TIME: Almanac 1993/TIME Almanac 1993.iso/time/031692/0316200.000

Text File | 1992-10-19 | 10.6 KB | 212 lines

                                                                                BUSINESS, Page 50

HARD TIMES

The Great Energy Bust


More than any previous recession in the U.S. oil and gas
industry, this one smells dangerously permanent

By RICHARD WOODBURY/MIDLAND -- With reporting by Courtney Tower/
Ottawa


    Along Highway 80 in West Texas between Midland and
Odessa, giant drilling rigs sit rusting in the winter sun. Gas
wells that dot the bleak mesquite-covered prairie lie shut down.
Downtown Midland has the stark look of an evacuated city, with
empty storefronts and vacant building lobbies.

    The scene across America's oil patch these days bears a
chilling likeness to the bust that befell the region in the
mid-1980s, when energy-production jobs plunged more than
one-third. But in fact the situation today is worse. While many
parts of the U.S. economy are struggling through the recession,
few are as hard hit as energy. By every measure, these are among
the toughest times since that first gusher at Spindletop in 1901
-- more akin to the Great Depression than the cyclical
booms-and-busts since.

    Across the South and West, drilling activity for crude oil
is at its lowest point in 52 years. The rig count, the best
gauge of life in the oil patch, hovered last week near an
all-time low of 660. Production from existing fields has shrunk
to its lowest since 1962. Scores of drillers, producers and
support firms are laying off, folding up or going bankrupt.
Warns Denise Bode, president of the International Petroleum
Association of America: "The industry is nearing a state of
economic collapse."

    More distressing, this latest downturn gives every
indication of being permanent. Faced with languishing prices,
lower profit margins and tight environmental hurdles to new
exploration, the major oil companies are selling off their
properties, packing up their drilling gear and heading overseas.
Ten billion dollars in assets are on the block as exploration
and production head for Africa, South America and the Far East,
where drilling costs can be cheaper by half and government
sweeteners make new ventures enticing. As the majors lay off
workers and leave, those independent companies that can are
following. Others are closing up shop or retrenching. Asserts
energy scholar Daniel Yergin: "We're seeing a fundamental
contraction on the domestic side along with one of the greatest
migrations in the history of the oil industry."

    Unlike the bust of the mid-'80s, which was marked by
nose-diving crude-oil prices, the immediate problem this time
is natural gas. Often extracted from the same formations as oil,
gas accounts for 24% of the nation's energy consumption, mainly
in heavy industry. Producer prices at the wellhead have been in
a free fall for months, plummeting last month to $1 per 1,000
cu. ft., down 23% from a year ago. At that price, producers say
they can barely turn a profit, and many who can still afford to
operate are shutting their supplies in the ground in hopes of
an eventual upturn.

    Campaigning in the oil patch last week, President Bush
responded to the plight -- and political anger -- of natural-gas
producers by taking steps to bolster demand. He removed
regulatory barriers that have hampered utilities from converting
power plants fueled by coal and oil to natural gas. At the same
time, Bush lessened restrictions on the sale of compressed
natural gas for cars and other vehicles. In Washington, Energy
Secretary James Watkins declared, "The worst thing we could do
is allow our oil and gas industries to decline the way we have."

    The gas price slide has been a roundhouse punch to the big
energy states of Texas, Louisiana, Oklahoma and New Mexico,
still struggling to climb back from the earlier debacle. Scores
of wildcatters, who find most of the domestic crude and who went
after gas when the market fell apart, have folded in the past
18 months.

    The impact has been just as severe in Canada, where oil
and gas are a bedrock of the economy, contributing nearly 12%
of the $588 billion gross domestic product. Since 1989, nearly
15% of the Canadian work force has been laid off, and major
producers are shuttering refineries and closing thousands of
service stations. Last year Imperial Oil, owned largely by
Exxon, posted the first loss in its 111-year history. Another
giant, Gulf Canada Resources Ltd., stunned the industry last
month by walking away from its stake in a huge undersea oil
project on the Grand Banks of Newfoundland.

    Outside the oil patch, few notice and many benefit from
the price slump. Supplies of oil and gas for home heating and
industry, abetted by a string of six warm winters, have remained
abundant. And the price of gasoline, an average $1.03 per gal.
nationwide for regular, is the lowest in months, thanks largely
to OPEC and other foreign producers; they have made up the drop
in domestic production by supplying 43% of U.S. oil consumption.
On the other hand, the public has not benefited from the drop
in natural-gas prices, as pipeline companies and distributors
have gobbled up the savings before the fuel reaches households.
Though prices at the wellhead have tumbled from $2.66 to $1.16
since 1984, household users in Charlotte, N.C., still pay a rate
of $6.14, only 51 cents less than they did 8 years ago.

