MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, APRIL 3, 1998 (4)
Oil in a Time of Glut
Kippinger On-Line
Saved by Technology
Though the price of a barrel of crude was recently $16, oil companies, both big and small, are making money. That's because the historic link between oil company profits and crude oil prices--a relationship which suggests that these companies should be on the ropes again--hardly exists anymore. "Technology and cost control, rather than oil prices, now rule the industry," observes Prudential Securities analyst Jeffrey Freedman. What he means is that technology allows oil companies to operate with fewer employees while greatly reducing the cost of finding and producing new oil and natural-gas reserves.
Although modern computers made the job of processing vast amounts of seismic and production data easier and faster, perhaps the most important innovation is the use of three-dimensional seismology. Simply put, 3-D allows geologists and other technicians to create realistic computer images of geological structures far beneath the surface of the earth. That enables them to pinpoint oil and gas deposits with greater accuracy. Result: The industry's success rate at making new discoveries has increased in the past decade from one strike for every four wells drilled to one in two.
Another breakthrough is the increased use of horizontal drilling. Froma conventional drilling platform, a well is dug straight down to a hydrocarbon-bearing structure. Then the well slants off horizontally and slices through a rock formation, which is usually longer and narrower than it is deep. Thinner pipe, made of more flexible alloys, has been developed to make it easier and faster to drill through a formation. The goal is to expose more oil-bearing rock to the well bore, which increases the production from each well and drains the reservoir faster with fewer wells. Horizontal wells drilled in North Dakota and south Texas show daily production rates three to five times those of conventional wells.
These technologies and others have reduced the cost of finding and producing oil and natural gas by 20% since 1986, from $5.50 per barrel to $4.40 per barrel. Exxon pursues only huge new fields; its finding cost per barrel is 50 cents, an 85% reduction in the past ten years. As a result, says the Fed's Bill Gilmer, the industry can thrive at $17 per barrel for oil and $1.70 per 1,000 cubic feet for natural gas. Until recently, oil sold for about $20 a barrel, and natural-gas prices were running above $2 per 1,000 cubic feet.
Improvements in deep-water-drilling technology have enabled oil companies to search in areas formerly considered inaccessible. As recently as 1992, oil and gas producers had written off the Gulf of Mexico as the "Dead Sea." They believed that all the oil and natural gas there had been found over decades of intensive exploration. Today the Gulf is one of the world's hottest exploration areas as companies venture into deeper and deeper water. The deepest well in the Gulf in 1987 was in about 1,300 feet of water. Exxon made two discoveries last year in 4,800 feet of water that contain the equivalent of 300 million barrels of oil. Shell Oil, a subsidiary of the Royal Dutch Shell Group, began producing natural gas last July from a record depth of 5,300 feet. In 1996 Shell drilled an exploratory well in 7,612 feet of water--also a world record.
Companies can operate at those depths by using floating platforms that are held in place by steel cables attached to the ocean floor. Another system, called subsea production, allows a company to install wellheads on the ocean floor and pump the oil and gas to a platform on the surface.
The impact of these new technologies has spread worldwide. A recent study estimated that between 1991 and 1995, new drilling techniques added 4.8 billion barrels of commercial reserves to the North Sea alone, worth from $30 billion to $40 billion. Some 60% of the gain came from new discoveries and 40% from earlier discoveries that had previously been unprofitable. Likewise, technological advances have led to a 40% increase in proven reserves in Alaska's Prudhoe Bay field since 1990.
Small is beautiful, too
Major oil companies are not the only beneficiaries of recent technological breakthroughs. Smaller companies, such as Houston's Santa Fe Energy Resources (SFR, NYSE, $11), operate successfully in the deep waters of the Gulf of Mexico and other locales that were once the exclusive province of the majors. For example, Santa Fe has drilled several horizontal wells on the Indonesian island of Sumatra, and it is using a development called floating-and-storage off-loading (essentially using a floating tanker for storage and then transferring its cargo to another tanker) in the South China Sea. "Before, we would have had to build a pipeline to get the oil to an onshore storage facility," says Tim Parker, division manager of international exploration. "That dramatically changes the profitability of smaller fields." Parker says smaller companies, like the majors, are now forced to venture abroad. "North America is the most picked-over part of the world," he adds. "There are simply more opportunities abroad, and a lot of them haven't been exposed to the new technology."
