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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: Chuzzlewit who wrote (24509)	6/22/1998 2:12:00 PM
From: Tulvio Durand	Respond to of 95453

Chuzzlewit, your point -- that production cuts (and not the price of oil) lessen the demand to find new oil -- is well taken. However the production cuts are intended to be as short lived as possible. Those cuts, lasting only months, will have minor impact on deep-water contracts for new production sites that take several years to develop. Moreover the production cuts, be they 2% or 3% of the 72 million b/d being pumped today, do little to stem exhaustion of the presently producing wells. Also keep in mind that oil consumption is increasing at 2% to 3% per year, thereby negating the effects of the production cuts insofar as exhaustion rate, estimated at 5% per year, of present wells is concerned. So the E & P must go on regardless of the price of oil and regardless of whether the cuts amount to 2% or 3%. Using Baird's wonderful analogy, of the nearly filled bathtub with drain open and faucets open, OPEC is merely negotiating the fill level by turning the faucet slightly. The long term need is to equate inflow (supply) to outflow (consumption). To do so requires finding new oil at all times. Tulvio

To: Chuzzlewit who wrote (24509)	6/22/1998 2:28:00 PM
From: Czechsinthemail	Read Replies (2) \| Respond to of 95453

Chuzzlewit, The urgency of the need to drill may seem less when oil prices are low, but it is not because the number of barrels pumped has declined. It is more that refiners and major integrated companies can get a more than adequate supply of cheap oil without having to commit funds currently to drilling projects. Though ultimately they would have to drill to replace depleted reserves, the urgency in doing so is less when oil seems cheap and abundant relative to immediate and near-term demand. Why drill when you can buy a virtually limitless OPEC supply on the cheap? Essentially, it means they can get oil without depleting their reserves. The result we are seeing is stacking of land rigs and harder bargaining with offshore drillers generally resulting in full utilization but at lower dayrates. When oil prices are high and forecasted to be high, the competition for rigs based on a higher forecasted profitability on drilling projects means someone will snatch up all available rigs so we see a hog rush to the trough effect that boosts drilling dayrates. I think what we have been seeing is a sea change in thinking about oil prices and total demand for oil that both will be lower longer than people had earlier forecasted. That may or may not prove correct. Rising oil prices suddenly improve the projected profitability of drilling projects and will renew the competition for rigs to drill them. Currently, the area where we're seeing that competition is primarily in the deep drilling sectors because of the twofold impact of better economics on the huge fields these projects can tap into and a scarcity of rigs capable of drilling them. But even here, the prospect of more deep rigs coming on stream and lower dayrates for shallow rigs may have a dampening effect on the deep drillers as well. Baird