    The steady rise in oil imports has alarmed many planners
and industry strategists, who fear that the nation may be
setting itself up for another crisis if war flares again in the
Middle East. Domestic production, dropping at the rate of
300,000 bbl. a day, has declined to its lowest level in 40
years. The Congressional Office of Technology Assessment
projects that by 2010 the nation could depend on imports for
nearly 70% of total supply, an amount that Houston energy
consultant Louis Powers estimates will take 36 supertankers a
day to deliver. Warns Powers: "The mind-set is to let the Saudis
give us all we need. It's a policy we will all live to regret."

    In many respects, the current slump is an extension of the
mid-'80s energy bust that saw prices plummet to $9 per bbl. Just
as the region was attempting to diversify out of its energy
dependence, the gulf crisis suddenly forced prices to $40 in
1990, spurring some drillers to crank up rigs again. But when
the war ended, hopes were dashed just as quickly; prices slid
back down, and the small trickle of investment money dried up.

    The big concern now is the depressed market for gas, which
is still the target of most drilling because its plentiful
reserves are largely untapped and exploration carries tax breaks
for investors. "It's a bloodbath," says gas entrepreneur and
former corporate raider T. Boone Pickens. "How many more hits
can the industry take?"

    Faced with declining profits from U.S. oil and gas
operations, such major firms as Chevron, ARCO and Phillips are
putting more money into overseas exploration than they are
investing at home. "You have to go where you can find the
reserves and make a profit," explains Wayne Allen, president of
Phillips, which has hiked foreign spending 15% since 1989 to
bankroll drilling in such places as Gabon, New Guinea and Italy.
All told, according to a Salomon Brothers survey, U.S. oil
companies are increasing foreign investment nearly 10%. At the
same time, the 21 largest firms are cutting exploration spending
in this country by 13%.

    Far more troubling than price fluctuations and investment
patterns is the fact that the U.S. is running out of
economically recoverable oil. Known reserves that can be
extracted at current market prices have been declining almost
steadily for 22 years, and the current supply of 26 billion bbl.
would last the nation barely four years at present usage rates.
And while vast formations remain untapped, they are in
environmentally sensitive areas -- the Alaskan wildlife refuge
and offshore California -- that Congress has put off limits.

    Oilmen argue that the failure to open such reserves will
only speed the move overseas and increase U.S. dependence on
imports. Marathon Oil Co. is pouring nearly three-fourths of its
$750 million current production budget into foreign ventures.
"Other countries covet our technology and the jobs we bring, and
they're luring us with sweet deals," says Marathon president
Victor Beghini, "while our government is turning its back."

    Oil firms also complain bitterly about an array of
regulations that require refineries to meet costly standards for
reformulated gasoline and other clean-burning fuels. As a
result, Shell, Amoco and Unocal are among big producers that
plan to close or downsize facilities. Oilmen say domestic
production is further threatened by proposed EPA regulations
that would impose tight controls on drilling wastes and other
by-products. Such rules, they warn, will force the closing of
hundreds of small "stripper" wells that make up 75% of the
nation's total.

    A more basic worry is that unless drilling rebounds to the
1,100-rig level and stays there, the industry's infrastructure
will be so impaired that it won't be able to come back -- ever
-- and U.S. production will slip further. Oilmen decry the lack
of attention and support that they feel the industry gets --
from the White House on down. "We should have a domestic energy
policy, but we still don't have," asserts Pickens. Baker Hughes
economist Ike Kerridge agrees: "There's a real danger in driving
too many people out of business. The government ought to be
concerned."

    The trouble is that the oil and gas industry is one that
many Americans have learned to love to hate. With the memory of
Big Oil's vast profits in the 1970s and early '80s still fresh
in their minds, consumers and lawmakers outside the oil patch
have little sympathy for the industry's woes. But that could
prove shortsighted at a time when U.S. reliance on foreign oil
is rapidly on the rise.

    Reversing that trend will take a combined effort by
Washington and consumers and the companies themselves. Energy
firms should develop new technologies that will let them extract
domestic oil and gas cheaply enough to make a profit even when
prices are low. And motorists should be able to tolerate an
oil-import fee that would raise gasoline prices a few cents a
gallon at the pump; that would provide fresh incentives for
domestic drilling and produce revenues to help reduce the
federal deficit. Without some such policy, the U.S. could find
itself paying for cheap oil and gas today with skyrocketing
prices when the next energy shock hits tomorrow.