Oil and Gas Drilling: The Price is Right But The Industry's in Trouble

Strong global demand has consistently kept the price of oil above $50 per barrel. But the price of energy is hardly the only indicator for measuring the real health of oil and gas companies.
Project delays and outright cancellations are having an enormous impact on the viability of energy exploration projects, and are closely linked to a range of critical factors such as drilling day-rates, the cost of rig equipment, and the availability of drilling personnel.

Importantly, ever since the mid-1990s, oil companies have been reducing the percentage of their capital investments for exploration. Yet according to the International Energy Agency, by 2030 the world will be consuming more than 115 million barrels of oil a day, up from 85 million currently.

So why isn’t energy exploration receiving more attention?

A recent ChangeWave survey focused on these and other natural gas and oil exploration issues – including resource shortages, the cost of drilling services and equipment, and personnel. A total of 168 Alliance members who work in the natural gas and oil industry participated.

Tracking Industry Resources and Costs

We began with a look at industry resource shortages:

Which of the following gas & oil industry resources - if any - are currently exhibiting signs of a shortage (i.e. in short supply)? (Check All That Apply)

Industry resource shortages are still prevalent, with the greatest ones occurring in professional and drilling personnel.

We also asked industry members how current costs compare to those of 90 days ago.

Based on your own knowledge and what you are currently seeing in the industry, would you say the cost of labor, drilling services, drilling equipment and production services is more than it was 90 days ago, less than it was 90 days ago, or the same as 90 days ago?

Costs are continuing to rise for the majority of companies, with three-in-five (60%) reporting the cost of labor is higher than it was 90 days ago. Similarly, by a wide margin companies say both drilling services and drilling equipment cost more than they did 90 days ago.

Drilling For Answers

To further gauge the impact of prices on drilling we asked:

During 2007, what effect – if any – have prices for drilling services been having on your company's exploration drilling?

The cost of drilling services is still hurting, with 31% saying it’s decreasing their company's exploration drilling (4% significant decrease and 27% slight decrease).

But is this leading to more postponements or cancellations?

During 2007, has your company postponed or canceled any exploration drilling due to the cost of drilling services?

Clearly, the costs of drilling are causing more companies to delay or halt exploration drilling. Currently, one-in-five industry members (19%) say their company has postponed or canceled projects due to the price of drilling services – 5-pts more than previously.

Bottom Line

Many of these trends have not just materialized in the past year or two. They have developed over the last two decades.

Nonetheless, too many oil companies are slowing their exploration programs for new petroleum sources.

Ironically, the growing gap between exploration and production is creating a premium for small-to-mid size oil and gas companies with aggressive exploration programs. Investors who make the effort to drill down to these companies are likely to hit a gusher.