Drilling industry unfazed by decline in energy prices

Against a backdrop of tanking oil and natural gas prices, drilling contractors Friday struck a contrarian tone at an annual gathering here: business is almost too good.

The recent weakening in commodity prices has raised investor skittishness toward energy in some cases. But oil and gas drillers, gathered for the annual meeting of the International Association of Drilling Contractors, continue to revise projected rig activity upward, even in the United States, where gas storage is at near-record levels, said IADC Chairman Claus Chur.

That optimism has bled into projections for 2007, with rig operators brushing aside worries that energy companies will cut back on drilling should oil or gas prices retreat further. Near-record storage levels in the United States have raised concerns that a mild winter or slowing economy could fill available storage, causing prices to crash.

The oil companies “are not so much focused on the month-to-month gas price,” John Lindsay, executive vice president for Helmerich & Payne Inc., a leading land driller, said on the sidelines of the conference. Tulsa-based Helmerich & Payne has seen no tapering off of activity due to recent commodity price declines,
he said.

October natural gas futures were off 15 cents to $4.63 per million British thermal units Friday on the New York Mercantile Exchange. Natural gas futures traded above $8 this summer out of anticipation of hurricane-related outages in Gulf of Mexico that haven’t materialized.

Lindsay acknowledged that robust storage could push gas prices to a point where that wouldn’t support the current level of drilling. But for now, Lindsay still expects activity to continue to grow through 2007, due to a combination of increased demand and declining returns from existing wells.

If the price of gas stays below $5.50 for three months, or below $7 on the 12-month futures strip, energy companies would likely cut back on drilling, said Kurt Hallead, an oil-field services analyst with RBC Capital Markets. But no magic number spells doom for the industry, he said.

“$7 is much more of a psychological marker,” Hallead said in the final presentation of the two-day conference.

Addressing the offshore market, Lee Ahlstrom, director of investor relations at Noble Corp., pointed out that most deepwater drilling projects remain profitable even when oil hits $30 or $40 a barrel, let alone Friday’s price of $60.55 in NYMEX futures.

But even sustained success comes with its own costs for the industry, several speakers pointed out. They focused on soaring injury rates that have more than kept pace with increased drilling activity. The trend has spawned a series of industry gatherings over the last year to explore best-practices to avoid accidents.

In the United States, deaths related to land drilling doubled in the first half of 2006 over the same period last year, and offshore drillers recorded two deaths, compared with zero last year, said Kevin Lacy, head of discipline-drilling and completions for BP PLC.

Lacy described the higher risks associated with drilling as a “mess” that “took 20 years to create.” His speech was based on industrywide conditions and did not focus on BP.

The BP executive called for a stronger focus on retaining personnel, to avoid putting inexperienced workers into the field.

Drillers will need to hire 30,000 new workers to staff the 500 rigs in the planning stages or under construction, Chur said. The influx of new workers comes amid the expected retirement of some 50 percent of the work force over the next 10 years.