Independent oil company CEO says lots of oil available at higher prices

‘We’re either in a boom or bust’
Higher prices for oil and natural gas have spurred a miniboom in drilling in the USA. To find out what’s going on in the domestic industry, reporter Mindy Fetterman talked with Bruce Bell, chairman of the Mid-Continent Oil and Gas Association of Oklahoma and CEO of Post Oak Oil, an independent oil and gas firm in Oklahoma City. (Related: U.S. drilling takes off as oil, natural gas prices rise)

Q: What is the effect of higher oil prices on drilling in the USA?

A: It’s had a dramatic effect on the industry here. You have to put things in perspective. We had a significant price increase in 1999, and we immediately saw dramatic increases in the number of wells being dug — from a low of 745 to a little under 1,300. That has not happened this time. That’s because by the time all 1,300 wells were up and running back then, the price (of oil) had already fallen down below where it had been before.

This industry has always gone jumping up and down. We’re either in a boom or bust. We don’t do so well leveling things out. But that has changed. We were so recently hurt by the fall in prices in 2000 that things are moving a lot slower now. We’re approaching 1,300 rigs, but we’re not there yet.

Q: Why so cautious?

A: One significant reason is that when everything went downhill, people who had lost their jobs or their money said they’d had enough of this, and they left the industry. Now, when we have the money to drill, we have a people shortage. It’s hard to train people to run rigs, train them so they don’t get hurt. It’s a dangerous job.

For the first time, even though we’ve increased by 80% the number of actively drilling rigs, we’ve seen almost no increase in production. We’re maintaining what we had been producing. No significant new reserves (in the USA) have been brought on line. That’s because North America is a mature province; 1998 was the peak in production for natural gas, and 1970 was the peak for oil. We’re having to drill deeper, which is more expensive and takes longer, and for smaller reserves.

Q: Is the U.S. oil and natural gas business changing?

A: Yes. Ever since (Edwin) Drake drilled the first oil well in Pennsylvania (in 1859), this has been a supply-side business. First, there’s too much production, then there’s a brief tight period which stimulates more drilling, and then there’s too much production.

Now, we’re moving into a new period — and this is worldwide — where it’s a demand-based business. China and India are the major reasons. China alone increased its oil imports by 36% in the last 12 months, and they import 6.4 million barrels a day. Obviously, the growth potential of China is basically unlimited.

Q: What will the new demand for energy from China and other countries mean?

A: It’ll give us more money to expand drilling until we get to the point where we’re not finding much of anything. That won’t happen for a long time. The shallow, cheap deposits have been drilled. But we still have huge deposits around the world.

The problem is what we have left is heavy sour crude. What we drill now is light sweet crude. That will change what a refinery has to do to process the oil, and that’s going to be a slow turnaround. The oil also will be harder to extract. It’s like the tar sands in Alberta, Canada. There are vast deposits of petroleum there. You can shovel it. But you have to get (the oil) out of sand. Those types of projects cost a lot more than what we’re used to paying for oil and natural gas.

Q: Will oil prices go higher?

A: When people start wincing at $50-a-barrel oil and $7 or $8 an MCF (1 thousand cubic feet) for natural gas, they don’t realize it’s not that high. If you adjust for inflation, then in 1981, oil was selling for $80 a barrel, and we were paying $15 an MCF for some natural gas and $3.50 a gallon for gasoline in today’s dollars. So it’s not like this is a horrendous time. Prices have a lot higher to go before they’re equal to where we were. But oil also is less a part of our economy now. It’s 3% of GDP; it used to be 6.5% to 7% during the oil shortage.

Q: What kind of drilling is going on in the USA now, and where?

A: We’re drilling new wells, mostly natural gas. (In) New Mexico, Colorado and Wyoming, once the federal government makes the land available. We’ve not gotten permission to drill on the continental shelf (off the East Coast). There have been exploratory wells off the west coast of Florida, and we know there’s oil there. But we’re not allowed to drill.

Now, we’re moving into the deep water in the Gulf of Mexico and drilling in water over 5,000 feet deep, then drilling a 20,000-foot-deep well beyond that. That’s the biggest area of exploration now, in deep water in the Gulf of Mexico — for both oil and natural gas.

Q. This fall, four hurricanes hit Florida. How has that affected oil and natural gas drilling in the Gulf?

A: We’re still down 150,000 barrels of oil a day and 6 million cubic feet a day of natural gas from the Gulf. We’re almost back to where we were. But 10% of Gulf production was cut off. Many of those rigs were completely destroyed, and they will take some time to replace. (The hurricanes) took over 33 million barrels of oil off the market. That’s a significant amount.

Q: Recently, the Organization of Petroleum Exporting Countries said it was going to try to stabilize oil prices around $50 a barrel. Can it?

A. Yes. We really have, for the first time, no excess capacity in OPEC. If OPEC took 3 million barrels of oil a day off the market, we’d see prices over $55 in a heartbeat. But OPEC does have an interest in not having prices too high because that would cause a significant (worldwide) economic downturn, and that would reduce demand for oil. They’ve learned that lesson, at least.

Q: What effect is the weak U.S. dollar having?

A: We’ve had a dramatic decrease in the value of the U.S. dollar, and both oil and natural gas are sold worldwide in U.S. dollars. So people in Europe (and elsewhere) have not experienced the price increase in energy costs that we have in the U.S.

Q: Now that President Bush has won a second term, what’s the likelihood that parts of the Rocky Mountain range and Alaska will be opened for drilling?

A: Most of the people in Congress are now coming to understand that we have a situation where if we don’t do something now, in five years we’ll be in a lot of trouble.

We need to open up these lands which are off limits to production. People need to realize that having an oil-field blowout (of a well) is very rare. It’s in the transportation end that you run the risk of oil spills.

You know, in 2000 when there were rolling blackouts in California, a full 85% of people there were absolutely against nuclear power. A similar poll taken recently found 60% favored nuclear energy. When people realize we’re talking about a life-altering problem — that we won’t have the energy that we need because we won’t drill a well here or there — they’ll change their minds.

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