Even so, Santa Fe does not compete directly with the majors. Parker says his company concentrates on finding and developing fields containing 50 million to 100 million barrels of oil and natural gas. Fields of that size, he adds, are the most common but are too small to satisfy the appetites of the big companies. Santa Fe's formula for success is paying off. The company increased its reserves by 38%, to the equivalent of 171.1 million barrels of oil in 1997. Earnings last year rose to 32 cents per share, versus 4 cents in 1996. Ellen Hannan, an analyst at Prudential, predicts Santa Fe will earn 50 cents per share in 1998 and 70 cents per share in 1999.
Technology has also proved a blessing for niche players such as Denbury Resources (DNR, NYSE, $20). Denbury, headquartered in Dallas, uses horizontal drilling and 3-D imaging to find oil and gas in Mississippi and Louisiana, states that were thoroughly explored by the major oil companies in the 1940s and 1950s. The majors left behind many small deposits that are ideal for horizontal drilling. Denbury drilled one well in Mississippi at a cost of $950,000 that has already produced 65,000 barrels of oil and paid for itself in less than ten months. It is eventually expected to produce 430,000 barrels of oil at a per-barrel cost of $2.50.
The company earned 62 cents per share in 1997, up from 50 cents in 1996. According to analysts surveyed by Zacks, Denbury should earn 80 cents per share this year. The stock trades at 25 times that 1998 estimate.
Recently, historian Yergin was asked why the U.S. and other industrial countries are so blase about the potential impact of the Iraqi crisis on world supplies. "We now have a free market in oil and, most important, we know that it works," he said. "In 1973 there was a mind-set that oil, as a dwindling resource, had to be regulated by the government."
Job's A Real Beauty - Firm Recharges Land's Vibrancy
Calgary Sun
The brochure's colorful pictures put out by Treeline Well Abandonment and Reclamation Ltd. tell it all.
Abandoned oil and gas wells replaced by pastoral scenes. Greenery and wildlife instead of torn-up land.
Rick Peterson, a native of Trochu, and Dan Bryson, a native of Carstairs, paint it all in simple terms.
There are some 140,000 producing oil and gas wells in Western Canada, and 30,000 'shut in' wells that are no longer economical.
In the boom years of the 1970s, no one cared what happened when a well's days were over.
Oil prices were high and there was always more oil and gas to discover.
But then, and despite the bad name 'radical' environmentalists tried to give to the industry, along came the likes of investors like Ben Docktor and John Inverarity, who figured along with making money, there was a social obligation to shutting down and enhancing abandoned wells and making them fit the landscape again.
So, in 1991, Docktor and Inverarity established Kinnell Well Abandonment and Reclamation Ltd. Inverarity is no longer involved in the company, by the way.
Kinnell Well Abandonment was not, exactly, a glamorous name by any means -- even though it explained aptly what the company did.
And what Kinnell did was to shut old wells, clean any contamination left behind, and re-beautify the land around it.
You'd never have known a well had been there after the company did its work.
"We were so successful," explains Peterson and Bryson, "that our clients have ranged from the majors such as Gulf, Imperial, to intermediates like Northstar Energy, and to small ma-and-pa operations."
Bryson, 27, and Peterson, 36, don't particularly like to be described as "environmentalists."
But in my opinion, they do more to preserve our environment than some of the more publicized and radical types.
And they make money at it, too, and create employment for some 25 staff members.
That's a lot more than just screaming about environmental protection.
Peterson and Bryson estimated their team of experts reclaim and enhance 200 abandoned oil and gas wells a year, all set to Alberta government standards.
Actually, provincial law requires this, but among the many aspects of Treeline's work is the company does all the regulatory and administration needed for its clients and submits just one bill for each project completed.
That avoids the hassles of multi-billings and government hassles.
Simplicity in itself.
"What's more," explains Bryson, "every job we do has to count.
