WORLD OIL SPECIAL REPORT

Slow improvement seen for consultants

Donnie Harris, President, Garb, Grubbs, Harris & Associates, Inc., Dallas

In past years, Forrest Garb usually prepared this article for World Oil. However, because he has cut back on his day-to-day involvement with our company, Forrest has decided that restoring Model T and Model A Ford cars is more fun than writing industry forecasts. Thus, he has passed the baton to me, and I will try to continue his tradition of assessing the E&P industry from a consultant’s viewpoint. As a first-time World Oil advisor, I will try to carry on Forrest’s tradition of using facts to bolster my opinion of recent events, as well as to shape a near-term outlook.

Forecasts normally assume that we are in a stable environment, both environmentally and politically. However, the recent terrorist events in the U.S. have caused all forecasts prepared before Sept. 11, 2001, to be obsolete. Instead of moving toward a world that would function as "one," countries will once again rely more heavily on their own internal capabilities.

The beginning of 2001 saw a huge jump in U.S. gas prices. This price spike was due mainly to the deregulation of electricity suppliers and their inability to meet peak demands stemming from a lack of new power plant construction in California. Through increased production, conservation, and brownouts and blackouts, gas prices had returned the Henry Hub average for 2001 to $4.35/Mcf by October 1. This compares to the 2000 average of $4.35/Mcf. I believe that the gas price average will maintain this level in the near future.

WTI oil prices continue to maintain a low, $20/bbl range, down from a $30.34/bbl average in 2000. As of this writing, the low oil price of the year was attained on Sept. 24, 2001, at $21.45/bbl. This low was one week after the terrorist attacks, and it coincided with a ban on U.S. commercial flying and curtailment of non-essential travel. During the Gulf War, oil prices climbed to a $40.40/bbl high, but the current war in Afghanistan does not threaten the large, Middle Eastern production volumes, at least not at this time.

OPEC is still trying to support a $25/bbl oil price with an informal price band mechanism adopted in March 2000. The current drop in air travel is lowering estimated jet fuel consumption by 5%. This should cause oil prices to suffer a short-term valley, but in the long term, they should climb as world demand overtakes global production – somewhere between 2003 and 2005.

"Multi-lateral technology has exploded over the past couple of years. This particular technology still has room for growth."   – Donnie Harris

From the viewpoint of a small consulting firm, 2001 has been a slightly below-average year, to date. We have maintained our clients that we prepare yearly reports for, and also continue to provide litigation support for taxes and estate evaluation. The smaller companies that we work for have cut back on any reporting beyond their basic needs. With more stable and possibly rising oil prices, additional U.S. production will become economic, thus increasing the need for third-party evaluations.

As has been said for the last several years, easy-to-find, inexpensive-to-produce hydrocarbons are a thing of the past. However, we are still discovering new economic fields. If the base statement was true at the time it was made, then what has changed? One primary answer is technology. New, improved technology helps us to more accurately assess potential exploratory ventures and minimize the risk before drilling. New technology helps us drill deeper to reach those targets. Once a reservoir has been discovered, new technology allows us to drill wells capable of producing and draining more of it, thus requiring fewer wells.

One specific technology is the advent of multi-lateral well completions. The technology behind drilling, testing, completing and producing multi-laterals has exploded over the past couple of years. Multi-lateral technology allows us to develop reservoirs, such as deep offshore fields that would be uneconomic if conventional, single wellbores were utilized. This particular technology still has room for growth. As with any other area of technology development, as the techniques develop, what is expensive to implement today will likely cost considerably less in the near future. The ability to use multi-laterals more extensively in existing marginal fields may improve a reservoir’s economics, thus extending the life and increasing the reserves.

An important component of reservoir evaluation when assessing the applicability of new multi-lateral completions – and evaluating existing multi-laterals – is results obtained from pressure transient testing. Our firm recognizes this need and is poised to best serve the industry in this area through technology, computer software and experience.

In an attempt to look forward, we always know that there will be technological advancements. The immediate future for the E&P industry seems to be on the upswing. The Baker Hughes worldwide rig count was 2,276 as of September 2001, up from an average of 1,913 for the year 2000. The price of oil until recently was relatively constant in the mid-$20s/bbl, and it may regain this level. Current world conflicts should boost exploration and production in developed countries, due to the industry’s safety and reliability in these nations. This upswing in activity provides some optimism that 2002 will be more attractive than 2001 for small consulting firms.