US Oil Eclipsed by Saudi Increase

Prosperity in The North American Oil Patch

THE businesses and communities that make up the United States "oil patch" report little if any benefit from the Persian Gulf crisis. Some even expect eventual harm. But "from a purely parochial viewpoint, US producers are at least not faced with [Kuwait's] production coming back into the market at one time," says Jack Ekstrom of Energy Research International, a Denver public-relations firm for energy industries.

In geographic terms, the US oil patch has Texas, Louisiana, and Oklahoma at its heart. It embraces scattered oil- and gas-producing territory from Alabama to Alaska as well.

In corporate terms, the oil patch is best known for "the majors," a handful of large integrated companies like Exxon, Shell, and Texaco. In the US, they account for 30 percent of exploration spending, but only 10 percent of the wells because they concentrate on big targets that have all been found, except those expensive environments like deep water offshore or the arctic.

In addition are dozens of large "independents" and hundreds of smaller, one-well-at-a-time firms. These companies spend 70 percent of exploration dollars to drill 90 percent of the wells.

Hundreds more businesses serve and supply the oil companies, helicoptering roughnecks to offshore rigs, delivering drill pipe and bits, logging wells, acquiring seismic data, and plugging abandoned wells with cement.

"I can't say that we've seen any business related to the war at all," says Laney Chouest, vice president of Edison Chouest Offshore. The Galliano, La., firm supplies vessels for offshore exploration. "I'm not in a vacuum. There is no change," he adds.

The Houston-based Petroleum Equipment Supplier's Association says that only those members who already had worked in Kuwait expect to help rebuild the emirate's oil infrastructure. Others tell PESA that the Gulf crisis did not affect their business.

But for US producers, "the worst thing that could happen is what happened," says industry tracker Ekstrom.

A year ago the mathematics of supply and demand were starting to look attractive to increased investment by the US oil industry. Prices were inching up along a stable track. The 13 members of the Organization of Petroleum Exporting Countries (OPEC) appeared comfortable enough with their oil revenue to avoid repeating the price wars of the 1980s.

But oil-market stability vanished like a desert mirage when Iraq invaded Kuwait last Aug. 2. Prices bounced between $30 and $40 a barrel for months, while Saudi Arabia and other countries increased production capacity to compensate for Iraqi and Kuwaiti oil locked out of the market by a United Nations embargo.

"One of the things that nobody wanted was additional supplies brought into the market," Mr. Ekstrom explains. "And that's what happened. OK, you had a disruption from Iraq and Kuwait, but that void was immediately filled. Now, when they come on stream, you've got a 4 million barrel-a-day excess."

That's several years away, but meanwhile, mild winter weather and a recession have depressed demand for oil in the US.

The number of working drilling rigs, the most widely watched barometer of oil-patch activity, averaged 1,010 last year, according to Houston drill-bit manufacturer Baker Hughes. The company still expects an increase this year, says its vice president, Ike Kerridge, but it has lowered its forecast to a rig count of 1,074 from 1,160 envisaged in its previous quarterly forecast.

The average rig count through March was 994, up from 934 last year. But a leading indicator tracked by Denver-based Petroleum Information points to trouble. PI reports that through February oil firms applied for permits to drill 4,436 wells, compared with 4,792 last year.

And only 20 percent of the permits sought to date are for riskier exploratory wells, compared to 25 percent last year. The others are for development of previously discovered fields.

Prices also offer little hope. Baker Hughes forecasts an average wellhead price of $17.07 for oil this year, down from $20.10 last year. The company expects natural-gas prices to average $1.65 for the year, down 4 cents.

The New York Mercantile Exchange, where crude oil futures are bought and sold, reflects traders' expectations of weak oil prices. West Texas Intermediate, the benchmark grade used by NYMEX, on March 27 settled at $19.41 for barrels to be delivered in May. The settlement price was similar for subsequent months, ending with $19.26 for December 1993, the last month traded.

If the Kuwait crisis demonstrated the need for secure domestic oil supplies, neither President Bush nor Congress has decided to open restricted offshore waters to oil exploration. "I think that's a shame but I also think that's reality," says Robert Stewart, president of the National Ocean Industry Association.

In a map appearing with the ``Oil Path'' Points of the Compass on Page 10 in the April 3 edition, the key reversed the color-coding on the natural gas and oil fields. The red fields are natural-gas deposits, and the green fields are oil deposits.

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