"One bad job and our reputation suffers. Our sales and service are based on repeat business all the way."
So far, clients affirm there has never been even one bad job, and that has been recognized by the Canadian Association of Oilwell Drilling Contractors -- and other industry associations.
"The oil industry has been extremely good for our province, and here at Treeline we like to think we are helping to repay the faith the people of Alberta have put into our province," they say.
And who can doubt that?
Engineering Firms Mate
St John's Evenung Telegram
Two St. John's engineering firms with extensive experience in the offshore oil industry have joined forces to bring more engineering work to Newfoundland.
MNC Group Inc., owned by businesswoman Moya Cahill, and RDS Engineering Inc., run jointly by David Fong and David Rees, have merged the offshore divisions of their companies under the new name Pan-Maritime Energy Services.
The new company's goal is to get work in Newfoundland, Nova Scotia and South America, Moya Cahill said Friday.
"We're looking at building a core team of 20 to 30 engineers," Cahill said. "With MNC's environmental and safety side together with RDS's structural and pipeline experience, we feel that together we complement one another very well."
If Newfoundland hopes to build an engineering industry capable of completing large contracts associated with offshore work, companies will have to get bigger, she said.
"What Newfoundland firms have to do now is they have to start building to meet that need," Cahill said. "We'll be continuing to chase projects like Terra Nova and future oil and gas projects, not only here but in Nova Scotia."
Though the bulk of the engineering work for the Terra Nova project is already under way, Cahill said the industry has plenty of room to grow.
"Were still in our infancy but we have a guaranteed industry that will only get bigger, we're confident of that," Cahill said.
Both firms were involved in engineering at Hibernia. RDS played major role designing topsides and drill rig modules had more 65 people working in France.
MNC Group performed quality inspection and vendor surveillance work for Hibernia
Pan-Maritime Energy Services will allow the two groups to share marketing and administrative costs as well as pool resources, Cahill said.
The deal itself was an easy one to put together once the idea was on the table, she said, and the distribution of ownership is not a major issue.
"It's more important to have common mind set," she said. "If the people that can work together, then everything falls together. We feel that we build a company that can not only be a Newfoundland strength but also one that we can take and export."
NOIA Mission Off To Calgary For Show
The Evening Telegram
Seventy-five local business people representing 60 companies will showcase their expertise and acquire up to date information on East Coast petroleum projects during a two-day trade mission to Calgary next week.
The mission, on Monday and Tuesday, was organized by the Newfoundland Ocean Industries Association (NOIA) which represents almost 400 member companies which supply and service Canada's East Coast offshore oil and gas industry.
Heading up the delegation will be NOIA president Stephen Henley, vice-president of AMI Offshore Inc.
On Monday, the visiting group will be addressed by officials of companies such as Mobil, Petro-Canada, Husky Oil, Chevron and Norsk Hydro and the National Energy Board.
A keynote speech will be given at a luncheon for the delegation and the Calgary business community Monday by Gary Bruce, vice-president, offshore development and operations, Petro-Canada.
Bruce will present an update on Hibernia and Terra Nova oil projects and "discuss the future role that these and other projects will play in the development of the petroleum industry on the Grand Banks," Henley told The Evening Telegram.
The delegation will also hear about future plans for Canada's East Coast from Chris Pierce, vice-president, strategic planning, Canadian Association of Petroleum Producers. There will be speakers as well from the Canadian Association of Oilwell Drilling Contractors; Small Explorers and Producers Association of Canada; and the Petroleum Services Association of Canada.
On Tuesday, the visitors will hear from such groups as the Sable Offshore Energy Project; the Canadian Energy Pipeline Association; Canadian Gas Processors Association and Canadian Gas Processor Suppliers Association.
"As suppliers and service providers to the East Coast oil and gas industry, NOIA members have developed world-class, marine-based technologies and expertise - skills not readily found on Canada's West Coast," Henley said.
"This mission provides the forum in which relationships will be made and complimentary skills and opportunities identified between Alberta and Newfoundland oil and gas companies."
Henley added, "It should be a couple of really exciting days."
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