increases.
The 234 oil and gas companies surveyed worldwide estimated they will spend a combined $113.5 billion on E&P next year, an increase of almost $20 billion or 18 percent from this year.
More than 80 percent of participants in the E&P spending survey said they were concerned about the availability of oil service capacity during 2001, especially drilling rigs and field personnel.
A similar percentage expect oil service prices to go up worldwide and continue to rise in North America, where unprecedented natural gas prices boosted exploration this year to its busiest in a decade.
There were 1,087 oil and natural gas rigs operating in the United States as of December 22, compared to only 797 a year ago, according to oil services firm and sector monitor Baker Hughes Inc. (NYSE:BHI - news).
The rig count in Canada was 456, up 52 from last year.
``The onshore rig counts are the highest in 10 years and drillers find it difficult to recruit new qualified crews,'' said Poe Fratt, an analyst with A.G. Edwards & Sons.
Offshore rig utilization is almost close to 100 percent in North America, and oil service prices have doubled in the last year, he added.
HIGH PRICES UNLIKELY TO TEMPER DRILLING RUSH
E&P companies' cash flows hit record levels this year, so they can afford higher oil service costs as long as oil and gas demand stays strong, analysts said.
``Oil and gas companies benefited for many years from low services costs,'' Shoemaker said. ``They recognize that those costs will increase, but their record cash flows can definitely accommodate that.''
Helped by near decade high oil and all-time record gas prices, Anadarko Petroleum Corp. (NYSE:APC - news), the biggest U.S. independent oil and gas producer, posted third-quarter earnings 15 times higher than the same period a year ago and forecast fourth-quarter earnings of about 20 percent over the third quarter.
The company said it was expanding its drilling program to take advantage of high prices, and expects to raise its annual production to over 200 million barrels of oil equivalent next year. In the third quarter alone, it produced 39.8 million barrels of oil equivalent of oil, natural gas and natural gas liquids.
Analysts expect it will take between three to five years until enough new rigs are built to satisfy the thirst for more oil and gas production and bring down service prices.
IDLE RIGS REACTIVATED
So far, oil service companies have chosen to reactivate idle equipment to satisfy the new demand for drilling.
``(Oil service companies) are still reluctant to make some investments and build new capacity,'' said Robin Shoemaker, a Bear Sterns analyst.
After two consecutive years of close to 20 percent E&P spending growth, the industry is set to reach and exceed the levels of activity seen in 1997, Salomon Smith Barney predicted.
Merely reactivating existing rigs will not be enough if the current drilling growth rate continues through next year, analysts said.
``A year from now, virtually all the idle equipment will have been put back into service,'' Shoemaker said.
In one area likely to enjoy a boom next year, offshore drilling, there are only 390 rigs that can drill at even a shallow depth of 300 feet (92 meters) in the world, and only 10 under construction. That's not enough at the current drilling growth rate, Fratt said. |
