OK Marc, i'll post it. Good article, i only highlighted one part, but there is lots of good information.
March 17, 1998
Oil Production Stays Profitable
Despite Fall in Price of Crude
By SUSAN WARREN
Staff Reporter of THE WALL STREET JOURNAL
LAUREL, Miss. -- Dollar-a-gallon gasoline is great for drivers, and oil at
under $14 a barrel is great for keeping a lid on inflation. But aren't they a
disaster for oil companies?
And might they prompt the companies to cut back drastically on the
search for oil, posing the risk of tighter supplies and a price shock
somewhere down the road?
Surprisingly, the answer to both questions seems to be: not really.
When oil prices crashed in the mid-1980s,
Coho Energy Inc. barely survived, and for six
bleak months didn't drill a single well. But
now, with crude oil trading at only $13.28 a
barrel for West Texas Intermediate, a
nine-year low, little Coho is planning 47 new
wells this year in Mississippi and in
Oklahoma, where it has just acquired huge
new drillable acreage. One of its new wells is
going down here in Laurel right now.
What has changed? In a word, technology. In an industry that once
required as much luck as skill, computerized gear that pinpoints reservoirs
and guides drill bits has simultaneously reduced both costs and risks. Coho
spends 40% less to lift out each barrel than in the mid-1980s, and 92% of
the wells it drills in the established fields it works are successful now,
compared with 75% then.
"The industry is fundamentally different today," says Archie Dunham,
president and chief executive of Conoco, the oil unit of DuPont Co.
"Technology allows us to grow and continue to be profitable even with
$14 oil."
Field Theory
That is true for producers ranging from giants like Conoco to small
independents like Coho. Profits are certainly down, owing both to the
lower prices and, in a few cases, to write-downs in the value of reserves.
But most companies aren't cutting crude-oil production. It is still profitable,
and they want the cash flow.
Exploration budgets are another matter; those are being trimmed.
However, the reductions are modest compared with the cuts many
companies made when prices tumbled in the mid-1980s.
Moreover, there is a cushion: The world's proven reserves are high -- up
40% since the mid-1980s -- thanks partly to new seismic technology. In
addition, some major production projects are already under way and
won't be interrupted by the current price weakness. So all in all, the
depressed prices aren't sowing the seeds of future oil shortages.
As for earnings, technology isn't the only thing enabling producers to stay
profitable with crude-oil prices this low. Most are leaner and less
leveraged than they were during the 1980s crash, when a plunge to $10 a
barrel from $30 forced them into gut-wrenching restructurings. Many also
now hedge their production in the commodities futures markets, further
lessening risk.
Energy lenders sitting in on a Banc One Corp. conference call last week
were "mildly concerned, but not overly concerned," says the bank's chief
of energy lending, Larry Helm, who adds that if prices stay at current
levels for several months, "a company wouldn't be doing as well, but it
wouldn't be broke, either."
Among things setting off the price drop last fall was word that the
Organization of Petroleum Exporting Countries would boost production.
The drop also reflects the likelihood of more Iraqi production and slack
demand from Asian nations whose currency woes reached crisis
proportions in October.
More Land
For Coho, the timing wasn't good. It had agreed in November to buy
Amoco Corp.'s oil fields in southern Oklahoma for $257.5 million, an
ambitious move for a company with about $60 million in annual revenue.
The two sides had barely shaken hands when oil prices began to slide. In
the 1980s, Coho would have walked away. Instead, it closed the deal in
December, doubling its reserves, becoming Oklahoma's biggest oil
producer and taking on a boatload of new bank debt.
Not that weak prices haven't caused Coho to change course at all. It will
probably snip about $20 million out of this year's budget for oil-field
development. Some of the chancier exploration ventures will be shelved.
But Coho still will spend about $70 million on oil-field development this
year.
Coho concentrates on geologically complex,
previously worked fields where it searches for
small pockets of leftover oil. This is a niche made
possible largely by the advances in technology,
which make finding and producing these small
reservoirs economically feasible. While the big
companies concentrate on identifying giant
200-million-barrel fields, "we're quite happy using
modern technology to find 10 or 20 million
barrels," says Jeffrey Clarke, chairman, president
and chief executive of the publicly held company.
Cost Breakdown
A few numbers show why drilling still pays, even with prices so low. For
every barrel Coho produces, it spends $1 on administrative costs and
$3.90 in operating costs, plus interest expenses of $3, for total costs of
$7.90. Anything above that provides the operating cash flow that keeps
the company running, Mr. Clarke explains.
Add about $4.50 for finding and developing the oil fields -- a historical
cost, and one that is declining -- and the company can break even with
$12.40-a-barrel oil. It sells its output to middlemen who then resell it to
refiners.
So while Coho's earnings certainly are hurt in this price environment, "I
don't see them going negative," Mr. Clarke says. Coho earned $4.6 million
on revenue of $45.5 million in last year's first nine months, before crude
prices slid. Fourth-quarter results, which will reflect part but not the worst
of that slide, are due out Friday.
The 52-year-old Mr. Clarke, born in Wales and trained in mathematics,
abandoned work on a doctorate to take a job as an oil-field geophysicist
when he was 23. In 1980, after traveling the world hunting for oil, he
helped start Coho in Calgary, Alberta. The company, named after a type
of salmon, began drilling in the U.S. without any real plan. "It was a deal
here, a deal there," Mr. Clarke says. The company has since moved its
base to Dallas.
In 1983 Coho zeroed in on the town of Laurel, perched on a gentle rise in
the piney woods of southern Mississippi. It paid $500,000 for a single well
that was churning out 40 barrels of oil a day in the backyard of a Laurel
resident.
