The Oil & Gas Rollercoaster
LOGA (Louisiana Oil & Gas Association)

The “oil rollercoaster” ride from $23 a barrel in 2002 followed by a six year climb to the record breaking peak of $147 a barrel in July of 2008 was like any rollercoaster ride, the ride to the top was slow and steady, the ride down to $35 a barrel was fast and steep. It took six and a half years for oil prices to climb to its peak and eight months to plunge 76% to $35 a barrel. If you’re riding the “natural gas rollercoaster” the climb and decent was similar, reaching a peak of $13 per thousand cubic feet and a 69% plunge to below $4.

The oil and natural gas industry is a price-driven industry. High prices equate to increased exploration, thousands of new high paying jobs, royalties for landowners, increased revenues for local and state governments and the development of new businesses and technologies.

Louisiana has experienced just that kind of growth for the past six years. We have been reluctant to call it a boom in fear of what we have experienced in past booms. It’s déjà vu all over again.

The boom is over. Oil and gas producers are cutting back their exploration budgets for the second and third time. Their revenues have crashed along with oil and gas prices, and their capital lender markets have disappeared along with the world economic meltdown. Publically traded oil and gas company stocks have declined in value to unprecedented lows.

"When everybody sobers up after the first quarter and sees what their real cash flow is going to be," said G. Steven Farris, chief executive of energy company Apache, "people are going to be very discouraged about how much capital they have to spend and that will depress the rig count even further."

The US rig count is down 37% from this time a year ago to 1,126 active drilling rigs and down 45% from the mid summer peak of 2031 rigs. Louisiana’s active rig count, as of this past week, is 137 rigs, down 4% from 143 rigs this time a year ago.

Louisiana’s mere 4% decline is the lowest in the US among the major oil and natural gas producing states. Texas is down 48%, and Oklahoma is down 46%.

If there is an oil and gas boom going on anywhere in the US it’s in North Louisiana in the Haynesville Shale. Though drilling activity has declined from a peak of 95 rigs just a few months ago to 71 rigs today, activity in NW Louisiana appears to be holding up. Natural Gas companies drilling in “Resource Plays” in other parts of the US, such as the Barnett Shale in Texas, and the Marcellus in the North East, have cut their drilling budgets in those areas but are continuing to explore the Haynesville Shale.

“The big bonanza is over,” said Jay Ewing, the completion and construction manager for Devon Energy in the Barnett Shale field. So far this year his company has brought its rig count from 35 to 8 in the Barnett. “Everyone is really shocked how fast everything has turned.”

Activity in South Louisiana is a different story. South Louisiana land drilling activity has declined by 38% keeping in proximity of the national decline percentage of 37%.

The South Louisiana Inland Water drilling barge activity however is significantly lower with a decline of 65% from a year ago and 77% down from the peak of 26 active drilling barges just 7 to 8 months ago. Inland drilling contractors have laid off nearly 1,000 employees in recent months adjusting to the decline in activity.

Drilling for oil and gas in the inland and coastal waters of Louisiana is capital intensive and comes with considerable dry hole risk. Hurricanes in the past few years have caused insurance cost to escalate to near prohibitive rates in some areas. Regardless of the risk and cost, the inland waters still remain an area for the future exploration and development of deep natural gas.

Rig activity in South Louisiana Gulf of Mexico (GOM) continues on a gradual 20% decline from the peak in 2000. A decade ago low prices caused companies to let idle leases expire while they pursued projects in other parts of the globe. The companies are now coming back to bid on expired leases to develop. The finding cost for a barrel of oil in the GOM is the most expensive in the entire world, according to a study conducted in 2006. However, due to the shaky geopolitics around the world, Western oil and gas companies will move back to the GOM to exploit the vast reserves estimated to exist in the GOM.

According to the Energy Information Agency (EIA) 59% of the undiscovered technically recoverable oil and 56% of the undiscovered technically recoverable natural gas in the US Outer Continental Shelf (OCS) is in the GOM.

Important to Acadiana is that exploration and production activity in the GOM will continue. The price/activity scenario does not necessarily apply to all exploration activity in the Gulf of Mexico, especially in the deep water. Exploration projects in the deepwater are developed and planned over a period of 15 to 20 years and are committed to a long-term plan, versus tracking the current price market trends. There are projects coming on line today that started fifteen years ago when the average yearly price was $15 a barrel.

There is no crystal ball for what lies ahead. Drilling budgets are being severely cut, drilling rigs continue to be stacked, and layoffs are happening. The road ahead will be rough.

There will be a return to higher oil and natural gas prices; it’s inevitable. Some analysts believe prices will spike by the end of 2009; some longer. The oil and natural gas gluts the world is now experiencing will turn into scarcities. The longer the industry stays in a slump the more difficult it will be to respond to the increased prices to come.

Under the veil of the current recession and President Obama’s proposed $30 billion tax on our industry, looking into the crystal ball and predicting the future is almost impossible.

Louisiana is the “Energy State”. Acadiana is the heartbeat that will continue to provide our country with the energy infrastructure to run the engines of the United States. When you look at this chart it becomes easier to understand. Twenty five percent of the oil and twenty five percent of the natural gas that fuels our country flows through the heart of our state. Fifty percent of the fuels that drive the engines of our country flow through the vast energy infrastructure of Louisiana.

The growth in the past six years of the American oil and gas industry will be what will sustain the industry in the slump for the coming months. There is a light at the end of the tunnel and it’s not a train.