What's Ahead in 2006

2005 has been a good year, and the 2006 outlook is bright

Robert L. Potter, President, Energy Transportation and Measurement Division, FMC Corporation, and Chairman, Petroleum Equipment Suppliers Association, Houston

Despite some unprecedented challenges, 2005 has been a very good year for the oilfield service/ supply industry. Most service companies have reported significantly higher earnings. The Oilfield Service Index (OSX) has responded, climbing nearly 50% through the first 10 months of the year, far outpacing the Dow and Standard & Poors.

Crude oil prices have climbed about 20%, to $60/bbl, as compared to October 2004. Natural gas prices have climbed 60%, to over $11/MMbtu. Oil and gas markets continue to be impacted by the Gulf Coast hurricane damage, geopolitical uncertainty overseas, and growing demand in Asia and other parts of the globe. Some price moderation is forecast for 2006, as Gulf of Mexico production is restored to normal levels and high prices begin to dampen demand. However, similar moderation was expected in 2005, and it did not occur.

The industry looks to have another promising year lined up for 2006. A number of trends pose challenges to us going forward:

• Limited investment opportunities for E&P companies, despite a favorable price environment
• Fewer large E&P projects are being pursued in the US, while more are being pursued in Africa and Asia going forward
• Host countries increasing local content requirements 
• Rig availability constraints
• Growing concerns over energy security, especially in the US
• Political concerns over energy company profits
• Cost pressures, due to availability of equipment and raw materials
• A growing shortage of engineers, project managers and other skilled technical people.

2005: The year of the unexpected. The hurricanes of 2005, Katrina and later Rita, posed perhaps the largest short-term challenge that the energy industry has faced in some time. As our customers relied more on the service/ supply sector for critical functions, the industry found itself dealing with perhaps this country’s largest natural disaster in Katrina, followed almost immediately by Rita. As a result of the storms, production of oil and gas came to a halt. Crude oil climbed above $70/bbl.

The impact on Gulf infrastructure was huge. The Minerals Management service reported that 66 producing structures were either destroyed or significantly damaged, four drilling rigs were destroyed, nine drilling rigs were damaged extensively, and six rigs were unmoored and adrift. On the downstream side, about 12% of the country’s refining capacity was shut down. Both the E&P and service/ supply sectors also faced the issue of a workforce scattered across the Gulf Coast.

However, the service/ supply sector responded. Working hand-in-hand with our customers, we have met the challenge. Barely two months later, nearly half of Gulf production was restored, and refining capacity was coming back online quickly. We can be proud of the men and women of our industry, and how they have performed under such difficult conditions, many of them having suffered significant personal losses.

The Washington word. Washington also responded to the challenges our industry faces, in some positive and other not-so-positive ways. Congress passed, and President Bush signed, a comprehensive energy bill, over four years in the making and some 13 years since the last major energy bill. While not a panacea for the policy challenges we face, the bill begins to address our energy infrastructure needs, encourages energy efficiency and alternative energy sources, and provides some relief in onshore permitting and LNG terminal siting issues.

Since Katrina and Rita, we have also seen further interest in addressing US energy needs. But we have also seen a ratcheting up of the political rhetoric, due to high prices, with calls for windfall profits taxes and other counterproductive measures. Every other energy-producing country in the world is investing in its industry. Given the projected high-price environment, our industry will need to remain vigilant in its advocacy efforts, to ensure a healthy climate for US oil and gas investment going forward.

Technology for tomorrow. As finding costs escalate, and production costs begin to increase as well, technology will remain the essential key to lowering risk and increasing returns for the E&P sector. Much of that technology is being developed by the service/ supply sector. And, given the E&P sector’s increasing focus on costs, funding new technologies continues to be a challenge. This challenge is being met in a number of ways.

At FMC Technologies, we are focusing on real-world innovation, using alliances with customers to develop technologies that we know address their needs. Our engineers work closely with our customers’ engineers in developing solutions for their difficult challenges. This shortens the R&D cycle, lowers our customers’ costs and enables them to bring their development projects online quickly.

Subsea technology continues to hold great promise for lowering development costs. Longer tie-backs are being utilized in the Gulf of Mexico. The next game-changing technology may be subsea processing, which will enable us to separate and process on the ocean floor, avoiding the costs of sending production topside. This technology should lower costs and increase recoverable reserves.

Continued advances in information technology are enabling sophisticated field monitoring systems, enhancing seismic interpretation and allowing operators to increase production yields.

The challenges. Going forward, the service/ supply industry will continue to face competing priorities:

• Balancing R&D while lowering costs for customers
• Increasing local content in remote areas while maintaining competitive costs
• Providing the supermajors with the equipment and technology they need for large projects in West Africa and Asia, while serving growing independent activity in the Gulf of Mexico and Europe
• Attracting and keeping the technical talent that we need while maintaining a competitive cost structure.

THE AUTHOR

Robert L. Potter has served as president of the Energy Transportation and Measurement Division of FMC Corporation since 1995. He joined FMC in 1973 as sales representative for its Wellhead Equipment Division and has held several sales management positions. He was named operations manager for the Houston plant of FMC’s Wellhead Equipment Division in 1988. Mr. Potter became manager of the Western Region and Wellhead Equipment Division in 1990, and manager of its Fluid Control Division in 1992. He serves as chairman, and as a member, of the Executive Committee of the Petroleum Equipment Suppliers Association. In addition, he is on the board of directors of The Cynthia Woods Mitchell Pavilion, and he serves on the Advisory Board of Spindletop Charities.