Drillers Report Strong Activity Despite Weakening Prices

Against a backdrop of tanking oil and natural gas prices, drilling contractors Thursday struck a contrarian tone at an annual gathering here: business is almost too good.

The recent weakening in commodity prices has raised investor skittishness towards energy in some cases. But oil and gas drillers, gathered here for the annual meeting of the International Association of Drilling Contractors, continue to revise projected rig activity upward, even in the United States, where gas storage sits at near-record levels, said IADC Chairman Claus Chur.

That optimism has bled into projections for 2007, with rig operators brushing aside worries that energy companies will cut back on drilling should crude or gas prices retreat further. Near-record storage levels in the U.S. have raised concerns that a mild winter or slowing economy could max out storage capacity, causing prices to crash.

The oil companies "are not so much focused on the month-to-month gas price," John Lindsay, executive vice president for Helmerich & Payne Inc. (HP), a leading land driller, said on the sidelines of the conference. Helmerich & Payne has seen no tapering off of activity due to recent commodity price declines, he said.

After a storage build that met expectations, natural gas prices fell 15 cents to $4.78 per million British thermal units in October futures on the New York Mercantile Exchange. Natural gas futures traded above $8 this summer out of anticipation of hurricane-related outages in Gulf of Mexico that haven't materialized this fall.

Lindsay acknowledged that robust storage could push gas prices to a point where that wouldn't support the current level of drilling. But for now, Lindsay still expects activity to continue to grow through 2007, due to a combination of increased demand and declining returns from existing wells.

Addressing the offshore market, Lee Ahlstrom, director of investor relations at Noble Corp. (NE), pointed out that most deepwater drilling projects remain profitable even when oil hits $30 or $40 a barrel, let alone Thursday's closing price of $61.59 in NYMEX futures.

But even sustained success comes with its own costs for the industry, several speakers pointed out. They zeroed in on soaring injury rates that have more than kept pace with increased drilling activity. The trend has spawned a series of industry gatherings over the last year to explore best-practices to avoid accidents.

In the U.S., deaths related to land drilling doubled in the first half of 2006 over the same period last year, and offshore drillers recorded two deaths, compared with zero last year, said Kevin Lacy, head of discipline-drilling and completions for BP PLC (BP).

Lacy described the higher risks associated with drilling as a "mess" that "took 20 years to create." His speech was based on industry-wide conditions and did not focus on BP.

The BP executive called for a stronger focus on retaining personnel, to avoid putting inexperienced workers into the field.

Rig operators are planning on recruiting a virtual army of newcomers in the next few years. Drillers will need to hire 30,000 new workers to staff the 500 rigs in the planning stages or under construction, Chur said. The influx of new workers comes amid the expected retirement of some 50% of the workforce over the next 10 years.

"It all requires long-term planning," Chur said.

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