What the industry expects in 2007

The year, 2006, has been very good for E&P, as activity indicators hit 21-year highs. Yet, there are real concerns about gas prices, personnel shortages and escalating costs.

Edited by Kurt S. Abraham, Managing/ International Editor

“Flush with cash” is how one E&P analyst described the condition of oil and gas companies this year, and high prices have certainly helped revenues. Although futures oil prices have cooled down to between $55 and $58/bbl for West Texas Intermediate (as of mid-November), the average futures price from January through September was $68.22/bbl. Furthermore, average first purchase price for US domestic crude was $61.92/bbl through August.

Thus, operators have enjoyed very good revenues for most of 2006. Even at recent prices, earnings off oil production are quite attractive. On the natural gas side, there is concern about a short-term oversupply, at least in North America. Last winter was a mild season, and natural gas storage levels piled up, accordingly. As of Nov. 10, 2006, working gas in storage in the US was 3.45 Tcf, up 7.4% from the five-year average inventory level. 

Prices have responded negatively to the situation. In August, average wellhead price was down 15% at $6.51/Mcf, compared to $7.68/Mcf in August 2005. In September, the price was down 42% from a year earlier at $5.51/Mcf. The situation worsened in October, as preliminary figures showed a 54% drop to $5.03 at the wellhead, versus a very robust $10.97/Mcf in October 2005. Some of the difference can be attributed to supply problems in the Gulf of Mexico after the hurricanes of 2005, which pushed up prices. Nonetheless, companies and gas traders are equally concerned that another mild winter, coupled with large storage volumes, could spell real trouble for prices. Thus, four firms – Apache, CNR, Devon and EcCana – have scaled back Canadian gas drilling until the US surplus is whittled down some.

Nevertheless, it has still been a very strong exploration and drilling market, both in North America and worldwide. With activity at 21-year highs, operators are experiencing personnel shortages, as well as escalating costs for equipment and supplies, particularly steel.

For details and analysis on all these issues, please read the following pages for our editorial advisors’ opinions.