Since then, two major pieces of technology have enabled Coho to turn
that one well into the company's largest oil field. Three-dimensional seismic
surveys helped Coho find the oil; and tricks like horizontal,
computer-guided drilling enabled it to get to the oil.
The well Coho is drilling now in Laurel was planned with the help of a
detailed underground map from a 3D survey. The well will snake through
the earth horizontally for more than two miles. Computers will guide the
drill bit -- a new design that bites harder into the rock and sends back data
on each layer it eats through.
Another computerized tool, laden with sensors that measure such things as
the ground's electrical conductivity, will be sent down the finished hole to
sniff out pockets of oil, flashing back data snapshots of its surroundings as
it descends: rock, sand, water, oil. A slender 4-inch pipe, flexible so it can
bend and twist with the narrow tunnel, will be inserted.
Guided again by computers, another tool will crawl through the pipe,
punching holes at precise locations so that oil can flow into the well.
Finally, Coho will erect above the well a 40-foot rectangular tower with
gears like a grandfather clock, which will begin sucking the oil out at rates
precisely modulated by field operators equipped with laptop computers.
The Old Way
Some of this technology has been around awhile. But it has become far
more powerful and more precise in recent years. The company ran its first
3D seismic scan of underground Laurel in 1983, but the technology was
so cumbersome and costly that Coho surveyed only one square mile.
Above ground, cows tripped over the bulky ground sensors, and rodents
gnawed at the miles of cable that had to be laid.
Vibrations picked up by the sensors were recorded on 1-inch magnetic
tape, which was fed into a computer. Days later, hundreds of feet of paper
spewed out, containing hundreds of squiggly lines that were painstakingly
analyzed by geologists over months.
One mistake in the process could set back the survey by days or even
months. "Getting it wrong could get you fired," recalls Mr. Clarke, then
head of exploration.
Still, the vague picture that finally emerged was enough to boost Coho's
hopes that Laurel was sitting on top of abundant oil reservoirs trapped in a
salt dome.
Technology solved another problem for Coho in Laurel: The field sits right
in the middle of town, but running around drilling wells in people's yards
was out of the question. So in the late 1980s, Coho turned to the rapidly
developing technique of directional drilling. From vacant lots it bought up
around town, Coho drilled its wells at an angle, and often horizontally, to
reach far under homes and businesses to the oil reservoirs. At one such
drilling site, 14 wells radiate like spokes from a hub.
In 1990, the company adopted another innovation: Rotoflex pumps. Much
different from the traditional horse-head, seesaw pump, the towering new
pumps use a longer, slower stroke to suck the oil out more efficiently and
with less wear. Coho estimates they require 80% less maintenance and
save it $3,500 a year per pump in electrical costs alone.
Another benefit: the pumps are quiet, keeping nearby residents happy.
Coho owns these pumps, but it subcontracts for drilling and seismic
services. The main driller of the new well in Laurel is Grey Wolf Drilling
Co., but the high-tech, horizontal part will be handled by a division of
Dresser Industries Inc.
Looking Deep
Recently, Coho commissioned a new 3D survey of the area. Whereas the
1980s survey had cost it $250,000 to scan a single square mile, the cost
was down to $81,000 a square mile by 1996. The company decided to
survey 37 square miles, for a much more complete underground picture.
Instead of unwieldy cables all over the land, the technology used radio
signals, transmitting data from as deep as 20,000 feet. And in contrast to
the laborious analysis of paper printouts, geologists used computers to
process enormous amounts of data quickly into detailed colored maps.
Universal Seismic Associates Inc. of Houston did the survey.
At his desk in Dallas, senior geophysicist Klyne Headley now spends most
of his time in front of two computer screens, studying results from Laurel
and other recent 3D surveys. With the click of a mouse, he can zero in on
a fault line that catches his eye, enlarge it, then view it from several angles.
Pinpointing promising drilling sites takes days instead of months.
To keep wells pumping at top efficiency, Coho production analyst Ed
Wildman now equips field operators with cellular phones and laptops so
they can send production data to his office. There, he fine-tunes operations
without leaving his desk, avoiding the trips he used to have to make to the
fields.
Today, the Laurel field that began as one well consists of 44 wells in the
middle of town, pumping 5,000 barrels of oil a day. Coho has identified
20 million barrels of reserves in Laurel, and finds more each year. Mr.
Clarke estimates Laurel will eventually bring in $500 million of gross
revenue.
Second Chance
Most of Coho's other operations involve reworking old fields. Using new
"logging" technology, Coho can reassess old wells, often finding thin layers
of oil that were invisible to the earlier generation of instruments. In one well
in Martinville, Miss., that was ready to be plugged by its previous owners,
Coho found a reservoir that now produces 300 barrels a day.
Similar opportunities await in Oklahoma, Mr. Clarke believes. He hopes
to increase production 20% in the newly acquired acreage by the end of
the year just by using new technology to tweak operations, fix problems
and rework old wells. Production engineer Petey Erwin, using special
software, recently took just one morning on her computer to identify a
problematic well that had been hurting output at an Oklahoma field for
years.
Mr. Clarke still believes in old-fashioned gut instinct and luck, and he frets
that with too much dependence on high-tech equipment, "the fundamentals
are being lost" in the industry.
Nevertheless, the old way of business was firmly fixed in his rearview
mirror recently as he made his first trip to Coho's new Oklahoma fields.
Forgoing a map, he punched his destination into a satellite-guided
computer mounted in the dashboard of his BMW, which directed him right
to the spot.
"Life is so much easier with computers," he says. |
