David H. Barr, Completion and Production Group President, Baker Hughes Inc., and Chairman, Petroleum Equipment Suppliers Association.
If I had been asked to write this commentary in late July instead of early November, I would have forecast a stable world with a steadily growing global economy and higher demand for hydrocarbons making 2009 another record year for the upstream oil and gas industry. After all, the E&P sector built momentum in the first three quarters of 2008. With high commodity prices, more drilling rigs were working globally than at any time since 1985, and operators were pursuing unconventional gas, heavy oil and deepwater subsalt plays, while applying all available technology to maximize production from existing fields. All the indicators pointed to continued investment by operators and uninterrupted growth for service companies.
But a lot has happened in the last three months. The US credit crisis sent shock waves through the global financial system. Equity markets for publicly traded companies have fallen substantially, following an erratic roller coaster of gains and losses. Crude oil prices dropped from $145 per barrel on July 4 to $63/bbl in late October, and gas prices fell to $6/Mcf from $13/Mcf during the same period. Most experts believe that the world economy will slow down substantially. With a backdrop of these changes, the outlook for 2009 is a lot cloudier than it was a few months ago.
In 2008, strong North American upstream activity has been driven primarily by gas drilling, with more than 1,850 rigs seeking gas in mid-September. The North American rig count also benefited from the spike in oil prices, which helped account for an increase of more than 20% in oil drilling from last year.
In the rest of the world, rig activity has been primarily directed at oil development, and gas prices supported by the global LNG market have sustained gas drilling, particularly in the Middle East, Asia-Pacific and Latin America.
The dynamics of the North American oil patch have been complicated by the financial crisis. Operators have been hit by the double impact of frozen credit markets and declining commodity prices. Independents account for the majority of land wells drilled in the US and Canada. Traditionally, independent operators have financed new drilling programs by selling non-core producing assets, through short-term borrowing, and by re-investing free cash flow. In the past few months, financing for asset sales has dried up, and it is harder for independents to draw on their lines of credit. Cash flows from production have dropped precipitously, too, as both crude oil and gas prices have declined by more than 50%. An offsetting positive factor is that many prospective projects are still economically viable with crude oil at $60/bbl and gas at $6-$7/Mcf.
Under these circumstances, North American drilling will probably decline in the first half of 2009 from 2008 levels. It is still uncertain how steep the decline will be.
The good news is that any slowdown in North American gas drilling is expected to be self-correcting within a few quarters. With today’s horizontal wells and stimulation techniques, first-year depletion rates in the major gas shale plays range from 65% to 80%. Without adequate drilling, total production is expected to decline rapidly, reducing supply and prompting higher commodity prices. The result should be more drilling by the end of 2009 or by early 2010.
In the rest of the world, we expect that operators also will take a restrained approach to E&P as they enter the new year. Even though most projects outside North America are evaluated based on long-term time horizons, the near-term financial crisis could cause delays on projects that have not already started. Both NOCs and IOCs may take a wait-and-see attitude as they evaluate the stability of the world economy and the prospects for oil prices and cash flows. Some smaller international operators and NOCs also may be hampered by tightness in the credit markets. In any case, oil companies in the international arena will be less aggressive in the first half than they were in 2008.
The oilfield service sector also will enter 2009 on a cautious note. However, even a 10% decline in the worldwide rig count from current levels would put drilling activity at a level 25% higher than the average rig count for this decade. Global service companies are likely to continue their investment in infrastructure and hiring, especially in emerging markets. Certain segments of the oil service industry will slow down more than others, with production-oriented products and services likely to remain in high demand. Technology will continue to be important, and we expect major service companies to maintain or increase their research and engineering investment.
The mid- to long-term outlook shows continued promise for our industry. The fundamentals are strong, with projected demand for oil and gas expected to increase another 50% in the next 20 years. In this context, the world’s current economic difficulties are only a temporary setback. As the economy recovers in the OECD countries and the developing world resumes its rapid growth, we can expect our industry to be called on again to accelerate its efforts to find and produce more hydrocarbons. 
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THE AUTHOR
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David H. Barr is Group President for Completion and Production at Baker Hughes Inc. and Chairman of the Petroleum Equipment Suppliers Association. He was Group President of Drilling and Evaluation for Baker Hughes from 2005 to 2007 after serving since 2000 as President of Baker Atlas. Previously, he was Vice President of Supply Chain Management for the Cameron division of Cooper Cameron Corporation, where he served for one year. Mr. Barr began his career with Hughes Tool Company in 1972 after completing his BS degree in mechanical engineering at Texas Tech University.
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