Kibsgaard: Slowing Gas Drilling Will Hurt Business

Schlumberger Chief Executive Paal Kibsgaard

HOUSTON - Schlumberger Ltd.'s North American business will suffer the effects of a slowdown in gas drilling, as well as the increased cost of shifting rigs to oil-rich areas, Chief Executive Paal Kibsgaard said Monday.

Over the past two quarters, "hydraulic fracturing pricing is starting to come under pressure and that this represents an element of uncertainty to our 2012 outlook," Kibsgaard said at the Howard Weil energy conference, according to prepared remarks posted on Schlumberger's website.

Kibsgaard added that during the first quarter, the downward pricing trend seen in natural gas basins has seeped over into oil-rich basins too. Also, the constant move of drilling rigs and hydraulic fracturing capacity from natural gas basins to oil-rich basins adds costs and cuts on operational time, he said.

"Together, these factors will have an impact on our results both in North America, and overall, in this and in the coming quarters," he said.

The comments by the head of the world's largest oilfield service company come in the wake of rival Baker Hughes Inc. (BHI)'s announcement that it was curbing its earnings outlook due to headwinds in the North American gas market.

Until recently, oilfield service companies were riding high on a relentless push to tap shale gas resources, but the resulting boom in natural gas supplies, combined with unseasonably warm weather, brought natural gas prices to 10-year lows. Now oil and gas companies are starting to pull back, and redirect their efforts to oil-rich areas, but the transition is having an impact on profits.

Kibsgaard said that natural gas drilling activity "is unlikely to recover in the short term." Globally, however, Japan's embrace of liquefied natural gas in the wake of its nuclear crisis has helped boost LNG prices, and will likely spur further investment, he said.

Kibsgaard said that he maintains a "very positive view" for the oilfield services industry in the medium term, as companies are spending increasingly large amounts of money to keep up with demand for oil. In the past 10 years, exploration and production spending has grown fourfold while oil production is up only 11%, he said. Brent crude oil prices have been consistently above $100 per barrel for more than one year and are "unlikely to lower significantly in the short to medium term," he said.

Those prices, however, have helped launch a new wave of exploration, which is critical to maintain production growth.

"Following years of under-investment in exploration, we have seen the start of a new exploration cycle in the last year, and based on the recent growth in net acreage held by our customers, this trend is likely to continue," he said.

The executive also said that currently the risk of a return to recession seems low.

"At present, the main risk of a global double-dip recession appears to be behind us," Kibsgaard said.

Copyright (c) 2012 Dow Jones & Company, Inc.


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